Biggest highlights from Barron’s Roundtable

By Edward Harrison On Jan 15, 2012

There was a lot to digest in the Barron’s Roundtable. Some of it was fluff. Some of it was ideology. Here are the comments I found the most interesting from the first part of this year’s Barron’s Investing Roundtable interview which was published today. I can’t say agree with all of these comments. But, at the very least, they are something to noodle on.

Faber: But why is there leverage? It is a symptom of artificially low interest rates — essentially zero interest rates — that force everybody to be a speculator because you’re not earning anything on your money.
Gross: When the headlines hit about MF Global’s collapse, along with the realization that a financial firm could take money from one pocket and put it in the other, I quickly diversified my own brokerage accounts to avoid such a thing. Large savers are diversifying against the risk of leverage and the misappropriation of that leverage.
Faber: Three professors named Baker, Bloom and Davis created an index measuring policy-related economic uncertainty. It is now at a record high.
Gabelli:Companies will face real headwinds in the first half, particularly in the second quarter, from a combination of sluggish economic activity and a negative change in the euro/dollar relationship.

Zulauf: From a currency standpoint, the dollar was weak relative to the euro for much of last year, and that benefited U.S. companies. Now the relationship is changing.

Gabelli: That will hurt reported earnings of a lot of companies I follow.
Gross: By the time we meet here next year, one or more countries will have departed the euro zone in currency terms.
Zulauf: The banking system goes bust. Assume Greece won’t repay anything, or at most 10% of its total debt. It is not just the government but the private sector that is bust. That means banks in other countries will be in trouble, which means they will be nationalized. Governments won’t have the money to pay for this, so they will assume even more debt. That is the chain of events I expect in 2012, and if you believe it won’t affect the U.S. you are dreaming. The estimated notional value of the over-the-counter fixed-income-derivatives market in Europe is estimated to be about 60 trillion euros. There are many links to the U.S. banking system, although we don’t yet know who is positioned how. If one country exits the euro, all hell will break loose.
Zulauf: Every European country will be in recession in 2012, and probably in 2013.
Zulauf: Fiscal stimulation is out of the question. That will come at the depths of the crisis, not before. Central bankers are more at ease with the problems and will continue to print money, but if the ECB overdoes it, Germany will say it isn’t participating in the game.
Gross: When money yields nothing, banks won’t lend it. If a bank can keep money on deposit with the Fed at 25 basis points [a quarter of a percentage point] or lend it at 27 basis points, the yield on a two-year Treasury, why take the two-year risk? The combination of low return and high risk basically freezes the system. The global system is trying to delever and central banks are trying stop that process and pump trillions of dollars in. In a bimodal world, we could have reflation in 2013-14, or deflation in 2012. The probability of both is high.
Gabelli: Let’s look at the history of delevering. How do you get out of it?

Zulauf: You either default and have a large deflationary accident or hyperinflate, which just delays the collapse. Politicians are trying to find a painless solution, which doesn’t exist.
Gross: [Utilities] pay big dividends because they continually are granted a 10% return on equity by regulators in a world where returns are moving much lower. After earning 10% they can pay out 4% to 5% to investors.
Hickey: I’m not bullish on the economy. Technology is something else. Tech has been in a 12-year bear market and we’re now seeing very low P/Es [price/earnings multiples].
Gross: There is a new balance. Profits now account for a larger percentage of GDP than wages. Government and business have been advantaged relative to labor for a long, long time. That’s what Occupy Wall Street is all about. Eventually this will reverse, not just in the U.S. but around the world.
Zulauf: The world economy will experience a brutal slowdown. Deflationary forces are going to strengthen and commodities in general will decline. You can buy oil to hedge a decline in base metals. Gold started a cyclical correction within a secular bull market last summer. The first wave of selling is ending now. Gold has to be bought some time this year, probably in the second half, below $1,600. Then the monetary authorities will load their guns again and print more money, which will make investors buy more gold. The gold market is so tiny that when people want to shift just a small piece of their wealth into gold, the price flies to new highs.
Faber: People say large-capitalization stocks are inexpensive, and I agree. I would buy a basket of high-quality big-caps in Europe and the U.S. You can by Total [TOT], in France, which yields more than 5%, and Nestlé [NESN.Switzerland] and Novartis [NVS] and Pfizer [PFE]. These stocks don’t have huge downside risk. Because emerging markets saw big declines last year, you could also buy SATS [SATS.Singapore], in Singapore, which provides catering services to the airline industry and ports. It yields 5% and trades for 13 times earnings. I also like K-REIT Asia Management[KREIT.Singapore], a real-estate investment trust that yields 7%. The stock has fallen by about 50% and the dividend might be cut. But even if it is cut to 4%, this is an OK investment. These stocks won’t go up right away, but reinvesting dividends will yield an adequate return over time. StarHub [STH.Singapore], the mobile-phone company, yields 6.9% and the P/E is 14.
Faber: The Hong Kong market was hit hard, and stocks haven’t bottomed yet. But you can buy Sun Hung Kai Properties [16.Hong Kong], with a P/E of five and a yield of 3.5%.Swire Pacific [19.Hong Kong] is a blue-chip, a well-managed conglomerate. It yields almost 5% and the P/E is 11. Hang Seng Bank [11.HK] yields 5.6% and trades for 11 times earnings. There isn’t a huge risk in these stocks, but maybe I’m too bullish.
Faber: Last year I was overweight the U.S. relative to emerging economies. At what stage will the outperformance of the U.S. cease and emerging markets rise again? It could be three or six months, or a year. I am gradually increasing my exposure to emerging markets. Thai and Indian banks have no exposure to Europe. Indian banks lend domestically.

Source: Barron’s