Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Tuesday, September 28, 2010

Tortoise -- and Hare

It's clear who the tortoises are: hugely indebted Western economies. Too much government and private debt have slowed --and will continue to slow -- recovery.

My own coinciding index for the US shows how after the inventory rebound, growth has slowed. The trend is still up, but oh what a slow grind it will be. At this pace, the index will not pass its previous peak for at least another three years. Meanwhile in the BRIC countries (Brazil, Russia, India, China) IP passed its previous peak months ago. It's true that growth rates there have dipped a little too, but that's because the authorities have had to tighten because things were growing too fast. We should be so lucky.

What a disaster the theories of rational expectations and rational markets have proved to be! It's no accident that the countries which are now booming have sound finances: high savings ratios, government deficits used to fund infrastructure not current expenditure, huge forex reserves and tightly regulated banking systems.

In the short term the West's share markets will continue to rise. But 'boom' is definitely not the word you'd apply to their progress -- their advance will be slow and erratic. I don't expect the S&P 500 high of 1524 in March 2000, or 1562 in October 2007 to be much exceeded in the next 10 or 15 years. Just as US markets were unable to beat previous peaks between 1966 and 1982, so the unwinding of the credit excesses of the last two decades will make investment performance once again matters of timing and economic fundamentals. And cycles are likely to be shorter than we've got used to. "Buy on dips" will remain the expensive mistake it's been for the last 10 years.

Not so for the hare economies, especially since massive monetary stimulus in the West will provide very favourable conditions for the developing markets. Buy resources, and buy Australia. Our market continues to outperform the US, even in same-currency terms.

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