Comstock Partners, Inc.April 01, 2004
"A Balance of Financial Terror"
Although we are in a small minority in our pessimistic view of the economy and stock market there are some thoughtful observers who espouse similar opinions. Although they don’t get much publicity, and you’ll seldom see them on the financial news networks, they offer an antidote to the cheerleader type of what passes for analysis in most of the media.
Former Treasury Secretary Lawrence Summers, in a recent speech to the International Institute of Economics said that the U.S was jeopardized by the mounting debts that made it dependent on Asia to fund its spending. He stated,”There is surely something odd about the world’s greatest power being the world’s greatest debtor…There is surely a question that must be asked when, in order to finance prevailing levels of consumption and prevailing levels of investment, it is necessary for the United States to be as dependent as it is on the discretionary acts of what are inevitably political entities in other countries.” While conceding that it may not be in China’s or Japan’s interests to rapidly dump U.S. debt, he added that, “…it surely cannot be prudent for us as a country to rely on a balance of financial terror to hold back reserve sales that would threaten our stability.” Referring to the rising U.S. budget and trade deficits, Summers stated, “…it’s hard for me to understand why there isn’t a broader sense of concern.”
In a recent speech to a group of college and university endowment officers, widely respected economic consultant Peter Bernstein echoed similar themes. In his view recent economic changes has resulted in a shift of jobs from the U.S. to Asian nations, declining U.S. labor compensation, and an increasing federal budget deficit. He added that these Asian nations were saving and lending to low-saving Americans who were borrowing to finance their excess spending. In his view this is a “we buy and they finance arrangement” that was not viable and a major cause of international imbalance.
In addition, financial advisor Bridgewater Associates, in a recent report, made a strong case that there really is a U.S. housing bubble. They cited high home prices relative to income, the increasing percentage of adjustable-rate mortgages, and the high level of new home sales. The firm concluded that, “As with any unsustainable market or economic event, it is impossible to pinpoint when the reversal is about to take place, but a pop in this bubble will likely have a larger effect on households than the popping of the Nasdaq did.”
Sentiments similar to those summarized here have also been expressed by outstanding investors such as Buffet and Templeton. We believe that this secondary bubble we are in currently is on its last legs and that stocks remain highly risky.