International Equities.. ‘The Only Show in Town’

1) Corporate debt cheap and getting cheaper. The yield curve is flattening. Healthy corporate debt yields will likely fall alongside Treasury and MBS yields.

2) Corporate earnings to all other asset classes at extreme positive multiples.

To cash or near cash companies yields are on multiples of 10 to 15. ie pes of 4 not uncommon. Cash currently on 2.5% interest and US 10 year bonds 1.8%. Vs property multiples of 5 to 7 can be seen. Precious metals – no yield. Equities are the only show in town by a long margin. Their prices have discounted a collapse in earnings ahead.

3) Corporate equities hedge fx debasement.

Unless you have the time to be an active trader multi national corporates hedge these debasement strategies far more effectively than cash due to international revenue streams. Multinationals safer than fx cash in world wide debasement/geo politically charged world.

4) Social tipping point in Developed Markets (‘DMs’). (In an economically planned system).

This is very important. We are at a level socially and economically whereby any decline in tax revenues, decline in employment, decline in confidence will step us over the brink in western states. We have or have had riots in many western states. A decline in corporate earnings would result in all the above issues re employment, tax revenues, confidence declines which, at this point, would equal anarchy in ‘DM’ world.

5) Ratio of cash and near cash to asset allocation at unprecedented highs.

This is a very very important (and misunderstood) metric. If cash and near cash are at high levels vs asset allocations governments and central bank monetary levers can be effected without inflationary implications. This makes monetary action (one way or another) a certainty. Given the combination of point 4 and 5 inc the almost complete ignorance of monetary issues in the wider population ‘action’ is certain. This action will likely be over kill and therefore expect more, much more inflation soon.

6) Moderate inflation is good for corporates in a low interest rate, falling real wage environment.

Inflation has not diminished. The inflation nos lag the prices in the market by some 12 months or so due to forward buying by most corporates. There fore we are still experiencing high cost push inflation nos at factory gates and consumer goods. The nos this week for sept reconfirmed this in Germany. GDP nos are inflation adjusted but corporate earnings are not. Salaries are not keeping pace with inflation whilst interest rates are low and likely to go lower still. These issues all drive corporate earnings nominally higher. Even if they lag inflation they will outperform cash especially given the multiple of corporate earnings to cash as above.

7) Worldwide middle class expansion.

Multinational corporates benefit from an expansion of the world’s middle class. Emerging Markets ‘EMs’ can slow down their nominal growth rates but continued nominal expansion is also certain especially given the reserve and low relative consumer and public debts in these ‘EMs’. I would suggest even if GDP (inflation adjusted) turned negative in these EMs nominally GDP would grow. As corporates earnings are not inflation adjusted it is almost certain their earnings will nominally continue to rise. The rise in the world wide middle class is very likely to continue even as the ‘DM’ world’s middle class lose purchasing power and even decline in number. Their decline is more than off set by the rise of ‘EM’ middle classes.

Ill try and update this over the weekend to provide charts by way of referencing the various points but the data clearly supports each item.

All the best

Rich