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“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
                          Friedrich Hayek

Commentary & Analysis
Attractive valuations: does that mean Keynes-ja vu all over again?

Hey – you can’t argue against the fact that stocks and commodities are more attractive buys right now than they were two weeks ago, based entirely on relative value.

Would I rather buy copper at $3.90 per pound instead of $4.50 a pound? Yes.

Would I rather buy Bank of America at a 30% discount to where it was trading 10 days ago? Yes.

But the more pertinent question might be: right now do I want to buy copper or Bank of America … at all? Not really; at least not yet. I think there are some major risks to the global financial system that easily trump these newfound “attractive” valuations.

Forget free-market fundamentals. What matters most to the capital markets now is whether the governments of the U.S. and Western Europe have the will and the wherewithal to save the global financial system from disaster yet again.

Those two sentences were from a Bloomberg article. And they point to two very important ideas that will impact valuations one way or the other:

  1. The global financial system faces disaster. This implies that it’s not just one nation or region undergoing economic headwinds; this implies that the major growth-producing regions of the world are facing financial problems that are set to wreak havoc on growth … together. Call it systemic; it evokes contagion fears – it appears time to start heeding the warnings.
  2. The global financial system faces disaster … AGAIN. The difference here is being that commentators, economists, investors, and policymakers have, only a few years ago, already witnessed a major financial crisis that rocked financial markets. That time, in 2008, the market collapse seemed to sneak up on everyone; this time many are at least aware that there are forces that could wreak havoc on markets.


Business from China and India is robust enough for shippers such as Paragon Shipping, Box Ships Inc. and Seanergy Maritime Holdings not to be losing sleep over financial crises in the United States and Europe, executives said.

This may prove my point. Investors, and even the esteemed policymakers and executives around the globe, may determine that major developing markets can compensate for the growth disappointment that the US and Europe are almost certain to deliver.

Gee, that sounds familiar. Yogi?

It’s like déjà vu all over again.

Last time we were told that emerging markets could compensate for lost demand as the US consumers’ hands were tied up in deleveraging. Turns out it was global money pumping and liquidity that compensated for lost demand. It’s like Keynes-ja vu all over again.

Except this time might it be India and China alone that compensate for a mediocre West?
After the 2008 financial crisis China saw its GDP growth slump into the 6% range. And that was back when China wasn’t facing near as many problems as they are now – e.g. their growth model is further stressed, inflation is a major issue and Chinese officials may have little influence to alter their economy’s trajectory.

India didn’t escape from the 2008 financial crisis unscathed, either. And now they are battling their own headwinds as well as those that come with slower global commerce.

We were told that South Africa and Brazil were among the emerging markets that had little, if any, exposure to the financial systems of the West. Neither of those economies fared well when the global financial system froze up. And I don’t expect they’re capable of taking up the slack if major economies continue to slow.

Are investors building their houses out of BRICS?

Together, or individually, Brazil, India, China and South Africa will not be saviors in the event the global financial system hits a brick wall, despite rumors (again) to the contrary.

But what about Russia, the only one of the BRICS I left off the wall?

I’ve been reading a few stories lately touting the “attractive” Russia investment story – some believe it is much more attractive than any of its fellow BRICS. Maybe! Maybe, but Russia isn’t going to pull anyone out of the fire if we revisit the credit crunch. Russia has commodities and commodities get creamed in a credit crunch. Period!

We will share the good, bad, and ugly of Russia and its economy next week when in the August edition of Global Investor. Stay tuned.

In the meantime, we’ll watch how the valuations argument shapes up. If investors come rush to snatch up seeming bargains on shares and commodities, I don’t think it will last. But it will set the stage to rack up some profits on a new leg down. Back to the Bloomberg excerpt:

Forget free-market fundamentals. What matters most to the capital markets now is whether the governments of the U.S. and Western Europe have the will and the wherewithal to save the global financial system from disaster yet again.

Ultimately, I think investors will be disappointed in the near-term by governments’ inaction. But the policymaking saviors will certainly (eventually) arrive in some way with measures to stem the market collapse. At that point we’re faced with what I talked about on Wednesday – does the Federal Reserve have the tools (the money, really) to restore investor confidence?

Have a nice weekend.