Notes on Talk by James Paulsen, head market strategist for
Wells Fargo Asset Management
Thursday, May 6, 2010
by Giles RA Fox at Fox Investment Advisors
gfox@foxinvestmentadvisors.com
First comment: “I know some of what I say today will turn out to be wrong”
Overall, a very upbeat message: the economy is in the 3rd quarter of
positive GDP growth and the recovery looks sustainable. A “double dip”
recession looks increasingly unlikely.
In 2008 there was remarkable FEAR of another depression and this made
things twice as bad. The problem wasn’t so much unemployment moving from
5% to 10%, the real problem was the other 90% of employed people who
stopped spending out of fear, and companies that stopped hiring and
spending out of fear and uncertainty.
Paulsen believes prices were (and maybe still are) based on psychology
(fear) and not fundamentals and that this is an opportunity for investors.
Five reasons for growth:
1.Massive policy push (e.g. fiscal and monetary policy) – LOTS of
government spending and super low interest rates and both of these take
about a year to flow through to the economy, so 2010 should be quite good
2.Reverse Corporate purge – companies that fired people and put off
capital spending and investing will have to catch up now that “armeggedon”
is not happening
3.Return of calm/confidence – people stopped spending out of fear; there
should be pent up demand from employed people
4.Addition by less Housing and Auto subtraction – Paulsen makes the point
that the housing and auto sectors have seen great drop-offs and have been
significant drags on economic growth; even if they stabilize at current
levels, they will no longer be a drag on economic growth.
5.US trade is improving (i.e. exports doing well)
One negative is that taxes will be going up (he seemed very sure of this
prediction!). Recent quarters have seen a HUGE run-up in the federal
deficit – but the good news here is that after large deficits, the next 5
years have historically been quite good.
Banks are “super” liquid right now and have $1.1 trillion in excess
reserves. The historical norm is zero – so lots of ammunition in the
banks to help with a recovery
Businesses have HUGE profit leverage. They are so lean at the moment (as
they were preparing to weather a depression) that profits have already
started to head up, and they could go much higher. As Paulsen noted,
“profits are the seeds for jobs”.
His forecast for the S+P 500 (and he warned not to pay close attention to
anyone’s forecasts!!) is earnings of $111/share looking out a couple of
years and he suggested putting a 15 P/E multiple on that (which gives you
a target of about 1660, versus today’s level of 1150)
Consumer confidence has been “obliterated” – some of the lowest levels
ever seen. It is getting better as people’s mood improves to thinking:
“oh, it’s only a recession!”
Household cash is at record highs (data goes back to the 1950’s) – and
this represents a huge asset for future growth. Consumers have about $10
trillion in cash, and Paulsen expects this to enter the economy but
slowly. In comparison, in 2000 consumer cash levels were at major lows
(everyone wanted to own tech stocks!)
He reiterated the point that if housing and auto data just stops getting
worse, this will be a big boost. These two sectors have been subtracting
about 1/2% from growth over the last several quarters. IF they can
contribute +1/2% this is a swing of +1.0% to GDP growth.
Similarly, net exports has been a drag on growth for years (a negative
trade balance); this has actually turned positive (with emerging
economies) and is now contributing to growth. Paulsen makes the point
that emerging economies are finally buying enough from us that we have a
trade surplus with them. This process is just beginning but he expects it
to continue.
In a nutshell he listed these positive happenings: household net worth has
increased for the last 4 quarters; we have seen job gains over the same
time frame; house prices have increased for 12 months and the “core”
inflation rate is about 1% (this strips out energy costs which have been
up)
Historically inflation falls for 12 to 24 months after a recession is over
– and he expects this pattern to happen again.
He expects “the Fed” to raise interest rates from zero to 0.5%. This will
be good because, really, a rate of 1/2% is not high AT ALL and should not
reduce growth, but the zero rate tells the world the you are out of
ammunition and the economy is in desparate shape. Basically a zero rate
is psychologically bad.
Finally – in 2000 people were using the term “New Era” and now in 2010 you
hear “New Normal”. Paulsen thinks people are trying to look forward, but
are really looking backwards. The term in 2000 really looked back to the
1990’s, and now we are looking back at a lost decade and forecasting the
next ten years to be more of the same.
Giles RA Fox
5/6/10
