Pundit Jeremy Grantham (of Grantham, Mayo, Van Otterloo) writes bearishly:
I, for one, am more or less willing to throw in the towel on behalf of Inflation. For the near future, his adversary in the blue trunks, Deflation, has won on points. Even if we get intermittently rising commodity prices, quite likely, the downward pressure on prices from weak wages and weak demand seems to me now to be much the larger factor. Even three months ago, I was studiously trying to stay neutral on the “flation” issue, mesmerized by the potential for money supply to increase dramatically, given the floods of government debt used in the bailout. But now, better late than never, I take sides: With weak loan supply and fairly weak loan demand, the velocity of money has slowed, and infl ation seems a distant prospect.
It is fairly clear that a weak economy and declining or flat prices are the prospect for the immediate future. With unexpectedly strong fiscal conservatism from Europe and perhaps from us, this slowdown looks downright frightening. I recognize that in this I agree with [Paul] Krugman, but I can live with that once in a while.
Many Americans (except Grantham and Krugman) don’t believe our government’s stimulus measures did any good, as unemployment is still so high. Imagine how many more people would be jobless had stimulus not been tried. If you want a been-there-done-that insight into how to deflect deflation, what better source than Japan which managed to inch its way out of deflation over the past decade?
From Japan, Daiwa Securities forecasts the world economic outlook:
On concerns over the possibility of a ‘double-dip recession’, there are reasons why it is not the most likely outcome. Moving toward fiscal tightening appears generally to be relatively measured. This year, the euro area and China are likely to run somewhat expansionary fiscal policies while others are likely to start on some fiscal restraint. Next year, almost all countries are likely to tighten policy, but the contraction fiscal impulse seems fairly modest in most cases. While fiscal policy is tightened, monetary policy is likely to remain expansionary.
Earlier expectations of a an exit from the low interest rate and non-standard monetary policy have been shifted well into 2011. With discretionary spending on durables and structures already having fallen to recent historical lows, this key driver of economic downturns has much less room to be compressed than before the crisis began. Indeed, this is one reason double dip recessions are so rare. The more and the longer such spending are [sic] compressed, the more pent-up demand builds to support the eventual expansion. Durable goods that have worn out eventually need to be replaced. With pent-up demand beginning to show through consumer and business spending, the economy is developing sufficient momentum through 2010 to deflect the upcoming headwinds to a significant degree. A positive feed-back look between investment, employment, and consumption seems to have emerged in most major countries.
Meanwhile Japan Equity Fund is behaving like a rabbit staring at the approaching headlights, with Toyota still its 3rd largest holding despite flaws, because the portfolio is looking for “names.” With political disarray and a high yen hurting Japan Inc., we are happy with more modest names small caps for the long-term, companies, not so bound up with current exports. These are selected by Chris Loew from his base in Osaka. JEQ is off 2.51% in the last month vs a mere 1.45% drop in Topix index. And it is off 10.19% in the last quarter vs a drop of 9.48% in the index. Which is not to say that we haven’t also lost in Tokyo. Details for paid subscribers below.
Tax simplification we should learn from the Brits. UK Treasury minister David Gauke said: “The tax system created by the previous government was overly complex and has made the tax affairs of millions of families and businesses across the UK extremely complicated. We need to reduce the complexities in our tax system and the coalition is committed to delivering that goal. The Office for Tax Simplification will provide important advice [for] making the right reforms to the tax system that will help to pave the way to bringing more international business to the UK, which will give our economy the boost it so urgently needs in the years ahead.” The program will not address tax credits or local taxes.
Oak Value Fund like Vivian in Q2 sold Diageo. They wrote of DEO, a British maker of booze:
Diageo is an advantaged business that generates significant free cash flow. The company has announced a strategic realignment to step up its investment in marketing and innovation in order to drive top line trends in their more mature markets. With the prospects of Europe remaining weaker for some time, we were faced with the reality that Diageo’s growth opportunities are likely to be somewhat muted for the next couple of years and that the costs of this realignment will weigh on the company’s profitability until it reaches scale and productivity. Diageo is an outstanding company and a leader in its industry. We will continue to monitor the company’s progress. Meanwhile, we believe the Fund portfolio will be better served with this capital allocated to other opportunities.
I owe an apology to Ron the web designer and Alex the webmaster. My problem yesterday with truncated emails from our website was not the fault of the drupal settings but arose with Google with my personal e-mail. Hysterical laughter greeted my woes from an associate who went to NYC’s Stuyvesant High School. I admitted I was technically-challenged.
I attended Stuyvesant’s archrival, Bronx Science. Science alumni are not supposed to be puzzled by tech. At Science I learned communication technology in shop class by building a transistor radio in a cigarette case. There have been some advances since. Although you still have to hold your cigarette case right for the Apple I-phone antenna to work…
My college classmate, Harvard Law School Prof. Betsy Warren, has been named to head the Consumer Financial Protection Bureau established by the new law. Congratulations!
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