Economist SNIP:JUST back from Societe Generale's annual strategy seminar...As always, it was a thought-provoking event, and not confined to Albert's normal pro-bonds, anti-equities message. Indeed, Albert accepts that bonds are a poor medium-to-long term investment but thinks we have another deflationary shock to go first. "2012: The Final Year of Pain and Disappointment" was the title of the event. His general case, which he has manfully maintained for around 15 years, is that we are in an "ice age" in which equities get de-rated and bonds do well, as has been the case in Japan.The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example). The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable. He cites the views of other forecasters such as the Economic Cycle Research Institute and John Hussman that a recession is on the way, and points to other confirming data such as the recent weakness in commodity prices.Dylan Grice took a more philosophical view, pointing out the limits of our knowledge. Historians have had 1600 years to work out the reasons for the fall of the Roman empire and still don't agree; economists still debate the causes of the Great Depression. He produced two lovely quotes, the first from Lao Tzu Those who have knowledge don't predict. Those who predict don't have knowledge.And the second from J K Galbraith There are two types of forecasters; those who don't know and those who don't know they don't knowFrom this standpoint, the confidence of central bankers in their ability to forecast is quite astonishing. He cites Ben Bernanke who, when asked what degree of confidence he had in his ability to control inflation said "100 per cent". This was the same man who asked about the chances of a US house price decline in 2005 said It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis.and then, when house prices were falling, said in 2007 that the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be containedDylan thinks that 30-year inflation breakevens at 2% are significantly underpriced.Andrew Lapthorne is the quant guy on the team. he had a number of interesting graphs, including one that showed the combined yield of a global balanced portfolio (50% equity, 40% government bonds, 5% cash and 5% corporate bonds) was now 3%. With total expense ratios on many mutual funds around 2% (and hedge funds charging 2 and 20), that doesn't leave much left for clients. Another graph was on pensions. If you look at the numbers, S&P 500 companies are expecting 10% returns from equities (after costs!). But a poll by Duke University found that chief financial officers median forecast for equity returns was just 6%; in effect, they didn't believe their own accounts.As for share buy-backs, companies are hopeless about timing. At what moment in the last 15 years did S&P 500 companies devote the maximum proportion of their cashflow to share buybacks? The answer is early 2008 just before the market tanked. In 2009, when valuations were depressed, they used only a small proportion of their cashflow on buying back shares.On a more encouraging note, Andrew found that more and more stocks were passing valuation tests at the moment. The only other time since 1989 whan such bargains were around was in early 2009.The final speaker was Edward Chancellor from GMO, and a noted historian of financial crises. He pointed out that many of the signs of bubbles - an uncritically assumed growth story, overconfidence in the authorities, rapid credit expansion, an investment boom - are currently present in China.
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