 Birth of a New Cyclical
Bull?
Puru Saxena
Posted Jan 29, 2009
BIG PICTURE
"Bull-markets are born
on pessimism, grow on skepticism, mature on optimism and die
on euphoria"
-John Templeton, Founder of Templeton Funds
The coming year may go down
in history as a bullish one. After the shocking asset-liquidation
witnessed in 2008, the following 12 months are likely to provide
above-average investment returns. Given the negative economic
news and awful investor sentiment, my assessment may sound absurd
but it looks as though the bear-market ended late last year and
we are now in the early stages of a new cyclical bull-market.
Below are some of the reasons why I believe the skies are clearing
for a 4-5 year bull-market:
- Surging liquidity - central
banks have pumped trillions into the banking system
- Low-interest rates - yield
on cash and cash equivalents is at a historical low
- Declining corporate bond yields
- risk appetite is returning
- Declining Ted Spread - inter-banking
lending rate has declined, a positive sign
- Low valuations - various
stock markets are trading at very attractive multiples
- Horrendous investor sentiment
- a contrary bullish indicator
- Volatility has peaked - VIX
has topped out and is falling
- US Dollar rally has ended
- bullish for the markets
- Global stock markets are making
higher lows - sign of base building
- Huge amount of cash on the
sidelines - US$8.85 trillion or 74% of US market cap
Now, I am well aware that the
above prognosis goes against the mainstream bearish view. After
all, most professional and amateur investors are very worried
about the state of the global economy and many are expecting
a horrendous economic depression. Furthermore, according to some
prominent bears, our world is heading into a deflationary bust
and the Dow Jones Industrial Average is about to contract by
another 50-60%.
For sure, anything is possible
in the business world, but at this stage, a 1929 style economic
depression is out of the question. Back then, the US economy
contracted by a whopping 46%, unemployment went through the roof
and thousands of Americans lost their entire savings as roughly
10,000 banks went bust. This time around, the US economy has
barely shrunk, the unemployment rate is not even close to the
1982 recession and not a single person has lost money due to
a bank-run. So, at least the current circumstances do
not warrant a prolonged economic depression.
Let there be no doubt that
the US economy is certainly struggling - housing starts, permits
and home sales are at multi-decade lows, auto-sales have slumped,
retail sales have contracted, unemployment is rising and manufacturing
is at the lowest level since 1980. Despite all these negatives,
the state of the world's largest economy is still nowhere near
as bad as it was during the Great Depression.
It is interesting to note that
Professor Nouriel Roubini (who correctly forecasted the extent
of this economic slowdown) was recently interviewed by the Financial
Times. During the interview he stated, "We are going to
avoid the Great Depression and a severe recession even if there
is a risk of protracted slow economic growth".
If Professor Roubini is correct
about the economy, then I suspect global equity and commodity
markets will see explosive moves from the current levels. We
must remember that the investment community is manic-depressive
and most participants have already factored in a gut-wrenching
economic recession or worse. So, if the current recession does
not morph into the widely expected prolonged depression, investors
will have to re-think their investment strategy and this will
be the catalyst for a powerful rally. Given the dismal yield
available in cash and government bonds, when investors search
for higher yields, capital will flow towards the beaten down
equity and commodity markets. At the same time, US Treasuries
will witness a spectacular crash. Figure 1 shows the astonishing
decline in the yield available on 3-month US Treasury Bills.
Figure 1: Yield on US Treasury
Bills (1941- present)
Source: www.thechartstore.com
As the financial crisis worsened
over the past year, a growing number of investors parked their
money in the 'safe haven' of US government bonds. This massive
inflow of capital pushed up the value of US Treasuries and drove
down the yield to almost zero.
In my view, US government bonds
are now grossly inflated. I have no doubt in my mind that when
global stock markets show further signs of a recovery, investors
who are holding these overvalued US Treasuries will look for
a higher return on their capital. And everybody will look to
exit through the same crowded door. This selling mayhem may cause
an epic crash in US Treasury Bills and send the yield sharply
higher (Figure 1).
Over in the precious metals
department, so far gold has fulfilled its 'safe haven' role by
holding up relatively well in this post-bust environment. However,
if my assessment about a recovery in equity and commodity markets
is correct, it is possible that gold may under-perform other
assets over the following months. Now, I am not saying that you
sell your gold bullion but at this juncture, I prefer the hardest-hit
industrial metals, silver and platinum over gold. Those metals
which suffered the most over the past six months are likely to
rebound the most in the ongoing recovery.
In summary, I maintain my view
that global equity and commodity markets put in important lows
in the final quarter of 2008 and we should see big upward moves
in the months ahead. So, I would suggest that you hold on to
your positions in commodities, commodity-producing companies
and precious metals as we pass through the bottom of this business
cycle.
Puru Saxena
 Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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