Wednesday, 1 August 2012
Pessimism about growth extrapolated: age of diminished expectations (Minack, Strategas, Pimco)
George Minack of Morgan Stanley as usual had nice charts with the accompanying gloomy and dreary analysis. How things are going in the US is just disappointing, see chart above.
Economists usually start forecasting something like trend growth, but nowadays that seems more 2% than 3% (=law of Okun). In the last months the expectations for 2013 got down seriously (because of bad recent numbers and fiscal cliff) and also 2014 starts to deviate from Okun’s 3%. Austerity will bring down growth to below potential in the US like in 2011 and 2012 and fiscal austerity will be the New Normal.
Accordingly the expected profits for the coming years are going down seriously. That revision still has more to go according to Minack. In the US the PE is still about the same as in last year (mainly because of miraculously good macro expectations), while in other countries the PE has gone down materially already. So American equities are very expensive, way overvalued for believers in Shillers (Graham)s PE.
So forget about good returns of equities: profits are gong down and PE’s also = bear market.
Then the growth in the Euro-Zone, that is not disappointing, but very, very disappointing. It is a miracle European equities still have some value.
Strategas had the chart above as proof that PE’s have to go down in the coming years.
I have to say that this analysis is believed by many more people than my analyses about a brighter future ahead, mainly for not that important (in western eyes) countries like China and India. People like to extrapolate trends. The charts above are pre-eminently suited for this. I think that has happened in the heads of most investors and so it should be discounted now in the prices.
Even as people have seen in Australia interest rates in the Netherlands are at their lowest levels in 500 years. Ineterst rates are becoming negative in more and more countries for longer and longer durations. But maybe it is no longer that safe to extrapolate the trend.
Pimco mentions now the end of the cult of equities. People have to become sensible and forget about equities (and in the future they should only invest in bond funds of Pimco).
You never know but maybe in the next years equity markets and bond yields will rise materially. Maybe they continue the path of the Kondratiev wave as lined out above in my blog.