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A Q1 Letter to Clients: Bernanke, Buffett and Siegel on the Prospects Ahead

April 3, 2012

by Dan Richards

Should you be interested in watching them, here are links to the comments from Ben Bernanke and Christine Lagarde.

And here’s a link to the IMF’s most recent global growth forecast:

From my own point of view, it’s worth noting that given European issues and a slowdown in China, there is broad consensus that the next five years will see “2, 6 and 4” growth – an average of 2% in developed countries and 6% in emerging economies, leading to 4% global growth overall. It’s this divergence in growth between developed and emerging countries that is driving increased focus by multi nationals on faster growing emerging economies.

Warren Buffett: “America’s best days lie ahead”

In the face of challenges for developed economies, there is a persistent view of America as an “empire in decline” – this was reinforced by last year’s downgrade of US debt and by the stalemate in Congress over dealing with America’s deficit and debt challenges.

As I look at formulating recommendations for my clients, I don’t subscribe to the view of a declining America. Without dismissing its issues, the biggest competitive advantage for United States is its vitality and capacity for change and innovation. It continues to dominate in high tech and remains a magnet for the best and brightest talent from around the world.

I’m not alone in this view. Here’s an excerpt from Warren Buffett’s annual letter to investors released in February,

 “In 2011, we will set a new record for capital spending–$8 billion–and spend all of the $2 billion increase in the United States. Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

… The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential–a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War–remains alive and effective. We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

You can read Warren Buffett’s full letter to investors here.

A long term perspective on valuations

While economic growth enables long term increases in corporate profits as a whole, in the short and mid-term we have to pay a fair value for the companies we buy. Anyone who invested at the peak of the U.S. market valuations in 2000 learned a hard lesson about the perils of losing focus on what we pay for a dollar of earnings. 

There are few more hotly debated issues on Wall Street than whether today’s market is overvalued, undervalued or priced just right. In looking at all the available data, my own conclusion is that the market is roughly fairly valued.

That’s not to say it doesn’t face some speed bumps in the period ahead. But I was interested to see a March 29 interview with Jeremy Siegel of the Wharton School. Author of Stocks for the Long Run, which examined almost 200 years of market data, in this interview Siegel looks at historical precedent and sees significant upside potential at today’s stock valuations.  Here’s a link to his interview: