Tuesday, January 12, 2010 0 comments ++[ CLICK TO COMMENT ]++

Outlook from a bull, Bill Miller

The Globe & Mail paints Bill Miller's stance as somewhat bearish but I think he is firmly in the bull camp:

But in the midst of a bitter cold snap, we prefer the warmth and good cheer of a true optimist. Which has drawn us to famed U.S. fund manager Bill Miller, who may be the most unreservedly bullish person we know when it comes to the U.S. economy, big-capitalization stocks and even the tattered greenback. And he has plenty of affection left over for Canada, too.


"The outlook for both the stock market and the economy is considerably better than the consensus forecasts. There ought to be strong returns in U.S. equities this year," says the chairman and chief investment honcho of Legg Mason Capital Management. "I don't think that the risks ... are anywhere near as great as what the consensus believes."

In making his case for a robust V-shaped rebound, the erudite market pro cites part of a well-worn comment about the nature of business cycles from the late Cambridge University economist A.C. Pigou: "Prosperity ends in a crisis. The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant."

That, says Mr. Miller, "nicely encapsulates what's gone on."

I'm a fan of Bill Miller; right now practically no one is. Yet, I think his flaw is that he is inherently optimistic about many things. This works mightily when times are good but you will get decimated if something bad happens. One thing I disagree with Miller in regards to the recent financial crisis is his blame of government officials:

"I underestimated the damage that would be done by poor Treasury policy coming out of the administration," Mr. Miller says mildly. "One's most generous description of it would be: inconsistent and confusing. They 'rescued' Bear Stearns and so protected the creditors and even preserved some equity value. ... But then they pre-emptively seized, and wiped out equity at, Fannie Mae and Freddie Mac." It was that action that terrified the market and triggered the capital flight from otherwise solvent financial players.


One lesson a chastened Mr. Miller has taken away from the debacle is that even the bastion of free markets could morph into Argentina under the right circumstances. "Investors have to be extremely sensitive to government policy and react quickly when that policy is not capital friendly."

Long-time readers may recall my vehement disapproval of some of the government actions, particularly how they handled the GSEs—a point Miller emphasizes here. But even then, I think Miller is over-estimating the damage from government policies. I think some of what he blames on the government were actually poor businesses, run by employees who were either negligent, incomptent, or greedy. Whatever the case, some of those investments were big mistakes, with or without the government getting involved.

Also, investors like Bill Miller are lucky that governments, particularly the US government, chose to socialize hundreads of billions of private losses. The only reason Citigroup, for instance, is trading at $3.65&mdahs;a market cap of $83 billion if Yahoo! Finance numbers are correct—is because of billions of dollars of injections by the government.


In any case, overall, Bill Miller sees strong returns for US stocks this year. I don't quite share that view but you should form your own opinion.

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