Steve's note: I've looked up to Alex Green my entire career. He's been more right, more of the time, than anyone I know. Today he writes the Oxford Club newsletter, which ranks near the top of the Hulbert ratings for five-year risk-adjusted returns out of hundreds of investment newsletters.
I recently sat down with Alex and asked him about how he sees the world right now. And I wanted to share a few of his points with you today...
Why This Is Not the Next Great Depression
Notes from a conversation with Alex Green
Tuesday, April 14, 2009
The things I keep hearing are "Are we going into the Next Great Depression?" and "Will this turn out to be a 'lost decade' like Japan?"
I call this the Great Recession today. But that's all it is...
The Great Depression in the 1930s was actually a downturn that became something much worse because of failed government policy.
What did the politicians do? They raised interest rates – tight money was wrong. They threw up protectionist legislation – that was wrong. They let the banks fail. And they raised taxes. The policy errors were horrific! Economic policy in the 1930s was like medicine in the Victorian Age.
Hopefully we've learned a lot since then. We're not going to bleed the economy with leeches anymore.
Sure enough, we've avoided the major mistakes. Bernanke's taken interest rates to zero. No one's going to pass the Smoot-Hawley tariff. (Although they put that "Buy America" provision in the stimulus bill, which was a mistake. And Obama says he's going to raise the top tax rates in 2011, which is not good, either. They're also spending a lot of money they don't need to spend, but that's just politics.)
Because we won't make the same policy mistakes, we won't see the Next Great Depression.
Then people say, "OK, so it won't be a Great Depression with 25% unemployment and breadlines and such. But what about Japan?"
It's a pretty scary comparison. Japan's Nikkei stock index peaked at over 39,000 in 1989. And a month ago, it bottomed under 8,000. So you're talking about an incredible, 20-year loss of around 80%.
That was in a way worse than the Great Depression. As bad as the Depression was, if you'd bought after the crash you were in good shape 20 years later. That's not true in Japan.
But there is a big difference between our situation and Japan's. What happened in Japanese real estate in the 1980s makes the U.S. housing bubble look bush-league.
Commercial property in the Ginza district of Tokyo was selling for $1 million per square meter. Residential property was also wildly inflated. Then it dropped every single year for 15 years. And yet, by 2004, Tokyo still had the most expensive real estate in the world. The starting point of Japan's downturn is beyond imagining here.
The second thing is, there was no political will in Japan to get things done. They let their banks go on, zombie-like, making more bad loans to bad debtors as if they were healthy. The authorities let it go on for such a long time. They didn't take the proactive moves they needed to take to save the economy.
So again, the current situation in the U.S. is not like Japan's... because the starting point is not nearly as bad and the Japanese didn't have the political will to take the hard steps to get things done.
I think we've seen the worst of the credit crisis here in the U.S. Although the economy is still not working the way it should, people can see that it's getting somewhat better, and it's only going to continue to get better.
People tell me they're in cash... To me, that's a fear reaction, not an investment posture. After taxes and inflation, you're earning negative "real" returns.
If you're totally in cash, you're basically saying, "I don't see any opportunities in any sector of any market anywhere in the world." Not just stocks, but bonds, metals, whatever. Are you really saying you don't see any opportunity anywhere?
I don't believe it!
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Steve's note: In the 15+ years I've known Alex, he's always managed to find winning investments somewhere. For more on Alex and where to find his best ideas, click here. |
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LOOKING FOR A SHORT SALE? LOOK HERE...
If you're looking to hedge the rest of your portfolio on the "short side," look at "secondary education" stocks...
Secondary ed companies are for-profit colleges, like the University of Phoenix. Many of them conduct their courses online. And for the past six months, they've conducted a heck of a stock rally. Several big players like Career Education and Corinthian Colleges enjoyed 60%-80% rallies off their December lows. That rally, however, is toast.
Remember how bearish "price and volume" action forecasted the big decline in oil service stocks last year? It's forecasting the same for secondary education. You'll see some gray and red bars at the bottom of our chart of Apollo Group (APOL), the big "bell cow" of the sector. The bars represent Apollo's trading volume. The black bars show the volume on days the stock advanced in price. The red bars show the volume on days the stock declined.
As you can see from the parade of tall red bars, investors are fleeing Apollo. We're not just picking on the bell cow... every secondary education player sports the same kind of "jump ship" price action. For a bearish cherry on top, Apollo was hammered a few weeks ago after reporting good earnings. It's a bad sign when a sector sells off on good news. Secondary education, look out below...
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Reversing its role as the world's fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China's central bank.
China has lent vast sums to the United States – roughly two-thirds of the central bank's $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.
In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country's huge exposure to America's financial well-being.
– New York Times
The remaining lifespan of the UK's North Sea oil and gas production risks being halved as the economic crisis has prompted a plunge in exploration in one of the western world's most important deposits, the industry has warned.
The number of exploration wells being drilled in the North Sea has collapsed by 78 per cent in the first quarter of 2009 compared with the same period last year, according to the most recent industry data from Deloitte, the accounting and consulting firm.
Exploration and appraisal wells are critical to any oil region's long-term supply prospects. But they are particularly important for the North Sea, where ageing fields' production is rapidly declining.
The worsening exploration climate could knock 10-15 years off the North Sea's expected lifespan of 20-30 years, meaning almost half of all its infrastructure could be decommissioned within the next 11 years, UK Oil and Gas estimates.
– Financial Times
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