Still Bullish On Stocks

I'm not an economist, and I only incorporate macro trends into my analysis of companies when absolutely necessary and relevant. This being said, as an investor I think the one relevant macro question to ask on a daily basis is:

What's different this time?

Bears are featured prominently in the news; greed is good, but fear sells better. On any given day you have bloggers and academics throwing countless reasons to get out of the market and stay in cash or get in gold. So, what are the most common bearish arguments today and are any unique or different from the prevailing century?

Trust me I understand how powerful debt is. When companies or countries carry too much debt and cannot make interest payments, they are forced into very dire situations. Although Europe and emerging market debt are very important, I will be focusing on the U.S situation. Here it is:

Above is US Debt (% GDP). I actually think using World War 2 as an example is very smart. Internationally governments were forced to take on extreme levels of debt...and what followed? The US had 25+ years of economic prosperity. This post war boom was truly remarkable and I don't think it was a unique aspect of the War, just economics at work. If you don't believe me, do a little homework.

Hey wait though - the US is running ridiculous deficits right now. The balance of trade is way off and China has got us by the balls...right?

US Federal Deficit (% GDP). Again, it was a hell of a lot worse during the War, and Keynesian economics worked beautifully. Oh I'm forgetting about subprime mortgages and the housing crisis?

Case Shiller National Home Price Index (Inflation Adjusted). This is one area where the bears have a respectable point. We did have an unprecedented housing bubble. I admit, a housing bubble is far more detrimental than a bubble of any other commodity - oil would be the only thing to even come close. But hey! I thought we were value investors? Contrarians. I think it's wise going forward to ignore many of the bearish arguments that don't center around housing. No one should reasonably expect a return to the 2006 high of 210, but with the index currently at 137 and the historical mean/median of 112, I see very little downside.

Unemployment?

It has peaked. That's all that can be said here. Perhaps the 'rate of recovery' is not fast enough for those in power, but for investors who have seen enormous returns off March 2009 lows, its not an issue. Trust me, my heart goes out to every person who is looking for work, honestly, but skyrocketing or even increasing unemployment figures are not to be expected.

Now after discussing some of the big topics, do I consider any bearish arguments to be of major concern? Only one

The Baby Boomers

The aging workforce is definitely going to be a damper on GDP growth going forward, and I do think that will limit market returns for the next 20 years. This is what is different between now and WW2 where the baby boomers fueled economic growth. It may sound terrible, but the retired elderly are bad for business. They don't buy houses, they don't shop, they don't raise families or educate the next generation, and of course they are an incredible cost to the government when you look at healthcare. I think that this is definitely a legitimate negative trend in developed countries. I also think that when you look in comparison to Japan, the US (and Canada) aren't necessarily in the hole.

This is also a problem that people in power are and have been aware of and are discussing. This is good, we're looking for solutions. Obama is an angel for markets. His healthcare reform is good on all fronts. Appeals to the standard Republican lexicon (when in doubt, yell Socialist!) are just that, and should not be accepted as legitimate arguments. Please read this for more convincing.

Interest Rates


This is undoubtedly the single biggest contributing factor. Every economist with half a brain knows what near 0 rates can do to an economy. Banks are getting to play the game for free. In turn, small businesses and multinational corporations benefit. When they benefit, consumers benefit. It's as simple as that. These rates are steroids for the economy. The argument that rising rates will kill the recovery is just bad logic. It will mean profits get taken down a notch, sure, but the benefits have already been sewed into the fabric of the economy. So, am I worried about inflation? Honestly, I'm not in a position to say. If I was, the game would be too easy. All I can say is that there are some very smart people that monitor those numbers everyday. As of now I don't see any threat to the US dollar due to inflation. I admit, I'm not smart enough to know or even have a good opinion, but my gut says inflation won't be the story of the next decade.

Commodity Bubble


Again, I think volatility is just finding a new home. I'm not touching any precious metals or energy. Soros and Paulson are heavily invested in Gold, but of course they know its a bubble - they just want to ride it. Please read my post

I'm not ruling out a correction this summer - but I am ruling out a double dip recession and/or depression. Remember to buy great companies at a good price, steer clear of excessive debt, and that cash is king.

In Defence of Warren Buffett

Currently the press is slamming Warren Buffett and Berkshire Hathaway for the sudden resignation of David Sokol and his questionable involvement with Lubrizol before the Berkshire deal. For more background please read Buffett Misses Chance to Show Moral Courage

I think it likely that an SEC investigation (already announced) and further questioning of Sokol will lead to more answers, but in my view, Buffett's reputation is being unnecessarily damaged. A true contrarian/value investor would look at this news, compare it to Buffett's (and Berkshire's) history, and realize that the street is wrong once again. Lets look at some facts:

• Berkshire's compounded annual gain (from 1965-2010) is 20.2%

• Buffett's annual base salary is $100,000
• Supported Barack Obama and advocates for taxing the rich 

• Convinced Sokol to stay at Berkshire twice
• "Lose money and I will forgive you, but lose even a shred of reputation and I will be ruthless" is taken out of context

The first point is just to reiterate that we are in fact discussing the most successful investor of all time. His performance is in a league of its own, and I think this puts the onus on his detractors to prove anything contrary to his sterling reputation.

The importance of the next two points cannot be understated. Warren Buffett is perhaps one of the most humble and honest people in the investment business today. His philanthropy, his views on social justice, and his 'walking the talk' all contribute to a person that can't be described as greedy or above the law.

The final two points support Buffett's innocence in the Sokol affair. If Buffett respected Sokol enough to convince him to stay at Berkshire twice, how can we possibly expect him to have been aware or even suspicious of wrongdoing on Sokol's part. Also, how can one expect Buffett to be ruthless with an employee that has already resigned? Are we realistically expecting the 80 year old man to publicly bash a good friend and employee of over a decade? Is this rational?

The press is holding the Oracle of Omaha to a much higher moral standard than the rest of the industry, and very soon people will realize this. The street is merely channeling bearish sentiment from one likely insignificant issue (who historically cared about Libyan oil?) to another. If anything, I take this 'Buffett Bashing' as another indicator of the small correction we're having in the midst of an extraordinary bull run. Sokol's mistake is not a "credit negative" for Berkshire and the issue is being blown out of proportion.