Alec Hogg: Pricking share market bubble

Alec Hogg writing about the potential for a drawn out, lacklustre recovery to come...

Every executive team needs some "yes, but....." types. The pessimists who can't help raining on parades.

In banking it's the crusty head of credit who reins in exuberant marketers. In industry, the one who asks uncomfortable questions whether numbers around the new factory still work in an economic downturn.

Investment markets are the same. The human condition tends towards optimism so in times when the future direction is murky, investors prefer grabbing on to good news.

Glimmers quickly become proof that "green shoots" of recovery have arrived. Fuelling hope, justifying wayward decisions to buy, and creating optimistic but momentum which feeds on itself.

We've seen this play out in stock markets around the world over the past half-year. The Crash of 2008 has become little more than a bad dream. After a 51% average rebound in American share prices - followed by stocks elsewhere, including the JSE - private investors are being sucked back into the share markets. And those who didn't buy earlier are rushing in before they miss the boat.

They might profit from cocking an ear towards the "yes, but......" brigade which has been in good voice this past week. Particularly as they include the world's best investor; earth's most respected economist; and the London-based magazine that is peerless in assessing the state of the globe.

First investor extraordinaire Warren Buffett.
Last week Berkshire Hathaway's penned an opinion piece for the New York Times ( warning that a dangerous vortex is developing in his country.

Focusing on what he calls "Greenback Emissions", Buffett says his government was right to initially throw money at the problem and praises them for avoiding a likely Depression. But he warns that unless the State turns off its spending taps, what is potentially an even greater problem will emerge.

Buffett frets that "enormous dosages of monetary medicine continue to be administered" and predicts that if left unchecked, these Greenback Emissions will "cause the purchasing power of the currency to melt". The plain-speaking native of Omaha worries that there's a chance of the US evolving into a "banana republic economy".

Nouriel Roubini, the New York University professor ridiculed for calling "Wolf" ahead of the financial crash, is also in full voice. He shares Buffett's theme, but gloomily predicts that US policymakers have no way out: they are damned if they do, and damned if they don't (

The US is heading for a 13% budget deficit this year ($1.8trn), more than double the worst non-wartime level since 1920. Also, the Obama Administration's own projections are for $1trn-plus annual deficits for the next decade.

There are only two ways to reduce a budget deficit - cut spending; or raise income which, for government, means raising taxes. Roubini, who revels in the nickname "Dr Doom", argues that US politicians won't follow either route as that would undermine an already tepid economic recovery. Buffett is more diplomatic, suggesting that slowing down government spending would require "extraordinary political will". A will which simply doesn't exist right now.

Back to Roubini's "damned" argument: Dr Doom adds that if the high budget deficits are maintained - as appears likely - they will cause higher inflation and bond yields will rise as lenders (read China) refuse to buy depreciating US government debt.
Rising bond yields means more expensive money higher across the board, choking off economic growth. Higher interest rates, by the way, are bad for corporate profits and hence share prices. Completing a pretty circle for those still making the case for equities.

Also in the "yes, but......." camp is the world's most respected magazine, London's The Economist whose latest edition carries two pieces supporting this view.
A well-researched piece on US house prices ( provides strong evidence that apparently good news is only temporary. And the magazine concludes in a Leader article ( that predictions of a rapid economic recovery are off-beam.

Rather than the hoped-for V-shape rebound, the magazine reckons: "A gloomy U with a long, flat bottom of weak growth is the likeliest shape of the next few years." Today's share buyers, be warned.

Write to Alec Hogg: or follow him
* Alec Hogg is the founder and editor in chief of Moneyweb


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