Disclaimer

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. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

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.

Tuesday, September 21, 2010

New Highs

The S&P 500 closed at a new high (relative to the last few months) yesterday. As you can see from the chart this is a decisive breakout on the upside. Note also that the 150 day moving average has turned up, though the 45 day moving average has yet to cross above the longer-term moving average.

My judgment is that the uptrend has resumed, though because of huge individual and government debt throughout the developed world, the economic recovery will be sluggish, and the market will mirror that. On top of which, valuations simply aren't compelling. All the same, it is clearly better to be in than out. The weakness since mid-April is looking increasingly like a classic mid-cycle correction.

Friday, September 17, 2010

Off to the races


No, prolly not. But the US share market is drifting higher, and I suspect will continue to do so. It's about to break out of the top of the range it's been in since May (Ozzie markets have already decisively broken out on the upside)

Nothing too dramatic, because the US recovery continues to be a bit sickly. But China is the key, and as long as China continues to race along at 14% IP growth, big US companies (who earn a lot from exports and their overseas subsidiaries) are likely to have rising profits. But if China falters . . . we are in serious trouble.

I'll keep you posted.

Wednesday, September 1, 2010

The Lucky Country

Take a look at the relative growth rates of Australia, New Zealand, the US, UK and Europe in the chart. Starting in Q1/2004 at 100, Australia is nearly at 155 (and that was before today's scorching 1.2 % Q-on-Q growth estimate for Q2/2010) much higher than any of the other countries or regions shown.

Why?

Partly luck. China continues to boom, and we're selling them raw materials. China is now the world's largest consumer of commodities. And despite a Chinese "slowdown" (we should be so lucky), prices and volumes just keep going up.

Partly good management. Unlike the Fed, the RBA took away the liquor before the party got too wild. They started raising interest rates early on before the 2002-2007 boom got out of hand, whereas the Fed kept rates too low allowing an unsustainable housing bubble to swell. When it duly burst everybody was covered with gunk.

Partly immigration. Massive immigration, some of it allegedly temporary (students here to study in a cheap but definitely not nasty English-speaking country) helped push up demand for housing, demand for everything. Our unemployment rate is just 5%.

There's talk of an Ozzie housing bubble. Meself, I doubt it. Unless... they slash immigration and remove negative gearing.

BTW, did you observe the good performance of New Zealand in all this? And they don't produce any commodities. Beaut country though. Maybe it's all the tourism.