First, John Authers in the Financial Times: How baby boomers lead bear market by the nose. In that column, Authers refers to a Barclays study about stock market bubbles, the gist of which was that equity market valuations were driven by demographics. Barclays found a strong correlation between cyclically adjusted P/E ratios and the ratio of 35- to 54- year-olds in the population (the peak demo, apparently for earning and investing). Authers’s conclusion was that we may have another ten years to go in the current secular bear market. That’s consistent with Vitaliy Katsenelson’s thesis.
Second, via GuruFocus, Vitaliy Katsenelson presents this PowerPoint slide show: China — The Mother of All Black Swans. Katsenelson argues that China’s economy is bubble about to burst. A few thoughts on this.
In first footnote to this post on the old blog, we summarized the positive and negative scenarios on the Chinese economy and its stimulus program.
On slide #4 of Katsenelson’s presentation, where he compares China to Starbucks, he ignores a material response by Starbucks to its “late stage growth obesity”: Starbucks raised prices — both directly, and indirectly. For a couple of indirect examples, ahead of Christmas, Starbucks used to sell its cards at a 20% discount to their cash value at Costco; it didn’t do that at the end of 2009. Also, Starbucks used to offer gold card members 10% off all purchases; now it just offers a coupon for a free drink every for every 15 drinks you buy.
On slide #10 there’s no mention (perhaps because it was written before the news) of China’s move to rein in bank lending yesterday.
On slide #17 there’s no citation for the claim of trillions of dollars in Chinese government-backed loans. This is a key point because while others (e.g., the FT’s Martin Wolf) acknowledge that the Chinese banking system probably has a lot of bad loans, they believe China can easily afford to recapitalize its banks, if necessary.
On slide #18, there’s a list of negative consequences of China’s economy going bust, but no investment prescription to profit from this.
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