Contrary to movie lore, where bolts start bursting
and spars breaking, one after the other until the climatic end, the break in a
wing load test is quite sudden, unpredictable with any degree of precision to
the casual observer. Yes, he will notice that stress is building as is the likelihood of a break, but the behavior of
the wing at 151% will anticipate none of its destructive explosion at 152%.
Stress in society and politics tends to follow a
similar pattern. In societies or countries experiencing very high financial or
emotional stress, the observer can readily notice abnormal behaviors and
worrisome signals, but nevertheless may conclude that train service will be more
or less on time, that politicians will keep assembling and voting and people will follow
more or less their usual routine. Until,
all of a sudden mayhem breaks out.
It is my belief that we are, so to speak, on a wing and a prayer in many parts of the world, certainly in Europe, and to some extent
and sometimes for different reasons, in Latin America. The extremely difficult question is whether
the stress load is at 120%, 130% or 149%.
One country of concern to the investor, or should I
say speculator, is Argentina. Its
economy continues to experience rising stress, its politics are poisonous and
every day life is marred by the lack of security. After the expropriation of Repsol, I decided
to buy shares in YPF and Telecom Argentina (TEO) as they were very cheap and I
expected the government to have to gradually return to more orthodox economic
and financial policies to reach its development goals. I also felt that international justice, while
slow, was closing in.
I had thought that we were at 145% or so on the
stress scale, but I now think while we may only be at 125%-130%, without an effective opposition we could go to 160% in a hurry. Besides, the prices of these stocks had risen
by 50% or so since we had bought them. I
decided to sell all of my YPF stocks and keep my TEO for the time being.
The government seems unlikely to mend its ways and
pressure to do so has not yet reached breaking point; its latest declaration in
the US Appeals Court that it would not abide by its ruling if ordered to pay
its debts may or may not be a ploy.
Furthermore, YPF seems to find it very difficult to implement the kind
of joint ventures it needs to exploit its shale oil resources: Exxon is MIA, Bridas may be a go but Chevron
is mired in legal complications from an Ecuadorian lawsuit, and YPF’s CEO is
seen courting second tier E&Ps around the globe. Even if these JVs start to
operate, there is still a lot of risk attached to government meddling, as can be
seen with Petrobras in Brazil.
Stress is building elsewhere too. In Europe, with no currency devaluation possible
and weak domestic and export markets, the fiscal adjustment must be borne by
the population in the form of lower wages and benefits, a shrinking public
sector and heavier taxation. So far,
there has been no statesman in a major country with the ability to push through
any combination of these policies. Monti
tried and was bumped out; Hollande didn’t even try; Rajoy may do better than
his two peers because of national cultural differences, but the jury is still
out.
Are we at 110%, 120%, 130% in Western Europe? Again, tough to say. My guess is we are over 100% which really
means that we are somewhat beyond the maximum “normal” stress level. I think that stress is bound to rise for two
reasons: either governments do too little and lose control over their autonomy
or they try to do the right thing and will trigger massive pushback from
pressure groups and maybe the population at large. I still like companies in basic sectors which
are effectively restructuring, such as retailers Carrefour in France and Tesco
in the UK. I also see strong
restructuring talent at Vivendi (France).
As for the US, I am embarrassed by Washington, but I
take solace in two factors: we are below 100% and there is a broader
realization in the population that we need to cut government spending just like
households cut their own. The debate, in
my view, will be how to devise a program that will be viewed as allocating the
sacrifices fairly.
What is unclear is the margin of safety that we have
as investors. The actions of the Fed
continue to distort all asset values, from real estate to bonds and
stocks. Traditional benchmarks such as
p/e multiples, bond yields and the like imply that bonds are expensive and
stocks are reasonably priced. But with a
slow growing economy and corporate profits at an historically high level, it
doesn’t take much imagination to see stock prices falling 10% or even 20%. So the important question is, should this
happen, would the stocks that I hold still be attractively valued based on
long-term fundamentals? And since we are
in a “what if” frame of mind, how about a Warren Buffett test that I find
compelling: would I hold the same stocks
if I knew that their shares would not be publicly traded for the next three to
five years?
