Is Value Investing a Safe Bet?

Posted Aug 10, 2016 by Martin Armstrong

QUESTION: What do you think of value investing?

Bob

ANSWER: As with everything, a cycle that you have to understand will unfold. Everything will move to extremes on both sides and you must understand the driving forces. Look at the PE Ratio. People write in and say I am wrong and the market must crash because of the PE Ratio. Everybody is wrong at some point in life. That is how we learn from our mistakes, which we call “experience.” If you assume such stagnant relationships are always fixed, well, you have a lot to learn.

Value investing works for the majority of the trend in general. However, that view typically looks just at earnings. As illustrated at the top, I used these charts during the 1980s and was blamed for creating the takeover boom. Why? Forget earnings. The book value of assets were ignored after the Great Depression so the low in the Dow Jones Industrial shares was 1977. You could buy a company, sell its assets, and triple your money. So looking just at earnings did not identify the takeover boom when the Dow rose from 1,000 to 6,000.

Now look at the PE Ratio. Here a second cyclical trend emerges. Note that the high in the PE Ratio exceeded 120:1 during the panic into 2009. Why? For the very same reason that interest rates are NEGATIVE on 10-year German bunds. People are uncertain about the future so they are willing to park money with ZERO return. This proves that “value investing” is just like everything else. Sometimes it works, and sometimes it does not. EVERYTHING is cyclical. There is a time to buy and a time to sell.

The trend where people hoard cash can be seen in the trading volume of the S&P 500 where the peak remains 1996. When confidence shifts 

and people wake up and say, “Oh shit!” you will see things go crazy like never before. There is no panacea for value investing based upon PE Ratios and “value,” for there comes a time when people are scared of the future and want to park.

Anyone suggesting differently is either fooling themselves or trying to fool you. Piling into the assets to preserve capital will become the name of the game.

This is not some wild theory that is isolated to a single event such as the German hyperinflation. This is a major shift in confidence that is historically consistent.

Pound will drop to penetrate the $1 par level probably no later than 2018.

Declining Pound Savior of Britain

Posted Jul 4, 2016 by Martin Armstrong

QUESTION: Marty
It looks like Carney and Osborne are talking the pound down in order to frighten people.

Only one of their prophesies have come true – the lower value of sterling.
But it is unhelpful that they continue to be negative – even though they’ve proved to have been wrong on all the other things [cost of borrowing, asset prices, the UK deficit, cancellation of investments].

I fear [being a Brit] that too much unwarranted negativity from their position of power will take the pound down too far. Do you agree that can achieve that and that they, representing the establishment, are trying to win back some of the lost ground? I would say that is treason [not to carney as he’s a Canadian. I’d tell him to go home].

Thanks
JF, Manchester

ANSWER: The reason “value” investing and “fair value” theories fail is because markets ALWAYS over shoot and under shoot. Our next real zone for the pound is in the mid 120 level. However, ironically, European concepts of currency value is SERIOUSLY WRONG. Post-World War II, European politicians used the rise in their currencies as proof that they did a good job. That installed this concept that a strong currency was good for the economy which in fact if you are concerned about trade, you want a weak currency. The entire reason the Swiss put a peg on to the euro was because the rise in the franc was reducing exports and major companies threatened to leave.

The decline in the pound will BOOST British exports and have exactly the opposite effect helping the British economy. The EU is doomed. Over taxes, over regulated and it has no meaningful democratic process. Worse still, just as Merkel by herself tried to help her negative image because of her harsh dealings with Greece wanted to appear reasonable, she invited the refugees in without any right of other countries to object. She made a decision as Germany, but it automatically impacts all of Europe. Under the EU, no such power should be allowed if all governments must suffer because of one leader.

The pound will drop to penetrate the $1 par level probably no later than 2018. With the political chaos of French and German elections next year, that decline can take place sooner than later. But this is what will force a monetary reform as early as 2018. The rise in the dollar will reduce US exports and that will put political pressure in the States for reform not to mention a debt crisis in emerging markets.

The peak in bonds appears to be in place. We are seeing the rates rise already in the peripheral markets. This will spread from the peripherals in toward the core. So Southern European rates will rise faster than German but when capital figures out the crisis is the EU, then German rates will rise. The Federal rates in the USA will be the LAST to rise because the initial shock will be foreign capital fleeing to the States.

The remarks of British politicians are to be seen in their context of this false perception that a strong currency is good. You hear Trump criticizing China as a “currency manipulator” implying they lower the value of their currency to increase trade. As the pound declines, this will save British jobs – it’s a good thing; not bad.