sp500-2009-08

Wow, what a spectacular run the equity markets have had since the low in March of 2009.  Meanwhile, the jury is out on whether this is a sustainable recovery, backed by fundamentals and precedent? There are people calling for hyperinflation and others for deflation ahead.  With such uncertainty, opinions vary widely regarding which way things will go as illustrated by the following articles which I found interesting (followed by my point form summaries):

The Greenback Effect
NT Times Opinion Article by Warren Buffett

  • “gusher of federal money” avoided meltdown & was needed to combat depression
  • “economy appears to be on a slow path to recovery”
  • US deficit/GDP will rise to 13% this year into uncharted territory - more than 2x the wartime record
  • risk of US losing reputation for financial integrity
  • rather than purchasing US debt, countries (like China) may decide to purchase valuable US assets (like equity & real-estate)
  • Treasury will be “printing money” to fund as much as half of $1.8 trillion in issued debt
  • re-election seeking gov’t won’t raise taxes or cut expenditures but will fund via inflation
  • John Maynard Keynes is quoted describing this type of action as a way to”confiscate, secretly and unobserved, an important part of the wealth of their citizens…,” which is “not evil,” Buffett emphasizes, when the debt, assets and income growth is proportional
  • doing “whatever it takes” still makes sense, but must be brought back into sustainability once recovery is underway

Is US hyper-inflation a clear and present danger?
A guest contribution at investmentpostcards.com by Paul Kasriel of The Northern Trust Company

  • “extraordinary increase in excess, or idle, cash reserves on the books of banks”
  • “banks are strapped for capital, they also are strapped for loan customers who are judged creditworthy”
  • risk that excess reserves may be “activated”once banks are better capitalized with more creditworthy borrowers
  • unless the Fed can neutralize reserve “activation”, inflation will result

Is This Rally The Final Kiss Good Bye?
By Simon Maierhofer of ETFguide

  • Some things look eerily similar to the Great Depression

The recession is dead, long live the recession!
Excerpts posted by Prieur du Plessis from the Aug. 20th report by David Rosenberg, Chief Economist & Strategist at Gluskin Sheff & Associates

  • S&P 500 has rallied 49%, the sharpest ever recession equity market rally
  • historically, to support such a rally requires more growth in GDP, employment, profit, & bank lending than is seen today
  • “The equity market right now is priced for 40% profit growth and 4% real GDP growth in the coming year!”
  • Gov’t trying to increase consumer discretionary spending while boomers not financially prepared for retirement
  • “not until the culture of credit and conspicuous consumption has been replaced by a renewed focus on retirement planning and financial prudence will it be safe to call for the fundamental lows in the market”

David Rosenberg on… Deflation
Nathan Martin’s notes on recent David Rosenberg interview

  • “three variables: rents, wages and credit — will ultimately determine the trend in inflation. Down, in other words.”

Clearly there is a lot of uncertainty and both deflation and hyperinflation are a possible risk, depending on how things play out. The sustainability of the recent rally is questionable at best.

Of particular interest is how the current economic situation will affect the electronic system development industry in the near and distant future?  What industry existed during the Great Depression that could be used as a proxy into what may lie ahead for the electronic systems industry and it’s supporting EDA industry?  Is the situation resulting in more or less innovation?  Is the situation making the industry more efficient and lean or is it causing things to stagnate?  Do the players in the industry have enough cash to weather the storm and innovate? So many questions with billion dollar answers. I wish I had the answers.  If you’ve got ‘em, be sure to post a comment.

What I do know is that electronic systems industry with the help of the EDA industry provides real direct and indirect value that results in improved efficiencies for individuals, business and government.  The economies of Chinese, Indian, and Brazilian consumers seem the most capable to pull the world out of this crisis.  The growing middle class of the world is addicted to computers, mobile phones, plus a whole whack of other gadgets with a naturally deflating price/performance. You can get a better digital camera and laptop today, a lower cost than it was a couple years ago, yet the camera you bought a couple of years ago is good enough and you can get by without a new one.  In my opinion, to compete, electronics providers must increase their value propositions by adding more user benefits at lower cost.  Lack of domestic demand and new demand from larger developing markets will put more pricing pressure on electronic devices and efficiency improvements will be needed. EDA tools can provide such efficiency but will be under pressure since purchasers’ revenues are lower.  EDA tool providers will need to become more efficient themselves.

To conquer the lucrative embedded systems market there has been some consolidation.  Heck, there is a sale on corporate acquisitions — it’s two or three for the price of one.  Here are some of my favorite recent acquisitions:

During a recent Synopsys conference call CEO Aart de Geus hinted that Synopsys may open up their $1B war chest and do some shopping (as I understand it, based on a tweet from harrytheASICguy).

And of course, let’s not forget the Internet, and the valuable offerings from Google, Apple, Yahoo, FaceBook, Twitter, and many others. With the Internet and new opportunities in cloud computing, spurred by virtualization and the ability to amortize hardware/software infrastructure across traditional boundaries, there are enormous opportunities for companies to adjust their cost structure and become more lean.  They can accomplish more with less.  At the same time, companies that serve the cloud computing realm have enormous opportunities to enable these efficiencies.  There has been some very interesting action in this realm:

There you have it, some perspective from leading business minds like Warren Buffett, some unanswered questions, some action in the realms of embedded systems and cloud computing.  The waves are in motion, these are uncharted waters and who knows what reefs,  monsters and new treasures lie ahead. How this crisis plays out across the worldwide economy is a trillion dollar question.  How it plays out for electronic system development is a multi-billion dollar questions, one of particular interest to those of us in the industry.