The Rising Influence of Rising Affluence

[DewDiligence]

Four Myths About the Current Global Economy

http://www.forbes.com/sites/kenkam/2011/09/01/the-oracle-of-manitoba-is-buying

First is the idea that the global economy is fragile. In 2007, at the last economic peak, global GDP came in at $65.4 trillion. Four years later, in 2011, global GDP is forecasted to be around $78 trillion. The world economy has grown 19.2%; slightly better than 4.5% a year, which is typical of a traditional global expansionary period. This is not indicative of an impending global economic collapse.

The second disconnect is that corporations are hurting. The media is extrapolating weakness in the banking industry to the rest of Corporate America. That fact is that corporate profits are growing nicely. In 2007, S&P 500 earnings were $82.54. In 2011, S&P 500 earnings are forecasted to touch $97.20, which is an increase of 17.8% from 2007. Looking forward, 2012 earnings are forecasted to grow more than 17% to $114.35 per share.

[The third disconnect is] that corporate balance sheets are strained. A key current indicator of balance sheet health is insider buying of stock with actual cash at market prices as opposed to stock option exercises. Just last week, insiders bought more company stock than was bought during the 2009 market low—which was the largest spate of insider buying in twelve years—according to Bloomberg [#msg-66293676]. Right now, corporate insiders are buying their own stock with their own dollars—a strong sign of corporate health.

[The fourth disconnect is] that government deficit issues will derail a tenuous recovery and push us into a double dip recession. We will not experience a double dip recession, because, for the most part, we have not experienced an economic collapse, particularly not on a global scale. Economies outside of the United States are still growing. As corporations continue to advance their profitability, even while governments cut back, there will be a natural reallocation of capital towards more productive and hence more valuable uses. It is entirely possible that government cutbacks will occur but that global economic health will continue to improve.

The above comments are from Randy McDuff, a portfolio manger who has outperformed the S&P 500 by 10%, 13%, 19% and 64%, respectively, during the past 1-, 2-, 3-, and 5-year periods.