When value investor Arnold Van Den Berg (Trades, Portfolio) of Century Management speaks, we should listen. A self-proclaimed student of the Benjamin Graham investing philogophy, Arnold has, " handily beaten all of the indices."
Observe an intreaging segment of his October 25, 2014 presentation.
Below is Part I Summary of his Century Management 2014 Client Review
Part I:
Positive things in economy Hydraulic fracturing 3-d printing Nanotechnology Robotics Most competitive manufacturing in the world Cheap energy, competitiveness Unemployment down Federal deficit from an "official standpoint" coming down…but not real Residential real estate improving Consumers saving more All these things boost corporate profit margins to record high
Net worth of households & non-profit organizations Record high Very proud of this country creating this wealth Favorite because the charts shows the creativity, hard work, and resourcefulness of the American public Reason why it concerns him: $13T "wealth added", but he notes: "Have we really improved this much since 2007 or is it sort of an artificial thing that's being promoted by the Federal Reserve?" Wealth created because Fed has driven down interest rates Pushed people into stocks, real estate, and other assets This would usually be in savings, fixed income (bonds) "more secure investments" for retirements "Chasing yields," they are going into a lot of "riskier investments" than they should… "Driving some assets up way beyond their true worth…" "This is something we really need to be concerned about" Positive thing is it has driven corporate profits to a 70 year high
Asks, "is it only due to low interest rates?" Labor costs have not kept up, good for corporations Corporations are not using this money to advance the company e.g. new technology or CAPEX What they are doing instead is… "buy back shares" Concerned because they are "buying back shares at pretty high prices" "Never been a time in world history where the whole world got together and is printing money" Individual nations have done this with "disastrous results"
Potential for inflation if "this money gets into the economy" "something to worry about" Banks are keeping it in the bank, "parking it" This has led to a "real bubble in the junk bond market" Because they can't get a good yield [investors are] going into junk bonds… such as "Covenant-lite loans" they "don't have a lot of protections" Shows a December 2013 quote from Richard Fisher, Fed Reserve Bank of Dallas, "I worry about the fact that we've painted ourselves into a corner which is going to be very hard to get out of." Created all this money, how are we going to pull it back out? Shows Quote from Alan Greenspan, July 2014, "we just do not know how this things is going to work out when we begin to tighten." Shows Quote from Jeremy Stein, August 2014, "There's no real precedent for anything of this magnitude… I don't think anyone has yet figured out the right answer about how to deal with this." August 2014 Arnold mentions it will not be a soft landing, it will either be "Inflation or deflation" Talks about what the FED's role really is, "create stability in the economy and the currency… like a teeter tatter" Currently no sign of deflation in the US Deflation is a cultural thing, why it's so dangerous… "Once people realize the price is going down they stop purchasing, when people defer their purchases they can't sell as much product so they have to lay off people… if you can't stop deflation then it goes into serious deflation like we did in '29." "Will send the economy into a tailspin" Shows chart of an example of another country's monetary base, Japan, Talks about the consequences of pulling the money out deflation for 12 years and still have barely pulled themselves out Talks about Ben Bernanke quote in 2002 about fiat currency, "there was very little risk of deflation" because the resilience of the economy," "I am confident the Fed would take whatever means necessary to prevent significant deflation…" Arnold states Deflation is highly unlikely but would not rule it out "it's unlikely because the "printing press" The government could reduce the value of the dollar" Increasing the number of dollars, the govt. can reduce the value of the dollar "same thing as raising prices" On inflation: "if you've ever lived through inflation there is nothing positive about that"
3 Other reasons why we are not going to have deflation Fed reserve has Cultural bias They would rather risk inflation rather than suffer the consequences of deflation… such as the US depression Gives example of the other risk-inflation Germany's hyperinflation: 1913 1 Egg = 8 pfennigs, 1923 80 billion marks Shoes 1913 12 marks, 1923 32 trillion marks Currency became worthless Arnold states "Once the currency goes, it goes very very rapidly" Germany's cultural bias is worried about too much inflation (because what happened in the past) These are cultural differences that can lead to unintended consequences Dual mandate Balancing act between Price stability and maximum employment Shows chart of declining value of US dollar 95% of purchasing of the US dollar since the start of the Fed, "so much for price stability" Deterioration in the currency Political pressure
Part II To Be Continued
The remaining parts of his presentation is accesible to the public on his website.
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