Does Buffett stand by his 1999 Sun Valley prediction?
Posted on 11 December 2008 with no comments from readers
Readers of the new official Warren Buffett biography ‘The Snowball’ will be taken aback by the review of his presentation to the Sun Valley meeting of the US super-rich in 1999. Then he suggested that the Dow might go nowhere for 17 years, following a pattern seen in many previous epochs, most recently 1964-1981.
Remember that 1999 represented the very height of the dot-com bubble. Buffett’s statement was bursting the bubble of business success stories like Bill Gates who sat in the audience, and gasped at this prediction.
Yet how wise the Sage of Omaha has proven to be. The dot-comers have seen their fortunes shrink and not recover from the bust. And the Dow today is substantially lower than in 2000.
Why buy now?
Why then did Warren Buffett put out a buy notice on stocks last month? Is this not a contradiction of his own prediction about 1999-2016?
Well, to be fair the Dow has rallied 20 per cent since his call. But is this therefore nothing more than a bear market rally?
If we are to take the seminal 1999 statement from Warren Buffett seriously, and he has not denied it and presumably endorsed its inclusion right at the front of his new biography, then that has to be the conclusion.
However, it could be that the inflation outlook has changed so dramatically in the wake of the $8 trillion in bailouts and stimulus packages now being thrown at the US economy that Buffett is having a re-think.
Stocks could well be buoyed upwards by a hyper-inflationary economy. This has happened most recently in Zimbabwe though this is hardly an economic model worth replicating in the world’s biggest economy.
Q-theory
Russell Napier, author of the definitive book ‘Anatomy of the Bear’ reckons stocks could rise for a couple of years on the back of the money being injected into the global economy, but this will ultimately fail and lead to stocks plunging to new lows.
According to Q-theory – which values stocks by reference to replacement value of their assets – the Dow market bottom is at around the 4,000 level or another 55 per cent down.
The ride from 4,000 back to 14,000 would be a very substantial roller-coaster ride, and that might indeed take until 2016 as Warren Buffett suggested in 1999.
But in the short term a two year bull market in an inflationary environment, and presumably with a weakening dollar, would be highly positive for precious metals, and particularly their stocks.
As suggested elsewhere on this blog the Dow-to-gold ratio could well go to its historic low of one: that is to say $4,000 an ounce for gold and the DJI at 4,000 within this two-year time horizon and maybe next year.
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Commonsense from Big Jim Sinclair, whose ahead of the pack as usual, from his website today:
From the Dow Jones high in 1929 it took until 1932 to establish the absolute low. From the establishment of that low point in 1932 low it took 35 years to regain the 1929 high (1954).
It was no coincidence that Roosevelt went to fiscal stimulation in 1932 – 1933 in the form of jobs creation by proxy, such as the Civil Conservation Corp (CCC) and other make work programs.
Roosevelt proposed conservation and other work programs as the means of unemployment relief during the 1932 presidential campaign. Senate Bill 5.598, the Emergency Conservation Work Act; was signed into law on March 31, 1933. This initiative is still on the books, having not been funded since 1941.
This is why liberal President Elect Obama will embrace fiscal stimulation with a vengeance, possibly as soon as at the Swear In Ceremony.
I am told that $1 trillion is only for starters.
Today is so different in substance than 1929 – 1932 even if it is a mirror image in unfolding chapters.
Monty is spot on regarding the total final cost of the Sin of OTC derivatives, saying that it will reach only $20 trillion if we are lucky.
CONSEQUENCES my friends. Consequences cannot be avoided.
While the Fed and Treasury take their lead into action from what went wrong with 1929 anti deflationary policies, no one is considering the consequences of their present economic acts that will go infinitely more wrong than any boo-boo in the 1929-1932 period.
Gold is going much higher than $1650. Alf Fields is right in his studies. My estimate of $1650 that I have held since 2000 is terribly conservative.
And from MoneyWeek today on the same theme:
Cue Tobin’s Q. This is a ratio developed by Nobel Prize-winning economist James Tobin to compare the market value of companies to the cost of their constituent parts, i.e. their real net asset value.
When the gauge is more than 1.0, it indicates that the market is overvaluing company assets, while a reading of less than 1.0 suggests shares are undervalued because it’s cheaper to buy quoted companies than build them up.
The Q ratio on US equities has now dropped to 0.7 from a 1999 peak of 2.9. That could indicate shares are now cheap.
But think again. The ratio needs to fall to 0.3 to signal the final stage of a major bear market like this one, says Russell Napier at CLSA. How does he know? Because that’s what it did at the end of the four largest US stock price declines in 1921, 1932, 1949 and 1982. That translates into the US S&P 500 index plunging another 55% by 2014.
Ouch.
But between now and then, there’s certainly a good chance of a bear market rally – maybe up to two years long, so those strategists may be right about 2009 – as Obama and the US Fed manage to delay the start of deflation with New Deal II. But those efforts will eventually blow up as ballooning government debt devalues the dollar and prompts a massive share sell-off – on both sides of the Atlantic.
“Bear markets always end when they begin ‘pricing in’ deflation, as the value of assets falls and the value of debt stays up, so equity gets crushed”, say Napier. “The results are always horrific, and equities will become incredibly cheap”. Albert Edwards at SocGen has christened this period the Ice Age.
Another bull market will start in time. But as Edward’s description suggests, it’s still a long way away.