George Soros is in heaven. He has created the perception of unquantifiable risk. By using Greece as his starting point, he has captivated the imagination of global investors to believe that European debt contagion is a real threat that could lead us into a double dip. Contagion can’t be calculated. Confidence in contagion produces unbridled fear. Few understand how sovereign debt actually manifests itself in real economic terms and Soros becomes the one who creates the threatening perception. Yes, Grandpa George is in heaven, or to put it more accurately, hell.
The man is out preaching his gospel of destruction to the media, declaring that Europe faces almost inevitable recession next year as eurozone countries pass austerity measures aimed at balancing budgets. He mentions that this is ‘eerily reminiscent’ of the 1930’s situation when governments were pressured to narrow their budget deficits when economies were still weak. As if comparisons with the Great Depression aren’t enough, Soros goes on to forecast that the current climate in Europe is ‘liable to give rise to social unrest.’ Is Grandpa George’s pessimism rational? To answer that question you need to understand two things about Grandpa George:
1-Stock markets manifest the war between bulls and bears. Although investors can and should alternate between bullish and bearish strategy, most don’t. Bulls are bulls and bears are bears. A bull invests according to earnings. If a company exhibits good growth potential the bull will own that stock in his portfolio, if the bull doesn’t like what he hears or sees he will sell the stock and move on. Bulls go to cash and occasionally go short to hedge the rest of their portfolio. Bulls don’t make money from misfortune. If they don’t like a company they simply choose not to own it.
Bears are very different. They seek to exploit weakness and push stocks down. They like to invest in abstract strategies of unmeasurable risk rather than the black and white quarterly earnings report structure. Bears are always coming up with lists of outlier events. They love to use words like ‘Black Swan’ and ‘Contagion’ and ‘Double Dip.’ Grandpa George is the chief global pessimist. And although the growth of the global economy continues to prove him wrong he continues his quest. If George Soros was always right, the global financial system would cease to exist and we certainly wouldn’t be able to maintain the highest standard of living this world has ever seen.
2-The Great Depression had nothing to do with government cost cutting as Soros wants you to believe. He knows the truth but he’s not telling you. He knows that economic depressions are caused by anti-growth regulation that squeezes liquidity and halts lending. The mark to market banking regulation that was put into place by President Hoover in 1929 did the trick until it was repealed in 1938 by FDR. The same mark to market banking regulation did the trick when FASB implemented it in November 2007 until it was repealed in April 2009. Grandpa George understands all of this and his goal is to have the world look at sovereign debt in the same kind of short term, squeezed, regulatory manner. If he succeeds with expanding the use of mark to market regulatory requirements, all in the good name of transparency of course, he will be correct in his statement that we are entering Act 2 of the financial crisis. Without anti-growth regulation, however, the global economy will continue to grow. European austerity measures will improve the economic footing of the region and the low euro will stimulate growth.
Don’t let the irrational pessimism of Grandpa George and his hedge fund gang cause you to miss the the biggest investable cycle in the history of mankind. As we hover at Dow 10,000 and Nasdaq 2,300 after climbing a little ways from the depth of March 2009, the mobile tech revolution is beginning to show signs that it will far surpass even the wildest predictions of the dot-com bubble. Grown men are taking off work to stand in line just to pre order the iPhone 4 (NASDAQ:AAPL). We have never seen anything like this. Morgan Stanley analyst Katy Huberty is forecasting that up to 50% of current iPhone users will upgrade to this new phone which will lead to 48 million units sold in 2010 and the installed base will rise to 100 million by the end of 2011. The acceleration of tech evolution predicts that 10 billion mobile Internet devices will be sold in this cycle that is just beginning with Apple (AAPL).
Apple has $50 billion in cash on its balance sheet. Corporate profits in general are surging with an average of 11% cash compared to assets on US corporate balance sheets. This is a 60 year high. Corporate profits are on pace to reach an all time high in Q3 2010. It’s only been one year since the depth of the recession and Real GDP is close to reaching its all time high. Manufacturing levels are showing the equivalent of 6% GDP growth. If you get caught up in Grandpa George’s heaven of pessimism you’ll miss the elephant in the room. Concrete data is proving abstract fear to be completely irrational.
Disclosure: Author is long AAPL and QQQQ