Replies to post #3309 on 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.

[DewDiligence]

Excerpts from Barron’s interview with Jim O’Neill of GS:

http://online.barrons.com/article/SB50001424052748704101304577038232857004326.html

›Barron’s: So you invented the term BRIC, meaning Brazil, Russia, India, China.

O’Neill: I am Mr. BRIC. It transformed my professional life. The creation of the BRIC club by the political leaders is something I never expected. I should add that they have yet to invite me to one of their meetings. The whole idea of individual BRIC funds was a surprise.

But BRICs weren't enough.

I came up with the term "growth markets" a year ago, because of my new job as chairman of the asset-management division. I was shocked at how conservative and cautious about the world pension funds are, and people still think of emerging markets as some kind of disease, despite the popularity of the phrase BRIC. It's just so wrong. The whole purpose of introducing the term was to help 5,000 people at GSAM [Goldman Sachs Asset Management], and through that, all our clients, start to understand how the world is changing.

The eight countries in the growth markets are the four BRICs, and, in addition, Indonesia, Korea, Mexico and Turkey. They are each 1% or more of global gross domestic product. That is the definition of a growth market. In the current decade, their combined GDP will rise by $16 trillion, about double that of the U.S. and euro area put together. Why do people call them emerging markets when they are driving the world economy? That's why I call them growth markets. You can't think of emerging markets the same way people did in the past.

In terms of GDP per capita, some really are emerging.

Obviously, they're not the same as the G-7, because of the wealth factor. But some are not far off. Korea is $20,000 a head these days; Brazil is $15,000. If you wait until they get as wealthy as the G-7, the investment opportunity will have gone. If these countries get to the wealth of the G-7, they will for the next decade turn out to be the best investments to have.

…What do you expect for Chinese growth?

In the next 12 months, the dollar value of the four BRIC economies will increase $2 trillion. That will create another Italy, and that wouldn't happen if those countries' inflation rates kept rising. The most important news recently was the Chinese CPI [consumer-price index]. It is very interesting that the Chinese stock market had another good rally. If China can't get inflation back down to 4% by the first quarter, then sustaining growth of between 7% and 8% or more would become increasingly difficult. Their problem this year has not been the European debt crisis. The fact that inflation appears to be turning in a number of these places is obviously good news. Oddly, the European crisis is a bonus, because it helped bring commodity prices down.

So China has engineered a soft landing?

It's a little premature to be overly convinced, but the past month's evidence strongly supports it. Next month's inflation alone could easily drop by another full percentage point. So inflation is going back below 5% next month. If what I have just said happens by the middle of next month, Chinese equities will already have rallied quite a bit further.

What about the rest of the world?

Europe is already in a recession. Despite that, I think we are going to get growth globally next year of close to 4%. I'm coming up to the end of my 30th year in this business, and over that period, growth has been 3.6%. If global growth is close to 4%, it confirms that Europe doesn't drive the world economy or world markets. In my opinion, the bull market in equities started in '09, post-crisis, because of two things: The BRICs and Fed monetary policy, and so you got the world growing close to 4%. If the world grows close to 4% next year because of China and the BRICs and growth markets, and the Fed stays really friendly, you will need constant bad news to stop equities from going up.

…What happens to equity markets between now and year end?

There are three major issues of the day. The improvement in Chinese inflation is increasingly raising the odds that we go out on the upside. In the U.S., I am in the camp that assumes the super committee guys [in Congress] will cobble something together. That's good for the upside as well. In Europe, until you get a Greek default out of the way, people hang back. So two out of three suggest we break out on the upside. It is very difficult for the market to drop. There is just so much cash around, and people are so bearish. Stocks around the world will be 20% to 25% higher.‹