Monday, January 28, 2013

The Best of Davos?

The Wall Street Journal had a blog entry called "Davos in Fifteen Minutes," or the Best of Davos.  If this was the "can't miss" material, it must have truly been a snooze fest.  But that ski slope powder, formidable!  I struggled to take away anything of value from the Best of Davos, but here it is.

Charles Dallara, who was leaving the Institute of International Finance after the meeting, joined the Swiss-based Partners Group, an asset manager.  After a tepid tribute to European central bankers, Dallara made a trenchant observation about where we are post all the financial card shuffling by Mario Draghi and others.  He said that the fundamental economic performance of Spain, Italy, Greece and Portugal continues to be unsatisfactory, despite all the press releases declaring victory.

He also laid blame squarely on the shoulders of the sovereign market investors, which include the national central banks, who have been "asleep at the wheel for years."  Since Europe has traditionally relied more on commercial banks for business lending (80 percent), commercial lending continues to be frozen in Europe.

Investors indeed have themselves to blame for drinking the European Kool Aid, but on the other hand, it was rational of them to take advantage of the "implicit subsidy" on sovereign debt provided by the previously unspoken, but inevitable ECB bailout.  Europe is still a ship taking on water, albeit a bit more slowly.

Robert Shiller of Yale and the Cowles Foundation gave a much more muted assessment of the housing market than is filling the front pages of our newspapers.  Professor Shiller is someone I've always enjoyed reading and listening to, including his economic class lectures at Yale. I want to know what he's thinking.

In the short-term, Shiller says the U.S. housing market is moving off the bottom and may be said to be improving.  Longer-term, as an asset class and as an economic driver, the outlook was--and he struggled for a word--"neutral."  The multi-family apartment market, he said, was more robust because of consumer demand and investor demand for their project paper.  The single family market, which reflects the American Dream of home ownership, had a more problematic and segmented outlook, reading between the lines and the look on his face.

Speaking about the stock market, he clearly wasn't enthused, but he noted that the valuations weren't overblown, especially given the paltry returns in fixed income.  Using the Cyclically Adjusted Price Earnings (CAPE) Ratio, he noted that it stands at 22.2x today.  The average for 2006-2013 was 21.7x, and the median was 21.5x.

Professor Shiller characterized the breathless headlines about the housing market being "off to the races," as so much fluff.

I think I'm going to go outside and enjoy some our fine Midwest powder, by shoveling it off my driveway!

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