Saturday, February 7, 2009

Buying Opportunity of the Century...Just Not Yet

An informative piece in Barron's today. Its the interview with Bridgewater CIO Ray Dalio. I've read some of his commentary before, and he is one of the "ones to listen to." According to him, we're not in a recession, but what he calls a "D-process", or bascially a depression. People don't understand them because they are so rare.

When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?

The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.

By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% -- and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today's TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.

At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn't get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.

He also sees inflation coming back, and likes gold.

A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years.

And on stocks...

Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century.

In my opinion, this guy is pretty much right on. We're in a de-leveraging period, and it has to clean itself out. This will come through defaults and bankruptcies, but its the only productive way. There will be some pain in the near term. Economic numbers are getting worse. And Washington politicians, like always, think they can fix everything, so they are pushing this stimulus through. Maybe it will help consumer confidence, because I'm not convinced it will help the economy. But looking back to what Dalio said, we'll see renewed optimism in a false sense many times through this turmoil, but it won't be good for investors. We cannot make significant moves higher until most of this toxic debt has been washed away.

He sees late 2009, maybe 2010. That could be correct. But I do agree there will be "better" buying opportunities than now, so we must be patient.

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