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The Cult of Equity Is Dead. Long Live Equities.

In pre-republican France, upon the passing of a sitting monarch the Duc d’Uzès would proclaim “The King is dead. Long live the King!”

The idea, of course, was that a new king was rising up to take the place of the old. The Crown as an institution was alive and well; it was just that the head under it had changed.

I was thinking about this as I read a headline in today’s Financial Times: buy cheap sildenafil citrate online canadian pharmacy‘Cult of Equity’ said to be dead.

 

The FT quotes Alister Hibbert, one of Europe’s leading fund managers, as saying safe canadian pharmacy “I think the cult of equity is dead.” This follows similar statements last week from Citi’s equity strategists that an canadian pharmacy generic cialis “immediate reincarnation of the equity cult seems unlikely.”

Whenever one hears “equities” and “dead” in the same sentence, it’s tempting to draw parallels to the oft-lampooned August 1979 BusinessWeek cover that announced the “Death of Equities.” More than thirty years later, the unfortunate editors of BusinessWeek have the distinction of printing what was quite possibly the greatest contrarian indicator in history.

There is a difference, however.  Mr. Hibbert is not saying that equities are dead.  He is saying that the cult surrounding them is dead, describing the sentiment of investors who no longer believe that stocks are “guaranteed” to make them wealthy.

The 1949 book The God That Failed was written by a prominent group of ex-communists who chose the provocative title to describe their own prior cult-like faith in Marxism.  In 2001, Hans-Herman Hoppe wrote a similarly titled book in 2001, Democracy: The God that Failed, in which he described the belief in universal democracy as being based on religious-like faith.  Neither ideology proved to be the panacea that its adherents believed as the bloodshed of the 20th century proved.

For many investors, particularly those in or nearing retirement, their faith in stocks has likely been permanently jaded.  Add equities to the list of gods that have failed.  The colossal 2007-2009 bear markets wiped out more than a decade’s worth of gains for investors who faithfully bought and held throughout the 1990s and 2000s.  Retirement dreams for many have been ruined.  Disgusted with the entire business, many have taken money out of the equity markets altogether and have opted for the “safety” of bonds.

During asset bubbles, investors engage in cult-like behavior en masse.   They cease to view their investments dispassionately, and when evidence or common sense would suggests that their faith is misplaced they get defensive.  (Read the comment section under my previous article on gold, and you will understand what I’m saying.)  But when faith begins to crack, sentiment tends to go too far the other way.  Investors oscillate between having too much faith and not enough. For those who are able to keep a level head, all of this is good news.

As I wrote in a prior article, many staid American blue chips are now priced to deliver respectable if not spectacular returns.  Dividend yields on many are well in excess of bond yields.

Returning to Mr. Hibbert, he would appear to share this view: “Given that the starting valuation for equities is now very low, then if those companies can continue to increase their earnings profile I think you will see very strong returns because you will get both capital growth and dividend yield.”

The death of the Cult of Equities is a once-in-a-generation blessing for those investors with the patience and temperament to wait for sentiment to improve.  With dividend yields as high as they are currently, they are being paid handsomely for their patience.

The Cult of Equities is dead.  Long live equities.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Graying of the Great Powers

Neil Howe, who previously co-wrote several groundbreaking books on demographic trends with William Strauss (Generations, The Fourth Turning, Millennials Rising), published a new book in 2008 with Richard Jackson: The Graying of the Great Powers: Demography and Geopolitics in the 21st Century.

We consider Howe’s prior work with Strauss to be required reading for anyone wanting to understand the role that demographics have played in recent history, particular the interplay between the major generations (Baby Boomers, Echo Boomers, etc.). We would say the same Howe and Jackson’s new book, though readers who are already familiar with Philip Longman’s work, particularly The Empty Cradle, might find it to be somewhat redundant.

Graying covers many of the same themes covered by Longman and others — the usual doomsday (though completely accurate) scare statistics about Europe’s demographic decline, the coming pension and health funding crises and probable wave of national bankruptcies — and combines them with some of the geopolitical themes discussed by Mark Steyn in America Alone and Patrick Buchannan in The Death of the West (though without Steyn and Buchanan’s abrasiveness and charged ideology) and to a lesser extent those covered by George Friedman in The Next 100 Years.
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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Death Elasticity and Taxes

The following is an excerpt from an article I originally wrote in June 2008.  Today, with the Bush tax cuts set to expire, the insights of this article are more important than ever.

Moving on to a different area in human predictability, Gerald Prante of the Tax Foundation recommended a white paper that examines how people adjust major life decisions—including death itself—in response to tax incentives. Kopczuk and Slemrod’s 2001 paper, “Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity,” is a fascinating look at these timing decisions.

In an article I penned for the March 2007 issue of the HS Dent Forecast, “Voting for Fertility,” I commented that government pro-natal policies were not likely to work. No government has enough money to convince reluctant adults to become parents unless they were already strongly considering it. Even Russia’s generous $10,000 “baby bonuses” do little to compensate parents for the money, time, and loss of freedom that children bring. Likewise, it is not likely that many couples would permanently forgo marriage to avoid the marriage penalty on their yearly 1040 or that a significant number of healthy people would commit suicide to escape the estate tax. Continue Reading →

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Post-American World

Book Review of Fareed Zakaria’s The Post-American World

Fareed Zakaria, Editor of Newsweek International and host of CNN’s Fareed Zakaria, has emerged in recent years as one of America’s best minds in current events and world politics. His recent book, The Post-American World, touches on several issues near and dear to our research. The gloomy title aside (this book got quite a bit of notoriety when then-candidate Barrack Obama was seen reading it during his campaign), Zakaria is actually rather optimistic about the economic prospects of the United States. He does discuss the role of demographics in America’s position in the world, which is a good start.

As this book has already been reviewed by countless others, we will steer clear of the sections most often reviewed, which are generally foreign policy related and compare the United States today with the British Empire last century.  We’ll start instead with Mr. Zakaria’s commentary on the US health and pension system, which echoes our own work on the subject:

Consider the automobile industry. For a century after 1894, most of the cars manufactured in North America were made in Michigan. Since 2004, Michigan has been replaced by Ontario, Canada. The reason is simple: healthcare. In America, car manufacturers have to pay $6,500 in medical and insurance costs for every worker. If they move a plant to Canada, which has a government-run health care system, the cost to the manufacturer is around $800 per worker. In 2006, General Motors paid $5.2 billion in medical and insurance bills for active and retired workers. That adds $1,500 to the cost of every GM car sold. For Toyota, which has fewer American retirees and many more foreign workers, that cost is $186 per car. This is not necessarily an advertisement for the Canadian health care system, but it does make clear that the costs of the American healthcare system have risen to a point that there is a significant competitive disadvantage to hiring American workers.

Zakaria also makes the point that tying healthcare to employment tends to tie people to their jobs and lesson their ability to leave lest they lose their health insurance. It also tends to make them fear free trade and globalization. The result is that the American economy is less dynamic and productive that it would have been under a more fluid labor market.

Moving on, Zakaria also refers to demographics as America’s “secret weapon,” at least vis-à-vis Europe and East Asia:

All in all, Europe presents the best short-term challenge to the United States in the economic realm.

But Europe has one crucial disadvantage. Or, to put more accurately, the United States has one crucial advantage over Europe and most of the developed world. The United States is demographically vibrant. Nicholas Eberstadt, a scholar at the American Enterprise Institute, estimates that the U.S. population will increase by 65 million by 2030, while Europe’s will remain “virtually stagnant.” Europe, Eberstadt notes, “will by that time have twice as many seniors as older than 65 than children under 15, with drastic implications for future aging. (Fewer children now means fewer workers later.) In the United States, by contrast, children will continue to outnumber the elderly…. Some of these demographic problems could be ameliorated if older Europeans chose to work more, but so far they do not, and trends like these rarely reverse.”

This goes to show that, with demographics, it’s all relative. The United States does indeed have a better long-term demographic prognosis than Europe or East Asia. But that doesn’t mean that the prognosis is good. “Less bad” doesn’t mean good.

Furthermore, Zakaria falls into the same trap as most economists that have approached this issue. He focuses on demographics as it applies to workers. The Sizemore Investment Letter focuses instead on the demographic characteristics of consumers. As Japan has proven for nearly two decades, a country can still produce with an aging workforce, but it ceases to consume at the same pace. And in an economy dominated by consumer spending, this is a problem.

The Post-American World is full of other interesting points that deserve more space than we can offer here. We highly recommend this book for your summer reading.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Summer Reading

This set of book reviews originally appeared in the July 2008 issue of the HS Dent Forecast month and cover a wide variety of topics: financial bubbles, pension funding, healthcare, immigration, population control, and of course, age demographics. Before your next trip to the beach, make a stop by the bookstore and toss one of these in your bag.

The New Paradigm for Financial Markets
by George Soros

We will start our summer reading list with George Soros’s most recent book, The New Paradigm for Financial Markets. In the opening pages, Soros gives a good history and analysis of the 2007-2008 credit bubble and crisis using some rather sobering language:

We are in the midst of a financial crisis the likes of which has not been seen since the Great Depression of the 1930s. To be sure, it is not the prelude to another Great Depression. History does not repeat itself. The banking system will not be allowed to collapse as it did in 1932 exactly because its collapse then caused the Great Depression. At the same time, the current crisis is not comparable to the periodic crises which have afflicted particular segments of the financial system since the 1980s…. This crisis is not confined to a particular firm or a particular segment of the financial system; it has brought the entire system to the brink of a breakdown, and it is being contained only with the greatest difficulty. This will have far-reaching consequences. It is not business as usual but the end of an era.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments are closed