What's $10 trillion?
Did the “end of the world” almost happen, or is it just around the corner?
One is left to pour over all sorts of information to try to parse this question du année for yourself. One recent anecdote caught my eye, and the DTM’s Brian Milner gets credit for sussing it out:
This month alone, global equities have lost more than $10-trillion (U.S.) in market value.
Keep this figure in mind. For the silver-lining crowd, the fear in the marketplace right now should be taken as a good sign. This is meant to be a sign of a bottom, despite what the long term S&P earnings multiples might suggest (see prior post “Time to buy? Maybe not.” October 17-08).
And who better to call a bottom than Goodwood’s Peter Puccetti, a local hedge fund manager:
Veteran hedge fund manager Peter Puccetti got two of the three right: lots of cash (about 35 per cent) and no borrowing. But the founder of Toronto-based Goodwood Funds remains long on stocks, and he has the bruises to prove it. So far this year, he’s down about 44 per cent.
Let’s imagine that 35% of his fund has been in cash all year. Which means 65% of his portfolio is in securities. If he’s down 44% on his total portfolio YTD, that means the securities he actually owns are off 67.8% (assuming no interest on his cash balance) YTD. Must have been those resource stocks.
Now there is someone to call a bottom.
But lots of us are down this year, and we don’t know how much money Goodwood made over the prior three years in the very sectors that are now causing extensive grief. Free pass for this year’s figure. What was more interesting, frankly, was the theory that “idle cash” is going to race into the market and drive it higher. Any day now:
One positive marker Mr. Puccetti and others in the anti-Depression camp point to is the trillions of investment dollars parked on the sidelines earning paltry interest.
Hedge and mutual fund redemptions continue at a record clip, forcing managers to divest both the good stuff and the junk. But the latest numbers show these huge forced sales are starting to abate. And despite a modest flight of their own, U.S. money market funds still hold about $3.3-trillion. Add more than $8-trillion in U.S. bank deposits, plus direct holdings of Treasury bills and other short-term instruments and the vast sums held by pension funds and wealthy individuals, and you have a lot of capital doing precious little.
“Where’s that cash going to go when people are feeling a little less nervous?” Mr. Puccetti asks. “It’s not going to stay in T-bills at 20 basis points. As Buffett pointed out last week, cash is about the worst kind of investment you can have, given all of the stimulus that’s being thrown at the financial crisis.”
I don’t know about you, but if the global markets have lost $10 trillion so far this month, how much of an impact do you think US$3.3 trillion of U.S.-based money market funds can have? Assuming those holders feel at all like taking a punt. As for the US$8 trillion that is in U.S. banks, these very banks desperately need those funds to stay right where they are — and not flee to some yet-to-be-identified pseudo-attraction of the stock market — if the U.S. banking system is going to survive.
Many of my friends on institutional sales desks, not to mention the great stock-picker Ira himself, teased me for a comment I made during a BNN TV interview on August 9, 2007 (see prior post “BNN interview on global credit crunch“); the advice wasn’t awe-inspiring, but I believe it still remains sound: “the punters should hide” until things clear up in the credit markets. It’s only been 14 months since that interview (Dow Jones has dropped from 13,650 to 8,378), and while it is fair to say that much has happened in the credit markets, whatever clarity has arrived in the form of government bailouts, it’s now “the economy, stupid!” as James Carville would say.
A walk along Bloor Street in Toronto yesterday would convince you that the economy is just fine, but a 50% drop in North American pick-up truck production this year isn’t solely due to the price of gas. The wheels came off in 2007 (see prior post “Buckle up – the wheels have come off” August 13-07), and they’ve not yet been found, let alone re-attached.