Bear footed
Mohammed Ekramul HaqueOutlook PROFIT, 26th June 2009
A perennial bear, Andrew Smithers, feels that going forward,
we won’t have a market driven by news better than expected,
but one that may be dampened by it.
For those of us who think that we may be heading for a way out of the current financial mess soon, Andrew Smithers issues a grim warning: “Don’t get too worked up about what this rally signifies about the markets and economies in the future.”
Often called ‘the perennial bear’, Smithers first swept into the international limelight after he co-wrote Valuing Wall Street in 2002, in which he used the ‘q ratio’ developed by economics Nobel laureate James Tobin to conclude that the stock markets in the 1999 tech bubble were in much more overvalued territory than during the bubbles of 1929, 1937 and 1968.
In a conversation with Outlook Profit, Smithers talks about the state of the world economy and blasts central banks, in particular the US Fed, for allowing excesses to occur in the first place. “It’s no good blaming commercial bankers who always behave stupidly in these conditions,” he says. The bear also predicts a possible rise in inflation ahead. To our readers, Smithers advocates caution in the markets.Watch out, iceberg ahead.
MAH: The recent run-up in global markets has been driven by the so-called ‘green shoots of recovery’. Do you believe the worst is over?
AS: I don’t think that the recent rally has strong legs, but I should clarify one point – it seems that markets respond too much to news and then they acquire a momentum of their own. But whether news is good or bad is relative to people’s expectations. The forecast that things may improve next year only represents a change of attitude that things may not turn out as bad as previously thought.
One shouldn’t get too worked up about what this rally signifies about markets and economies in the future. Having said that, I feel that some comments made at the beginning of the year were so gloomy that it was reasonable to expect that people would soon become a little less depressed than before. Now it seems that we have swung from a mood of excessive despondency to one that is more balanced.
The next thing I would say is that if the markets were entirely driven by news being better or worse than expectations, plus the momentum that comes with it, and if the views about the future were reasonably rational, then you would have completely unpredictable markets. But there is evidence that markets are not entirely driven in that way. Another thing that seems to have influence is value, but that is important only when it is at extremes, or over a very long period. Markets at the moment are very near to their fair value – neither very expensive nor very cheap. Value should, therefore, have very little effect on what returns you can expect over the next few years. Under current circumstances, we cannot expect value to give any guidance about the behaviour of markets in the next 1-2 years.
But there is another factor that has been shown to have some impact on short-term movements: the flow of new issues and buybacks (in a paper by Donald Robertson and Stephen Wright, what they called the ‘cash flow dividend’). What they’ve shown is that there is a statistical significant relation between the amount of cash that companies distribute to shareholders as dividends and buybacks and the performance of the markets.
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