Food for thought

Last week I had a chance to read the latest commentary by Bill Miller (of Legg Mason). Yes, Mr. Miller the investor had his ups and downs and let's leave it at that. He is a very smart person and I listen carefully when he has something to say. This does not mean that I take everything he says at face value. It just means that I pay a good deal of attention. In this commentary, that can be found in its entirety here, Mr. Miller has some interesting things to say.

"...the top 5% of the population, those making more than $210,000, account for about 33% of total spending."

Note: what do the rich actually buy and in what quantities? Yachts, villas, caviar and luxury cars, while being expensive, may not represent adequately the overall US consumption picture. For example, if I bought a Lexus from a dealer that has 100 Corollas on a lot across the street, I may have accounted for a chunk of his daily profit, yet in terms of jobs my spending did not really move the needle. Selling 5 Corollas could be maybe the same in terms of dollars gained from sale, but producing/selling/servicing/driving 5 cars is, arguably, more beneficial for the economy. But let us continue:

"The rich sharply cut back on spending as stocks plunged during the financial crisis, pushing their savings rate to over 20% in the fall of 2008, compared to about 5% in the immediate pre-crisis period. As the stock market recovered in 2009, their spending accelerated, the economy recovered, and their savings rate fell to negative.

With the stock market faltering in the last few months, they have again curtailed consumption, and economic growth has decelerated...

The common view seems to be that the weak stock market reflects a weakening economy. More likely is this: the weak stock market is causing the economy to weaken..."

Now, there is correlation and there is causality. For all this analysis is worth, Mr. Miller may see patterns in places where they do not exist. Or, if he is right, this is a great way to think about one of the ways the stock market is linked to the economy. This is excellent food for thought. He finishes by saying that "U.S. large capitalization stocks represent a once in a lifetime opportunity... to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951."

Well, the world in 2010 is arguably not the same as in 1951, and in many different ways. And pursuing relative value could be dangerous. Yet, everything is relative in investors' minds. What is cheap today?