Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stocks Bear Market is Not Over, Interview with a Value Investor

Stock-Markets / Stocks Bear Market Jun 05, 2011 - 05:29 PM GMT

By: Mike_Shedlock

Stock-Markets

Best Financial Markets Analysis ArticleInquiring minds are reading a Guru Focus Interview with Investor Arnold Van Den Berg, a value investor.

Guru Focus: You seem to believe that there will be high inflation risk in the coming years. What is the best strategy in this inflationary environment?


Van Den Berg: It is important to define what we mean by inflation. Inflation rates in the low single digits (1% to 3.5%) generally meet the definition of low and stable inflation. Inflation rates greater than 4% or lower than 0% have a high risk of destabilizing the economy. The primary risk of inflation stems from the potential for monetary policy errors. Monetary policy makers do well when the underlying environment is relatively stable. But when conditions change suddenly, there is a possibility for error. Thus, monetary policy errors can be either deflationary or inflationary. The risk is especially high in unstable monetary environments, like we are experiencing today.

Both inflation and deflation compress valuations. In the 1970s, stocks sank to single digit P/E ratios. We all know what happened to markets in the early 1930s. Generally, economic instability is bad for valuations.

We believe that we could go through a period of above-average inflation (on the order of 5%), but nothing like we saw in the 1970s. This period will be very poor for stocks. Since it is difficult to predict the timing of such episodes, we adjust for inflation (and deflation as well) by adjusting our valuations for lower price multiples. When we find bargains, we will buy them; when we cannot find bargains, we will hold cash. We expect that conditions in the economy and in the market will run counter to our investment philosophy for short periods of time, but we know that over the long run value investing outperforms.

Guru Focus: There was a piece in OID approximately eight years ago where you discussed the post-bubble periods. It was transformative for me but I wonder where you think we are at present. It seems the risks are greater than ever as our government tries to solve an over-consumption problem by issuing massive amounts of debt.

Van Den Berg: A major characteristic of bear markets is that things that would normally cause the market to explode -- like low interest rates -- have either minimal or temporary effects. In bear markets, earnings could continue to grow, but multiples become compressed. This causes stock valuations to trade up one to two years, but then revert back to low levels and start the cycle over. Over the duration of the bear market, the prices of stocks may not significantly appreciate. Stocks that may look cheap on a multiple basis may often get even cheaper. This is exactly what we have been seeing since 2000.

At the end of the bear market, multiples have compressed to very low levels. This sets the stage for the next bull market.

How much longer will we be in this bear market? Bear markets typically last about sixteen years, so I would say that we have about five more years to go. This coincides with our earlier comments on how long we think it will take for the real estate, unemployment, and fiscal problems to be reconciled. The way to invest in this kind of environment is to stay focused on the valuations of individual companies. You can still make money in this environment by buying stocks when they are cheap and selling when they are near fair value (remember that multiples are compressing, so stocks won't go as high as one would expect in a normal environment). When bargains can't be found, hold cash.

The Guru Focus interview is well worth a read in entirety.

Are Stocks Cheap?

Stocks look cheap now but they aren't because of three factors.

  1. PE Compression
  2. Earnings are mean-reverting
  3. Record government stimulus globally

Van Den Berg discussed point number one in detail.

I covered points one and two in Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think.

For a follow-up on those points, please see Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

Earnings High From Record Global Stimulus

Point number three should be obvious, but obviously it's not given pervasive bullish sentiment nearly everywhere, including smack in the middle of article with bearish sounding titles. For example, please consider a few excerpts from Dow Has Its Longest Weekly Slump Since 2004

  • Michael Shaoul, whose Marketfield Fund Ltd. beat 81 percent of competitors last year, said that while the payrolls report was disappointing, it may also be a signal the slowdown in the economic data is near its peak. He noted that weaker nonfarm payrolls reports in February and July 2004 failed to derail the last bull market, which peaked in October 2007.
  • The biggest decline in the S&P 500 since August is creating a buying opportunity for investors, according to Blackstone Group LP's Byron Wien. The price-to-earnings ratio for the S&P 500 has fallen close to its lowest level in 2011, according to Bloomberg data. The index currently trades at 14.8 times earnings, near this year's low of 14.7 when it fell in March after Japan's earthquake.
  • “The economy is not as bad as it looks right now. Corporate profits will be good, very good. People are asking me, 'Do you still think the market can get to 1,500 by the end of the year?' I do."

In contrast, I think it is crystal clear much of the recovery is a mirage based on unsustainable government stimulus, that stimulus is fading, there is little chance right now for more stimulus, and that corporate profits have peaked this cycle in conjunction with a slowing global economy.

I discussed the slowing global economy in a video: Mish on Yahoo Finance...

High Inflation Coming?

Van Den Berg clearly has a different definition of inflation and deflation than I do. I prefer to view inflation and deflation in terms of money supply and credit. He looks at prices. He is calling for "high inflation" but high means 5%.

Can we see a 5% CPI with falling demand for credit? Sure, why not? And if it plays out that way, there will be no hiding places at all. Treasuries and stocks both would be hammered. It is one of the reasons I do not like treasuries now.

It is also a good reason why corporate bond rates at 2.33% for 10 years constitute a bubble. , Bear in mind that a renewed credit crunch might send treasury yields lower but it will not be good for corporate bonds, especially junk bonds.

Dissimilar Starting Points, Many Similar Conclusions

Van Den Berg does not like gold. I do. I gave my reasons in a Yahoo Finance video last week. Please see Why I Continue to Like Gold for a discussion. There are other differences as well.

However, we have both arrived at the similar conclusions regarding equity valuations in general even though we have very different starting points about what inflation is.

Conclusions

  • The bear market is not over
  • Valuations are not cheap
  • When there is little value, then there is nothing wrong with cash

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2011 Mike Shedlock, All Rights Reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in