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Christopher Pavese, CFA
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Mr. Pavese holds several positions within the Broyhill family offices, serving as Chief Investment Officer of Broyhill Asset Management and BMC Fund, Inc., an SEC registered investment company. His primary responsibilities include macroeconomic research, strategic asset allocation, portfolio... More
My company:
Broyhill Asset Management, LLC
My blog:
The View From the Blue Ridge
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  • Russian Long Thesis in Two Charts

    Russia appears to be one of the cheapest markets on the planet today.  Yes, the planet is generally overvalued, but the discount shown below is difficult to ignore.  It becomes even more difficult to ignore when one considers that the median age amongst middle eastern oil producers ranges from 18 to 29 with up to 40% of the population under 15 years old.  With food making up anywhere from 25% to 50% of this young population’s total consumption, those hoping for a quick fix to the “stone throwing” in today’s age of instant communication are likely to be disappointed.  On the other hand, those looking for alternatives to middle eastern oil, might look to Russia, the world’s largest oil producer, and the Market Vectors Russia Fund (NYSEARCA:RSX) with 37% of net assets invested in the oil and gas sector.



    Disclosure: I am long RSX.
    Mar 02 1:29 PM | Link | Comment!
  • Monster Rally
    This chart from our friend, Ron Griess at The Chart Store, is a perfect picture of what Ned Davis refers to as a Monster Rally in a Secular Bear Market.

    This market has now doubled from “the lows” reached in March 2009.  Unnervingly, there have been only two other times when the market has rallied so sharply over this time period.  Neither of them occurred during raging bull markets.  In fact, both of them occurred during theSecular Bear Market of 1929 to 1942.  Over this period, normalized valuations (as measured by CAPE) fell from a peak of 32.6 to a trough of 5.6.  While there were occasionally powerful rallies throughout this cycle as evidenced below, investors were well served waiting for lower valuations and/or extreme oversold conditions before dipping their toes in the water.

    We find ourselves in a similarly uncomfortable position today, with the markets extremely overbought (below) and still, stubbornly extremely overvalued.  In the current Secular Bear Market which began at the turn of the millennium, normalized valuations reached 43.8 – more than 10 points better than the peak of 1929.  Even today, after a ten year bear market in stocks, normalized valuations still stand above 24x CAPE, a level significantly higher than any other market peak outside of 1929 and 2000.  Coincidentally, today’s Monster Rally (shown below), has taken us back to a similar level of overvaluation reached after the Monster Rally of 1937 (22x CAPE).

    The prognosis for forward returns does not look particularly appealing.  As shown below, the market’s performance after past Monster Rallies of this magnitude has been decidedly negative 4, 8, 12, 26 and 52 weeks later. It is impossible to know exactly when the fuel will run out of Junk Ben’s Rally, but history has not been kind to those holding on for the last few percent of speculative blow-offs.  Be careful out there.




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: Overvalued, CAPE
    Feb 21 2:34 PM | Link | Comment!
  • We Cannot Support Ever-Rising Debt

    “The signs of trouble lay in excessive asset prices and too much debt.

    Investors and economists either understand this or ignore it at their peril.  Excessive asset prices (in tech stocks, then in housing, then in . . . ) got us into this mess in the first place.  Our “solution” – more excessive asset prices and more debt.  Witness Bernanke’s response to recent questions on QE’s effectiveness.  Our Fed Chairman actually points to the performance of the Russell 2000 – a proxy for small cap speculative stocks!!  Never mind that US small cap equities are now priced to deliver negative returns over the next decade and are as expensive as they were in December 2007, before the market collapsed!!

    Great article from one of the few economists who “get it” in The Times.  Emphasis added.

    We cannot support ever-rising debt.

    Andrew Smithers
    The Times – Economic Opinion, 29th December 2010

    Most macro-economic theories had egg all over them when the financial crisis broke. Only a few economists, among whom I am naturally proud to be included, warned of the looming problems. The signs of trouble lay in excessive asset prices and too much debt. But most economists saw nothing to worry about because asset prices and debt have no place in their theories.

    In the immediate aftermath of the crisis there were some signs of contrition. Dr Bernanke, the Chairman of the Federal Reserve, who had previously insisted that asset prices did not matter, appeared willing to reconsider the question. Such doubts seem now, however, to have been forgotten. Few of those who give recommendations on economic policy have changed their views to reflect our sad and dramatic experience. They forget that those who refuse to acknowledge past errors are likely to repeat them. It has been said with more wit and truth than charity that “Science advances obituary by obituary.”

    The traditional and unreformed schools of economists, such as Monetarists and Keynesians, want further stimulus to the economy by increasing debt. Keynesians want faster growth in national debt and Monetarists in bank debt. The major division today is between those who see more debt as the way out of our current difficulties and those few iconoclasts who saw debt as the cause of our troubles and now fear that more debt will add to them. 

    Since World War II the world economy has grown well, but growth in output has been dwarfed by growth in debt. In the US debt has tripled as a percentage of GDP, with private sector debt growing five times as fast as output. This raises two major questions. Why has it occurred and how long can it continue? The first is quite easy to answer. It has paid! Despite the dramatic increase in private sector debt, there has been no comparable long-term rise in the losses suffered by lenders and thus nothing to discourage them from even more lending. Economic policy has been responsible for this. When an economy slows, bankruptcies rise and the losses suffered by lenders make them cautious about new lending. To stop such caution causing the economy to contract, governments and central banks have stepped in. Debtors, and thus of course lenders, have been bailed out by increased budget deficits, lower interest rates and, on occasion, by direct support for failing companies.

    Until recently these policies appeared to be successful. Recessions and periods of rising defaults have been mild and short-lived. Governments and central banks have combined to ensure that there has been no increase in the overall risks run by lenders. The specific risks run by bankers and other lenders, which are that individual borrowers will default, have remained in place. But lenders have been insured by official action against the risk of a general rise in the level of defaults. Had this been allowed, it would have discouraged lenders and stopped the growth in debt relative to output. This would have had the short-term disadvantage of making recessions sharper and more frequent. But it would have had the huge advantage of avoiding our recent asset bubbles and the major recession which has followed. We suffer today not only from a severe loss of jobs and output, but also from the dramatic rise in budget deficits which has weakened our ability to cope with another debt crisis.

    A clear sign of the limits to our ability to support ever rising debt has been given by the Irish crisis. Before the trouble broke, Ireland had a very low national debt and was running budget and current account surpluses. Its problem was the huge level of debt in the private sector. When borrowers ran scared that they wouldn’t be repaid, the government was forced to make its implicit promise to bail out lenders into an explicit one. Excessive private sector debt suddenly became an excess level of national debt. 

    For the past 60 years output has grown far more slowly than debt. It has been rightly said that what can’t go on forever, will stop. Keynesians tend to respond by saying that this is a long-term problem and, quoting the master “In the long run we are all dead.” The Irish crisis suggests, however, that we are all now living in the long-term. 

    Excessive worries about the short-term outlook for the economy were the fundamental cause of the current crisis and radical short-term measures were, I think, needed to deal with the result of past errors. But it is surely time to turn our attention to the long-term issues of debt and excessive asset prices. There are obvious steps that should be taken and equally obvious steps that should be avoided. One positive step would be stop subsidizing debt as we do today, by making interest an allowable expense for corporation tax. One thing we should not do is push up asset prices through central bank buying, known as quantitative easing. We have an asset bubble in bonds and, although US share prices are nothing like as overvalued as they were in 1929 and 1999, they are at levels equal to the other peaks of 1906, 1937 and 1968. Although this does not mean that the bubble will burst next year or even in 2012, we are running large and unnecessary risks. The Federal Reserve’s policy of asset buying, known as QE 2, seems to me to be most ill-advised.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 17 2:22 PM | Link | Comment!
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