"A massive paradigm shift away from everything we have known for all our lives to something we have read about in history books, with numerous twists; history never repeats itself but many times rhymes. As we have watched the credit crisis unfold over the last 2 years most peoples’ lives have been largely unaffected as residual momentum and habits built up over decades haves crested and reversed, but now the slippery slope downward is set to accelerate VISCIOSLY." -Ty Andros
Mr. Andros has been spot on both leading up to and during the current financial crisis. He is one of the few analysts whose opinions I respect and listen to. I would like to get into a little more of Mr. Andros' views in a second, but we must digress briefly before moving on.
In prior issues of Bourbon and Bayonets I have discussed extensively about the failures of Keynesian economics. Here is a brief from a prior article.
"The most blatant sign of a Keynesian based economy are the business cycles. That’s right; the business cycle is not a naturally occurring process. It is the direct result of liquidity expansions during economic downturns and liquidity contractions at economic peaks.
The excess liquidity results in a higher economic peak than the prior peak. As the old adage goes, the bigger they are the harder they fall. So not only does each peak that follows have a higher peak, but the troughs have lower troughs requiring more liquidity to turn the boat around, which then, in turn, results in a higher peak. It’s a merry-go-round that has started spinning too fast to get off, and it has a major snowball effect."
That passage really sums up the macro theories that directly caused some of the more micro trends that got us here. Considering the importance of this notion, I would like to further discuss these ideas. That's where Mr. Andros comes back into the picture.
Charting Keynesian Economics
I would like to start this discussion by sharing a chart provided by Mr. Andros via John Mauldin. For those of you who are visual learners, this should help as it is a visual of my views on a Keynesian based economy.
This is the 3-year moving average of annualized change in S&P earnings. As you can see, over the past 50+ years the average growth in earnings on a year over year basis is 6.6%, while the actual rate of change fluctuates significantly around that 6.6%figure.
This chart shows exactly the higher consecutive peaks and lower consecutive troughs that results from Keynesian economic policies. I would just like to note that this divergence between peak and trough was really taken to a new level under the Clinton administration.
I am going to share with you Mr. Andros' predictions about S&P earnings because his analysis has been uncanny when it comes to its accuracy.
At the beginning of 2008 Andros predicted aggregate S&P earnings to come in at $50 while Wall Street analysts were predicting a range between $70-$80. The actual figure is looking to shape up around $48. Andros was spot on.
Andros is now predicting aggregate earnings to come in at $30. If you include unfunded pension liabilities, the number looks closer to $22. I wonder what the bulls think of that. At $22 earnings and a 10x multiplier, that gives us a number of 220 on the S&P, which is approximately 70% below current levels.
Economic Imbalances Underestimates
Here's the deal. Personal income and business are in free fall, and it's significantly worse than anyone on CNBC or the morons that manage your money realizes. In the recently released manufacturing managers survey, not one sector of manufacturing is in expansion...NOT ONE.
All in all, Andros figures that this whole mess is going to result in double digit GDP declines for 2009 and 2010, and he said that he wouldn't be surprised to see declines upwards of 20%. Meanwhile, media analysts seem to be trying to figure whether their precious recovery is going to occur in the first or second half of 2009. I wonder what the CNBC team would say if someone came onto their show and predicted double digit GDP declines in 2009.
With that said, considering the tone of this article, I think it's fitting to finish with a truly telling quote from Ty Andros.
"Stocks, bonds, commodities, currencies, natural resources are ALL mispriced for what’s unfolding. The VOLATILITY created will be enormous and “Volatility is opportunity” for the prepared investor. You must learn to make money in RISING and FALLING markets. Buy and hold is DEAD for now!"
Wise words. I would like to thank Mr. Andros again for allowing us to take a look at his analysis.
Nicholas Jones
Analyst, Oxbury Research
www.oxburyresearch.com
Disclosure: no positions
Mr. Andros has been spot on both leading up to and during the current financial crisis. He is one of the few analysts whose opinions I respect and listen to. I would like to get into a little more of Mr. Andros' views in a second, but we must digress briefly before moving on.
In prior issues of Bourbon and Bayonets I have discussed extensively about the failures of Keynesian economics. Here is a brief from a prior article.
"The most blatant sign of a Keynesian based economy are the business cycles. That’s right; the business cycle is not a naturally occurring process. It is the direct result of liquidity expansions during economic downturns and liquidity contractions at economic peaks.
The excess liquidity results in a higher economic peak than the prior peak. As the old adage goes, the bigger they are the harder they fall. So not only does each peak that follows have a higher peak, but the troughs have lower troughs requiring more liquidity to turn the boat around, which then, in turn, results in a higher peak. It’s a merry-go-round that has started spinning too fast to get off, and it has a major snowball effect."
That passage really sums up the macro theories that directly caused some of the more micro trends that got us here. Considering the importance of this notion, I would like to further discuss these ideas. That's where Mr. Andros comes back into the picture.
Charting Keynesian Economics
I would like to start this discussion by sharing a chart provided by Mr. Andros via John Mauldin. For those of you who are visual learners, this should help as it is a visual of my views on a Keynesian based economy.
This is the 3-year moving average of annualized change in S&P earnings. As you can see, over the past 50+ years the average growth in earnings on a year over year basis is 6.6%, while the actual rate of change fluctuates significantly around that 6.6%figure.
This chart shows exactly the higher consecutive peaks and lower consecutive troughs that results from Keynesian economic policies. I would just like to note that this divergence between peak and trough was really taken to a new level under the Clinton administration.
I am going to share with you Mr. Andros' predictions about S&P earnings because his analysis has been uncanny when it comes to its accuracy.
At the beginning of 2008 Andros predicted aggregate S&P earnings to come in at $50 while Wall Street analysts were predicting a range between $70-$80. The actual figure is looking to shape up around $48. Andros was spot on.
Andros is now predicting aggregate earnings to come in at $30. If you include unfunded pension liabilities, the number looks closer to $22. I wonder what the bulls think of that. At $22 earnings and a 10x multiplier, that gives us a number of 220 on the S&P, which is approximately 70% below current levels.
Economic Imbalances Underestimates
Here's the deal. Personal income and business are in free fall, and it's significantly worse than anyone on CNBC or the morons that manage your money realizes. In the recently released manufacturing managers survey, not one sector of manufacturing is in expansion...NOT ONE.
All in all, Andros figures that this whole mess is going to result in double digit GDP declines for 2009 and 2010, and he said that he wouldn't be surprised to see declines upwards of 20%. Meanwhile, media analysts seem to be trying to figure whether their precious recovery is going to occur in the first or second half of 2009. I wonder what the CNBC team would say if someone came onto their show and predicted double digit GDP declines in 2009.
With that said, considering the tone of this article, I think it's fitting to finish with a truly telling quote from Ty Andros.
"Stocks, bonds, commodities, currencies, natural resources are ALL mispriced for what’s unfolding. The VOLATILITY created will be enormous and “Volatility is opportunity” for the prepared investor. You must learn to make money in RISING and FALLING markets. Buy and hold is DEAD for now!"
Wise words. I would like to thank Mr. Andros again for allowing us to take a look at his analysis.
Nicholas Jones
Analyst, Oxbury Research
www.oxburyresearch.com
Disclosure: no positions
