Tuesday, July 7, 2009

A Great Pointer on P/E Ratios and Random Bleak Thoughts on the Future


























Over on Zero Hedge, they have posted a nice interview with David Rosenberg, the guy who got kicked out of Merrill for ruining their game (and then went on to some shop in Canada which ran these unfortunate full page ads). Anyway, he says in the interview that the S&P P/E should be the inverse of the Baa corporate yield (hence S&P under 700 based on $75 in earnings). Thanks to the SL Fed, we have the graph above.

I personally think that 2-3 years from now, the Baa rates will be much higher, hence there will be a substantial multiple contraction on the S&P. But with increasing inflation expectations, the value of the S&P will not go down as much simply because there will be a rush for assets, any assets. You already see this in the deals that China is doing all over the globe: natty res grabs in Australia, Canada, Latin America, as well as massive farmland grabs by them and the oil-rich mid-east countries in places like Zimbabwe, Kenya, Sudan and others. This is a massive dollar flight that is done step-by-step: if those countries thought that their dollar assets would be worth more in the future, they would not be exchanging them for hard assets, right? This is not a short-term play but a larger, more strategic view.

Next in line will be the inability of the US to borrow in dollars, effectively delegating it to a banana republic status. Following that, the US will have to pawn off assets as a backing for any financing. It has already allegedly started with the US giving the B-2 bomber blueprints to China in exchange for some debt relief. Then you will have some base deemed "non-strategic" "leased" to a creditor country (think Guam or the abandoned airfields on multiple Pacific islands). Then you might see a wholesale turnover of the "keys" to the empire: handing off the bases in Djibouti, Panama and the Straits of Hormuz. Next will be the drilling rights in currently off-limits US coastal zones: California, the Atlantic Seaboard. Next will be the mineral rights in portions of Alaska closed for drilling. Simply put, there is NO free lunch. You cannot consumer more than you produce for a prolonged period of time. Unfortunately, our government simply does not get it, and what might be coming will make Peter Schiff sound like a lovable optimist. I hope the Kennedy descendants on Cape Cod enjoy the view of CNOOC drilling rigs guarded by Chinese navy boats.

Good luck trying to pull off a Margaretta then.

"I have not become the King's First Minister in order to preside over the liquidation of the British Empire." 1942

Who said that? Once you have the answer, read the link below. Any parallels are coincidental. For sure.

Decolonization and Decline 1945-1997

No comments: