Feb. 24 (Bloomberg) -- Last month, Russian Prime Minister Vladimir Putin labeled the world’s reliance on the dollar “dangerous” and called for an “irreversible switchover” to a system of multiple reserve currencies.
Dream on, Mr. Putin.
To end the dollar’s reserve currency role, you need a replacement. There is none. The euro is a multinational creation, belonging to no specific country and adopted by 16 nations, several of which are economic basket cases. The yen and the pound aren’t used enough in international trade and financial transactions. China’s yuan isn’t freely traded or exchangeable.
What’s more, bulging budget deficits, massive borrowing programs, runaway spending, a crippled economy, a dysfunctional banking system, and rock-bottom central-bank interest rates would ordinarily sound the death knell for a currency.
Not the dollar. Not this time. And certainly not because the greenback is a particularly good-looking investment. On the contrary, it is the least unattractive of the collection of ugly sisters that populate the world’s major currency markets.
Let's start with the notion that fresh and new bear market lows have been seen in the past week. This is not entirely true, believe it or not.
Not only is there one index that did not break below its Nov. 20 low, it just happens to be the most comprehensive of all stock market averages. I am referring to the Dow Jones Wilshire 5000 index (97199001
) , which represents the combined market capitalizations of virtually all publicly traded stocks in the United States.
And at least according to this broadest of all stock market indexes, the low of the bear market that began 18 months ago occurred last Nov. 20. As of Thursday night, the total-return version of this index was 2.8% above that closing low of three months ago.
That's not a huge margin of safety, to be sure, especially given the stock market's extraordinary recent volatility. But, until and unless the Dow Jones Wilshire 5000 index breaks below its Nov. 20 low, it remains at least plausible to argue that the bear market ended then.
How can it be that the Dow Jones Wilshire 5000 has consistently remained ahead of its Nov. 20 level even while the Dow and the S&P 500 have dropped below it? The answer is that the smallest-cap issues have performed markedly better over the past three months than the largest-cap stocks.
It is time to check in with the market monitor breadth. Here is the S&P 500. Notice that we are not back down at the extreme depths of the market monitor breadth indicator, suggesting that there is some healing going on. We are not out of the woods yet, but it will take something drastic for us to get a whole lot lower.
It is easy to be sceptical about shares right now given their woeful performance, but the analysts who have just finished writing the 2009 Barclays Equity Gilt Study give reason for hope.
Firstly, the underperformance of shares has nothing to do with the asset class per se. Secondly, it says the macroeconomic environment has little influence on shares, which is a cheery thought given the deepening global recession.
Even corporate profitability, you might be surprised to learn, isn't the deciding factor on whether a share outperforms or not.
The study concludes that the "brutal" lesson will can learn from the past 10 years is that valuations are the core determinant of equity market returns.
Its research suggests that the reason shares have had such an abysmal ride over the past decade is that they were overvalued. Through the good times we were paying too much to get access to bumper profits.
"When the surge in growth ended abruptly in 2008, equity prices fell in line with the actual and expected decline in profits.
Expensive valuations therefore caused equity returns to underperform profits following the 2001 slowdown and then did the same during the ensuing boom, while finally failing to provide a cushion when the business cycle turned down," the study concludes.
You can probably guess where the Barclays mob are going with this, so if you are considering stuffing your spare cash under your mattress, keeping it in a savings account despite the dismal rates of interest, or even following the herd and piling into bonds, then bear this in mind.
The authors of the study believe that equity valuations will fall a little further and remain low for a while, before recovering late in the decade. Meanwhile, bonds' rising yields will "self-evidently" damage returns. The end result is that equities will outperform bonds over the next 10 years.
While the financial news may seem unremittingly bleak, medium- to long-term investors should remember that the experts who predict gloom today did not see the current crisis coming – and may not see the recovery, either.
The other day I was in the opticians for my annual check-up and in walked a former next-door neighbour, a builder who retired a few years ago. He wondered if I had retired too and was surprised I was still at work.
He wondered why. I said I wanted to see out the stockmarket recovery, in which my investments would grow significantly over the next three years. He said it wasn't just my eyes that needed testing.
According to him, everybody knows we won't see a recovery of economies or stockmarkets in our lifetimes. Obviously he believes the experts who pump out the bad news that surround us right now. These are the same experts who last summer advised us property was a key investment for our retirement savings.
They're the same ones who confidently told us the US dollar would plummet. And who predicted gold, when it was at £1,000 an ounce, would double over the next 12 months. As oil hit over $145 a barrel, the same experts predicted it was heading to $200 and higher with continuing prices in hard and soft commodities.
Every one of these predictions ended up wide of the mark. History tells us that when all the experts are agreed, it's time to take a different view. It tells us to be afraid when things look too good and to be optimistic when things look too bad.