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Could the next bull market be already underway?

May 5th, 2009 · Greg Atkinson · 34 Comments

Without doubt the 2008-2009 bear market has been savage and most investors have seen their investment portfolios take a battering.  This year has been particularly unnerving as the Australian stock market looked like it may fall below 3000 just some weeks ago and we were heading for levels not seen since the last bear market.  But just as all bull markets come to an end so do bear markets, and so I cannot help wondering if the rally since the lows of March (Ides of March?) mean we are already in the next bull market phase?

One of the tricky aspects about investing in the stock market for many people is that the market can start to recover in the middle of a recession. As I have mentioned before this is because investors are focused on the future prospects of a company, so even though sales might be down if investors can see light at the end of the economic tunnel they will start to look for bargains. The question is now if the rally we are experiencing will turn into the next bull market run, or if it is what some analysts call a “suckers rally”.

My personal view is that we have seen the lows of this bear market and although we will see further corrections (as we always do every year) we are now in the early stages of another bull market. This does not mean every stock is a winner and some companies may not survive the recession, but I reckon now is a good time to be in stocks. (actually I have never been out of stocks)

As I mentioned last year, I have been a cautious buyer of shares ever since the market fell below 4800. After the failure of Lehman Brothers in September last year my resolve was tested but I kept selectively buying small parcels of stocks in what I thought were quality companies. Finally I am starting to hope my strategy will pay off although I was getting pretty nervous in March when the market looked like it could fall through the 3000 level.

So what is making me feel a little more confident? Well the key reasons for my renewed optimism are:

  • The relationship between the QBE stock price and the ASX All Ordinaries Index (see: QBE and the ASX All Ordinaries – are they back in sync? has been restored. This suggests to me that the chaos caused by the failure of Lehman Brothers is now behind us and we are back to the days when mainly market fundamentals are driving the market.
  • The appetite for risk is beginning to return to global markets. It might be hard to believe but there are faint signs that investors are moving out of cash (and maybe even safe haven assets like gold) back into stocks and dare I even suggest it, property. According to the Nikkei Weekly (May 4th) individual investors in Japan are returning to stocks and that “excessive pessimism is now abating with the emergence of signs that the global economic downturn is coming to end end”.
  • The Australia dollar has slowly been gaining against the Japanese Yen now for some weeks. Back in February the Australian dollar was buying around a paltry 55.5 JPY, today it would get you around 73 JPY. This indicates to me that Yen is slowly heading back into Australia looking for higher yields/returns.
  • The Baltic Dry Index is off its lows. (Although it does not signs a a major recovery at this stage.)
  • The government has finally woken up! As I mentioned in August 2008 (see: What we need for a sustained stock market rally ) we needed Rudd and Co. to wake up and take steps to help Australian businesses and drop the planned Emissions Trading Scheme (ETS), which is nothing more than a tax anyway. It appears that finally the Rudd Government has backed down and will delay the introduction of the ETS; which is curious since the Prime Minister told us that global warming was such a threat to the nation that swift action had to be taken.  I guess there is only two conclusions we can draw from delay in implementing an ETS: one is that the Government is not quite as concerned about global warming as it was just weeks ago or  the second is that Kevin Rudd has saved the planet! Maybe congratulations are in order Prime you just have world peace to sort out, make sure you get the quality of meals you deserve and find a cure for the common cold.
  • Our key trading partners appear to be stabilising. Although the Chinese economy is off the boil it appears that actions by the government are holding up the domestic economy. In Japan there are tentative signs that the worst may be over and in the U.S. some analysts are saying the bear market is dead and that even the housing market has bottomed. I would not say that the economies in any of these three nations were robust at the moment but the flow of bad news is slowing and some positive trends are beginning to emerge.

So there are reasons for stock market investors to be a little more optimistic this month than last month, but there is no guarantee that the current rally we are enjoying will not be snuffed out by a further shock to the financial system or some geopolitical issue. 

All I can say is that my reading of the tea leaves is telling me the worst is over, but I have been wrong before (and will be wrong again) so I welcome other views regarding where the market is heading or comments on what indicators investors should be watching.

34 responses so far ↓

  • 1 Pete // May 7, 2009 at 11:54 am

    QBE relationship?

    Baltic Dry?

    Appetite for risk?

    Emissions trading scheme dumped?

    Stabilising trading partners?

    You believe that after a decade of a bull market driven by cheap credit, that a year of recession is enough to fix that?
    …and you’re living in Japan?

    I think that for all the reasons you have given, one or two are signs of a rally and the others are irrelevant. The rally that you believe is a return to a bull market is nothing more than a suckers rally. But that is the point of suckers rallies…to sucker people in. The only sad thing is that you got suckered in so early.

    The comforting thing to realise is that a majority of people will also be suckered in to the rally. So it won’t be lonely.

    But, some people do great trades in suckers rallies – so good luck to the traders with that. Long-term traders will be obliterated if they don’t use stop-loss.

  • 2 Greg Atkinson // May 7, 2009 at 1:07 pm

    Hi Pete. Where to start? 🙂 In regards to Japan there is an article on this site by Professor Gregory Clark and I am quite happy to say I side with his view of what happened in Japan after the Bubble. You can find the article here: Economic Lessons from Japan.

    The other things I mentioned are simply indicators. The Baltic Dry Index is off its low and that is a fact. The Yen is weakening against the AUD and the major stock markets from Paris to New York have all rallied. As for the QBE share price, well the charts do not tell tales….the All Ords and the QBE charts are back in sync.

    As for the appetite for risk this headline from Bloomberg today sums it up pretty well: “Yen to Decline Versus Dollar as Carry Trade Resumes, Bank of America Says The yen will probably fall to 112 versus the dollar by the end of this year as money flows out of Japan to higher-yielding assets overseas, a Banc of America Securities-Merrill Lynch research report said. ”

    I am a long term stock investor and was not wiped out on the way down, so I am optimistic that even if this rally takes a breather, that I am getting into some nice long term positions. (and I will quite happily take the dividends anyway)

    Only time will tell of course if this is a suckers rally or not. But when the dust settles we might find that all this mess was just what it looks like…a nasty end to a market bubble. Some countries may not recover as well as others but the global economy will go on and we will most likely see another asset bubble go bust sooner than we would like.

  • 3 Pete // May 7, 2009 at 3:18 pm

    Greg, some questions for you to ponder:

    “The Baltic Dry Index is off its low and that is a fact.”
    Why is it? Increased Chinese demand? If so, why is there increased Chinese demand? What does it actually mean?

    “…major stock markets from Paris to New York have all rallied”
    What kind of rally? Why are they rallying, did things suddenly get better? Are they rallying based on some information? How accurate is that information?

    “…the All Ords and the QBE charts are back in sync”
    Sorry but I don’t see the relevance of this. A large portion of ASX stocks sync up with the index, particularly financials. This is because positive news for financials means positive news for the economy due to the nature of credit problems.

    Re: Bloomberg
    Will the higher yielding assets remain higher yielding? What exactly are these higher yielding assets? What kind of income will these higher yielding assets produce, and in which currency? This appetite for risk you speak of is about Japan…not Australia?

    “I am a long term stock investor and was not wiped out on the way down, so I am optimistic that even if this rally takes a breather, that I am getting into some nice long term positions”
    You weren’t wiped out on the way down? Is this a case of semantics, whereby you didn’t lose 100%? Because losing an entire portfolio would be pretty tricky unless you were leveraged. Are you suggesting that your longterm shares you held ‘before’ stocks headed down are in fact still at their highs? (In which case well done, good choices).

    I’m picturing two scenarios, re: longterm trading in the current environment:

    (nothing takes into account inflation levels at all, assume that is accounted for)

    Bill invests in stocks now, with a longterm strategy in mind. He holds some stocks that have taken a hit already, but expects that overtime they will recover. He has 10 stocks that are at 70% of what he bought them for, and buys another 10 in the current market (current value therefore is 100%).

    A) Five years later and the market has taken some serious nose-dives. Stocks are down another 30% from the point he bought his second round of stocks. What is the value of his stocks?
    1st round value = 49%
    2nd round value = 70%
    Average value = 59.5%
    Required rally of stocks to break even = 68%

    B) Five years later and the market has grown by 30% since he bought his second round of stocks. What is the value of his stocks?
    1st round value = 91%
    2nd round value = 130%
    Average value = 110.5%
    Current rally means an overall growth of = 10.5%

    C) Bill decides not to invest in round 2 and in fact liquidates his first round of 70% valued shares. He puts them in the bank earning a paltry 4% interest (assuming no tax).

    Whilst the figures are relatively the same, the proportional rally differences are somewhat severe.

    *In A), Bill requires a new rally of at least 68% average for all of his stocks, just to break even.
    *In B), Bill managed to recover his original money and make a premium of 10.5%, assuming he sells then (minus tax). This was over 5 years, averaging 2.1% gain per year.
    *In C), Bill has has 85.1% of his original money, still down 24.3%.

    These scenario’s don’t bring anything particularly new to the table. However, when you consider the different ‘risks’ involved in each investment (A,B,C) and their likelihood, the results could be either more or less likely.

    Consider the effect of just one stock becoming insolvent or losing most of its value – Eg Bear Stearns or Lehmann, or ABC Learning, or Centro, or Babcock and Brown for instance. How would that affect the portfolio? What if some stocks in the portfolio rally by 50%, but others by only 5%? How likely is a 30% average gain?

    My personal view on long-term trading is that it is a losing game. I think that typically, any business that becomes large enough, shoots itself in the foot over time. It becomes slow and lazy and starts to take things for granted. It doesn’t have the fighting history that it started with. And it is doomed to failure.

    Consider how many companies still exist from before the Great Depression? Where did they all go?

  • 4 Greg Atkinson // May 7, 2009 at 4:06 pm

    Pete, I wrote an article last year about why I watch the QBE share price: QBE and the All ordinaries Index so I will not go over that ground again.

    The BDI is indicating that the movement of raw materials is on the rise…I am sure China is part of the reason for this but I suspect the demand for raw materials in Japan is probably also creeping up again now.

    As for the stock market rallies, well the bad news is not getting worse and that is good news for stock markets. The global financial crisis will cause further havoc in the real economies in Australia, the U.K, Japan and the U.S. for months to come but stocks tends to rally 6 months or more before business conditions improve. The stock markets are not saying the global recession is over, rather these rallies indicate investors are seeing light at the end of the tunnel. Of course that light could be a train!

    The quote from Bloomberg was about the U.S. dollar and the Japanese Yen. It is an indicator the Yen carry trade might be coming back on. This suggests that on a global level investors are looking for higher yielding assets. Which assets?…well pick one..most are at bargain prices now. Take a simple play…borrow Yen and then buy Australia dollars. Then sit and wait for the Australian economy to recover and the RBA raise rates. When you think you have had your fill bring the AUD back into Yen when the AUD gains strength. (and it should if the demand for commodities picks up)

    Now onto long term investing. A long term investor does not have to hold stocks forever and in fact I take profits from time to time by selling off parcels of shares. In addition there is a nice stream of dividends to be had (many fully franked) and so even after a bear market like this one all is not lost. I would only make big losses if I waited until the bottom of the market and then sold everything, and why on earth would I do that. In fact I do the opposite, I buy when in gloom and sell in booms.

    Sure going long does not protect a portfolio, but short sellers also get burnt. In fact all assets classes have the potential to cause investors pain.

    As for Bill above, he did not earn a cent from dividends? Where is his franking credits? Did he not manage to sell any shares at all for a profit?

  • 5 Pete // May 7, 2009 at 9:00 pm

    Greg: I saw your QBE article. It is an interesting idea, but not very useful in my opinion.

    BDI means demand. Very good. What kind of demand? Demand to ship ores? What will said countries do with the ores? What is the reason behind the demand?

    I agree about the rallies. But do investors know so well? Follow the herd to green pastures or the slaughterhouse? Do you think the other sheep know where they are going?

    So, if the Yen carry trade is in effect, wouldn’t this imply only a short-term recovery for Aus? A “buy and dump” investors strategy? Perhaps a suckers rally? Another question is, can Japan lend to them?

    The standard longterm traders defence: ‘I will just hold until they boom again’. Which is nice, but if you do actually take inflation into account, the ‘break even’ point could take a very long time. Who wants to ‘break even’ anyway? Surely we invest to ‘make’ money, not lose it. And the ‘never sell low’ attitude of some longterm investors is quite funny. Instead of selling and switching to a more worthy stock, they just sit and wait.

    Its like Bill walking from A to B and finding out that the ‘shortcut’ he took will actually take him much longer. He might get opportunities to correct his mistake several times on the way (switching stocks), but out of sheer stubbornness he continues on his ill-fated path.

    I did not include dividends in my scenario, but good point. Longterm stocks are usually lower risk, which means less dividends per share. So not inconsequential, but not necessarily game changing. Although they could account for inflation if it stays at low levels.

    The “[buy in] gloom and sell in booms” idea is pretty much just a rewording of ‘buy low, sell high’. Its what every investor tries to do. Every other investor that is buying and selling on the other end of the trade thinks they are too (except for margin calls and some other examples).
    Are we always smarter than the other trader?

  • 6 Greg Atkinson // May 8, 2009 at 8:22 am

    Pete, well you do not have the follow the QBE price of course. Let’s just see how it is tracking at the end of the year.

    BDI – thanks for your little exam 🙂 BDI is a complicated issue because although demand for raw materials across the world (and it is a global indicator) may be heading up, shipping capacity has also been taken out of the system so it is too early to say a recovery is confirmed. However we do know that China, Japan the U.S. will spend a small fortune on stimulating their economies so that is going to get commodities onto those bulk carriers again.

    Next, many long term investors cut their losses and do not sit on dud stocks. I personally adjust the portfolios from time to time and move from cash into stocks etc. depending on the outlook. I also do not try to compete with traders; investing should not be an ego trip but a way for people to meet their financial goals. I figure it is no use trying to compete with gurus who were boasting about 20% or more in returns over the last few years because many of them went bust in the bear market. I would rather sit back and earn steady returns than have a few BMW’s one day and be broke the next.

    As for the rallies, sometimes investors of course get it very wrong. I do not expect we will soar back to 65oo of course, but I do expect we will see a recovery to some level. It will not be a bad thing in my view if world consumption does not get back to the crazy pre-bubble levels.

    Finally if you do not factor in dividends and franking credits when talking about Australian stocks you are missing a big part of the picture. That is why look at an accumulation index when talking about stocks is useful.

  • 7 Pete // May 8, 2009 at 10:23 am

    BDI – you said:
    “…demand for raw materials across the world (and it is a global indicator) may be heading up”
    How do you know that the demand is not localised to say, China? Could China in fact be stockpiling resources while they are cheap? Would China continue to stockpile resources if they become expensive again?
    (I believe that the demand that people are seeing is not what they think it is, nor what they want it to be. Consider what the figures actually tell you, and the assumptions you make).

    “we do know that China, Japan the U.S. will spend a small fortune on stimulating their economies”
    Is that working? Are people ‘spending’ at increased levels? Australia might have upped spending in the short term, but is that sustainable? Is it sustainable for Governments to put money in the hands of consumers, every time it thinks they need to spend? Where does the money come from? If the money is not actually ‘earned’ or a product of a thriving economy, will we have exactly the same issues with people not spending in the future? Is it okay to spend $40 billion every few months to keep people spending?
    (I think that Gov’s trying to re-inflate the credit bubble with their own spending is ludicrous. It will not work and will only create strange distortions in the economy. Imagine if you liked to eat ice-cream every day. It is your choice, which you are comfortable with. Now imagine if you were then forced to eat ice-cream every day, whether you like it or not. Would you still like ice-cream? My point is that trying to manipulate and force people to behave in certain ways is very hard, would need to be targeted precisely after extensive research and also be managed well. With the ice-cream example, that would be the same as convincing someone that eating ice-cream everyday is what they want to do. Gov’s are doing none of that, their approach is broad and rushed.)

    See, to me it seems quite like Governments are trying to reinflate the credit bubble…with money they are borrowing instead. Now the issue with this is that people were pretty oblivious to the first bubble and willingly went along with the boom. If the Government thinks it can make people choose what to spend on, it is very wrong. Only a strict Gov. can do that (in fact one area in China will fine people if they do not smoke…hows that!)

    – Longterm trading –
    Have you heard of index trading? The idea is that the index in the longrun generally outperforms most managed funds. Whilst you might pick individual stocks, would you expect them to outperform the index? Do you also expect the index to perform well?

    Arguing against longterm trading is almost impossible, because the argument for it is simply ‘buy and hold until you make a profit’, which is impossible to predict against (who could predict accurately that the market would be still flat in 10 years?).

    However…there are some issues:

    1) commitment: Committing to a stock can, over the longterm still give you negative real returns. Especially in the face of high inflation. However that is a different type of discussion altogether, because it involves wealth preservation.

    2) dividends: Rely on earnings and financial health of a company. Dividends have not been so good lately. Will they improve? Or will stock prices drop so much that dividends look more attractive? The P/E ratios of companies in 2007 were generally awful, and so were the dividends. The ‘risk’ factor was overlooked whilst people would invest in stocks that returned so little.
    Whilst that has changed since (because stock prices fell), I think it is still a very dangerous path to ‘expect’ dividends for the future. In an economic downturn dividends can fall significantly. There may be a bit of lag time whereby some companies try and save face (and share prices) by posting higher dividends than they can really afford, expecting that better times ahead will make up for it. That is exactly the kind of company management you do NOT want. People with short-term, risk taking attitudes.

    3) Dodgy management: Company managers who take on too much debt (eg Rio Tinto, Oz Minerals, ABC Learning) or other forms of risk that are not initially apparent. For the longterm trader, things might be sailing along nicely…then slowly down…down a bit more…down a bit more… Waiting for a ‘recovery’ may leave you waiting a long long time (especially if you expect returns in ‘real’ terms).

    4) Ignorance or complacence: Becoming attached to a company, and getting emotionally attached to it. Or forgetting to check up on it regularly. Short and medium term traders won’t generally have this issue so much. But it can be quite

    5) Lack of a ‘backup’ plan: Long-term traders will generally not use stop-loss on their stocks. Why would they? They expect the stock to increase over the long-term. This leaves these traders vulnerable to very large price downturns (eg Centro, people may have thought it was a stable stock). Not downturns of 10%, I mean downturns of 90%.

    6) Not diversifying evenly: Overextending holding in one stock. That leaves you very vulnerable to 3), 4) and 5), which can potentially drag your entire portfolio down considerably.

    They are my general points on longterm trading. However…that said, I am personally much more partial to medium term trading than short-term trading. Short-term trading takes a lot of time and risk tolerance.

  • 8 Greg Atkinson // May 8, 2009 at 12:44 pm

    Pete, regarding BDI I follow the trade data, company reports and keep an eye on Bloomberg. I do not make too many assumptions, I watch hard data. You can see for example where Australian commodities are going by looking at our trade statistics. China might be stockpiling some commodities, but if you look at their spending plans it is pretty clear they are going to need a lot of raw materials. Also remember they are still rebuilding after the massive earthquake last year. In addition I track what Japanese companies in China are saying about demand since the trade between Japan and China is enormous. The latest report I saw in the Nikkei Weekly said Japanese companies in China are seeing demand pick up again.

    Regarding the stimulus packages etc. I do not worry at the moment if they are effective or not, I am looking at demand. Government spending is more often than not wasteful and for every dollars spent the taxpayers will be lucky to get 30 cents of value, but I invest in companies not governments. We all know that one day we will end up paying for the national debt in some form.

    I am not a big fan of governments getting too involved in the markets at any time. People seem to forget that it was U.S. government policies that created the market for sub-prime loans. Also governments could have done more to regulate the banks but as we know, all political parties do like their fund raising and the finance sector are usually generous donors. Amazing how when the bubble burst the politicians pretended they never knew what was going on!

    Your points on long term trading make sense to me. Long term stock ownership is not always the way to go and I am certainly not a hold for life investor.

    Yes I have heard of index investing and I have indirect exposure to a number of index funds. I expect an index fund will plod along with the index it is tracking, saves me the grief of trying to put together a similar bag of stocks etc. I also like ETF’s for a little bit of diversification.

  • 9 Pete // May 9, 2009 at 8:48 pm

    BDI: Okay, so some Japanese and Chinese companies are suggesting a pickup in demand. But where are the sales going? And why?
    The big question here is: Is the demand sustainable?
    Eg: Some big Chinese company could say “I want to spend $100 billion on steel, get it for me” but afterwards not spend a cent on steel for the next 10 years. All that would do is create a momentary boom in iron ore.
    The way I see it is that if you don’t know what is driving demand from a ‘big picture’ perspective, then you run huge risks of not understanding the boom in demand at all, and risking losing from it.

    It is all about the assumptions we make, from the data we have. We can make logical assumptions, but are their alternatives? Are their counter arguments that would derail us? There are too many variables for anyone to be 100% accurate at predicting the future, but I think it is folly to assume correctness by only looking at a few figures. It is the same reasoning that brought down the likes of Lehman.

    As for the Government: They WILL affect your trading. This is due to taxes, regulations (trading and on companies) and trustworthiness. You seem to understand when you mention that Gov. spent money loses a lot of value. But you also need to remember that they are spending money on ‘our behalf’. For each person that earns money and pays taxes, they are spending that tax money (plus much more because of their borrowing) on stupid ventures, trying to fill in the gaps that the GFC left.

    All the Gov. will do is make things much worse. And we should consider that Australian companies and citizens need to operate in that environment.

  • 10 Greg Atkinson // May 9, 2009 at 10:04 pm

    Pete, I think 1.25 billion Chinese will be enough to keep demand going for a while. I do not believe I mentioned any “boom”, just the fact that demand is picking up again. It is funny you mention a company might be buying steel and hoarding it..would not the same logic apply to gold? Anyway steel is not a great thing to store long term, it takes up a lot of space and rusts 🙂

    In any case I think it is pretty obvious the Chinese see a long term demand for commodities..hence the reason they are buying up stakes in Australian miners and have been pumping money into Africa for years. You may not see a long term commodities demand but the Chinese do. Personally I am going with the 1.25 billion Chinese.

    As for Lehman Brothers, I think they had more problems than just some poor assumptions. Their risk management seems to have been pretty poor but I guess it will take a while before we know the truth about that saga.

    Yes government policies are a worry, hard to get around those. But of course one can mitigate this by investing overseas.

  • 11 Pete // May 10, 2009 at 1:15 am

    Greg: We will have to agree to disagree on the Chinese growth model. Like some others (but probably a minority) I believe that Chinese growth will only come after significant restructuring of their economy, which takes a lot of time. Artificially driven demand (eg temporarily stockpiling resources while prices are low) is not sustainable growth at all, but would serve them well in the future when they need the resources.

    My take on the BDI is that there is a demand for shipping. China is stockpiling resources. Why China is stockpiling resources, I do not know. My guess is that it wants cheap raw materials, while they are still cheap. Or just somewhere to spend its stupid amount of $USD. However the BDI does not imply to me that the huge amount of demand from the US, China’s main customer, has resumed to high levels. Nor has any taken country taken its place.

    Besides that, of course there is still ‘some’ demand for Chinese products from all around the globe. Just not at pre-GFC levels.

    When the pinch starts being felt by all is when things will get much worse. When people start saving every available dollar and Harvey Norman goes bust. Already some companies (including Harvey, but especially car companies) have huge stockpiles of unbought goods. If those goods were imported from China, guess how big next years order for goods will be? Much less. And so on.

    My point is that demand has to come from somewhere. And it needs to be sustainable. From what I understand, the difference between what you believe and what I believe is simply whether or not China can generate demand itself. And whether it would want to – potentially starting its own messy bubble.

  • 12 Greg Atkinson // May 11, 2009 at 10:10 am

    Pete, actually I am not counting on China alone but demand creeping back up in the U.S, China, Japan and the Eurozone. These are the big four economies, Australia is just along for the ride. In fact I would go as far as saying there is little Australia can do to get out of this recession without getting a lift from these economies.

    Anyway in a few months we will be able to see how demand is holding up and where resources are heading.

  • 13 Ned S // May 11, 2009 at 12:01 pm

    Greg and Pete – Got to admit I to tend to agree with Pete on this one. For one simple reason – If Western governments have found a way to turn a 15 year boom around after a bust of maybe 18 months, then it sounds a bit like they’ve come up with the Economics equivalent of the cure for the common cold. It is possible I suppose, but it does sound a bit incredible?

    I think I’m going to go and try and figure out what a decade or so of stagflation might sound like in a globalised context. (As being just maybe a best possible case scenario.) Wonder what brings stagflation to an end?

    In the interim I suspect there are a few different basic types of people in all this:

    a) Those who figure there is something strange going on but believe government has it all under control and will ultimately provide regardless.
    b) Those who figure there is something strange going on but believe there isn’t anything much they can do about it either which way so will take what comes.
    c) Those who figure there is something strange going on, and would really like to know what it is so they can do something about it, but can’t quite figure it out just yet. (While they watch the value of their assets decline.)
    d) Those who find something to trade and do it successfully.
    e) Those who find something to trade and do it unsuccessfully.
    f) Those who live in a third world village somewhere and say life is pretty much the same today as yesterday – For better or for worse.
    g) A few pretty well established types who feel reasonably confident they have all the bases covered and remain inpregnable through just about any high or low. (Wonder if Paris Hilton’s daddy would like to take me into the family as a son-in-law so I can keep his little girl under control? Nah, have to keep things in perspective – I suspect there could be worse things than poverty – Smile!)

  • 14 Greg Atkinson // May 11, 2009 at 12:47 pm

    Ned S- can we add?

    h) Those that reckon economic power is shifting from the West to the East. In other words the Western Governments can fumble around but eventually the Asian economies will become a much bigger part of the global economy and thus the Western Economies will have a reduced influence.

    Mind you option g) looks terms of looking after the Hilton girl 🙂

  • 15 Ned S // May 11, 2009 at 12:52 pm

    One more then I’m going to try and hibernate for a while.

    A curious thought has been building in my mind over many months now I guess:

    Western governments don’t seem to want a nasty recession. So it is pretty much stimulate or die sort of mode – Even to the point of QE – Which is pretty dangerous from what I gather. And which I’ve also read tends to get less effective the more you do it. (I don’t know if that is correct or not.) But either way, I have not heard of it ever having been used successfully anywhere – If anyone knows of a historical precedent that contradicts that, then certainly let me know please.

    Perhaps it is simply a case of America figures that with its stock market having dropped 55% odd and its housing boom being down by 20% odd they have paid their dues to Austrian Economics ideas and they deserve a few happy times ahead? (And ditto for the rest of the west in one variation or another.)

    But what say they really don’t actually believe that at all and figure it is pretty much a case of they know that they broke their toy and it is going to hurt a lot to fix it?

    Then that would mean it is starting to sound to me like a case of if they really do have to have a nasty recession, they are going to at least try to drag the pain out over a very long time to try to make it not “feel” so bad maybe.

    But why not do the Austrian type thing and cop the pain? Well here’s the specific thought for comment:

    If my take on it is correct, that type of thinking says If you are sensible you shouldn’t get in a mess to start with, but if you haven’t been sensible the best way is to nationalise your banks, let inefficient businesses go broke, cop the stock market crash, cop the property crash, cop the widespread job losses and the pain will all go away in the shortest possible time as new efficient businesses with lots of shiny new jobs rise from the ashes – Oh, and your banks will be profitable and you can sell them back to lots of willing investors again.

    Sounds simple enough in theory (providing you reckon the unemployed won’t vote you out or any such thing maybe) – But just potentially problematic if you suspect a lot of those efficient new businesses could spring up in someone else’s country or using capital from another country where the profits will ultimately find their way back into that other country – Rather than your’s – That just might be sounding like a case of I’d appreciate a decade or so minimum to think about this please type material from a Western government’s perspective maybe.

  • 16 Ned S // May 11, 2009 at 3:03 pm

    Greg – I think our thoughts re option h) may have pretty much crossed. It’s a shared perspective that comes from having spent a bit of time having contact with a one of the BRIC nations I guess.

  • 17 Pete // May 11, 2009 at 4:49 pm

    Ned S:

    I agree with most of your points in this.

    And you bring up something worth noting in your closing paragraph:

    “Sounds simple enough in theory (providing you reckon the unemployed won’t vote you out or any such thing maybe) – But just potentially problematic if you suspect a lot of those efficient new businesses could spring up in someone else’s country or using capital from another country where the profits will ultimately find their way back into that other country”

    Okay, so basically we have a world made up of countries. Countries that compete against each other constantly for the most favourable economic, trade, and living/working conditions. Also we can definitely include competing for influence over other nations (which involves trade, military, media).

    Let us pretend we are the Prime Minister of Country X. Country X has been hit really hard by the GFC and our house prices have started to plummet, our banks started to get into real big trouble and unemployment has started to skyrocket.

    We can choose to either:
    a) let everything fall down (maybe nationalise the banks as you mentioned Ned)
    b) try and mess with the economy and make it better

    Before making this choice, we’d also have to consider:
    *- conventional economics theories (eg Keynes) have strategies that appear to work with these issues
    *- people don’t vote in Gov’s who make them unhappy
    *- we are competing with nations who will also do the same things. Who would want to live and invest in Country X when it is down in the dumps. Especially when Country Y seems to be holding it together for now
    *- forecasters say that economic conditions will pick up in the near future
    *- if the economy starts to fall we may not be able make full use of the near-term upswing
    *- we didn’t see the problem coming, do we even understand the problem?
    *- everyone else is doing the same thing, so we can hardly be blamed for such a ‘Global’ problem
    *- going out on a limb is not something conducive to a prolonged political career (eg, politicians are born and bred with an attitude of self-preservation)

    After considering those points (and i’m sure theres many more), the answer is actually pretty easy. A bit of a self-fulfilling prophecy, no? It appears we are doomed to repeat the same old history over and over until we truly learn our lessons.

  • 18 Greg Atkinson // May 11, 2009 at 5:33 pm

    I agree basically with Pete. I think it just boil boils down to the people in power want to stay in power and recessions tend not to help them do that. This is the reason I to believe we are locked into boom-bust cycles because no government is probably going to allow a correction to truly run it’s course. In theory letting banks fail and not propping up companies might be the correct hard core economic thing to do, but a government that does this would not be re-elected. Even the regime in China is fearful of civil unrest because of the economic downturn.

    Will we learn lessons from this bubble..yes. Will we forget most of them when the good times return? Probably. If you look into the measures taken after the S&L crisis in the U.S. you will soon see how easily we forget the pain of an economic downturn.

    As for QE actually many economists feel this was a success when used by the BOJ…then again many experts say QE did not work. But who was right may never been settled. I guess it is one of those glass is half full, half empty sort of debates.

  • 19 Ned S // May 12, 2009 at 11:18 pm

    Greg and Pete – Thanks, I’ve taken both your thoughts on board and am mulling them over. You are both telling me to expect a few more years of hubble, bubble, toil and trouble. (Minimum.)

    For me personally, that probably means I should consider trying to acquire some trader type skills – In something. Interesting prospect because I’m not at all sure I can develop the mindset for it. In that to be successful, a person seems to need to be a balance between 1) a do your research thoroughly type who in most games might be able to expect to be “right” at least maybe 95% of the time and 2) a “near enough is way good enough” type who accepts that they are pretty unlikely to get things right even 66% of the time maybe – But played sensibly that is still way good enough?

    Pete – Your point re us each being nations who will compete is a good one – For me at least. I’ve spent enough time rubbing shoulders with different nationalities that my sense of nationhood is a lot more watered down than most I think. So it is handy to get a reminder that the world is as nationalistic as it is. Additionally, I think it is pretty obvious world governments are in uncharted waters and making it up on the fly with pretty much a fingers crossed /we hope these economists know what the heck they are talking about type mentality.

    Greg – A comment re QE – Any national economy I have heard of that has seriously ventured down this track has crashed and burned – As opposed to the one national economy I know of that took the Austrian cure (Sweden in the early 1990’s – the Bo Lundgren Banking Crisis story) and crashed and recovered. One could hypothesise it may work way different when the whole world is in the can I suppose – Dunno – But my gut suspicion is that it would work much the same – But that it just could mean that shift of economic power from the West to the East you mention could take place a bit more quickly than either party is really ready for. (And be way too politically unpalatable for the West if hurried of course.) Keynes apparently had some very harsh words to say about it. Although Freidman came along later and figured Keynes was a dill and QE was wonderful. (Iceland apparently modelled a lot of their economic thinking around Freidman – That’s not to say Iceland ever did QE! But it could at least indicate there were a few fundamental gaps in either Freidman’s understanding, or in Iceland’s application of it – More than one way to skin a cat – And more than one way to crash and burn an economy perhaps.)

    Had a read of Bill Fleckenstein’s latest freebie write-up. (If nothing else I’m cheap!) I find him interesting. Some people seem to take the attitude of Why would you read him – He’s always wrong. Well not quite. Although he does tend to be way too early for his own good when it comes to stocks. He was screaming “market crash” years before it happened – And for pretty much all the right reasons as I recall. Which should give any critics who reckoned he was just a professional short and would do anything to talk the market down, a bit of cause for thought. And he was real bullish on bullion all through it for anyone who cared to listen.

    His current best guess is stagflation (for the US at least I suppose?) – Although he doesn’t seem to be taking any real firm stance on anything much re stocks right now. Maybe I’ve been reading him for too long – Because the thought stagflation was flicking through my mind real recently as well. But if he repeats his last performance and is a few years early, I guess it could give America a bit of idea of what to be preparing for. Buffet is calling inflation. Makes sense that they’d have Volcker on the team. None of that especially helps anyone who wants to make money now I guess. Unless it gives some indication of why stocks might be going up – People are starting to want to hedge out of cash?

    Also had look at S&L Crisis – A way more detailed reread required to get my head around it I think. Stagflation doesn’t seem to have resulted from that though. Rather it was there before it all? Definitely more thought required.

    Anyway, I looked up stagflation on Investopedia and the one comment that particularly struck me was “There are multiple theories on why stagflation occurs.” Or just maybe looked at from a slightly different perspective, stagflation is something that can happen real easily when we don’t have clue what is going on or how to fix it??? – If so, the current situation could certainly seem to be in with a chance. (That may be way too cynical and superficial of course!) Still, I guess it would sound better to government than stagdeflation – They don’t seem keen on any economics type words with the letter “d” in them at the moment (like decline, decrease, drop, down, deflation, stagdeflation, depression – None of them are popular words at all.)

    I also remember reading quite recently that the US Fed are “not at all concerned about inflation” or some such – Which probably means it is a rather sensible thing to be concerned about.

    Reading some of this stuff – It all sounds a bit like the movie Groundhog Day maybe, but without the happy ending. How quaint. But then there was no sequel was there? I suppose the hero and his girl could have got divorced – Whoops – There’s another “d” word – They must be eliminated from the vocabulary! Smile. I don’t think I’d like to be an economist – Imagine being that wrong that often and that repeatedly – And causing untold damage to national economies and millions of lives while you were making your daily pontifications – These chaps are certainly made of stern stuff. A bloke could end up having thoughts like joining one of those sorts of monasteries where you take a vow to never speak again and spend the rest of your life in quiet contemplation and prayer or some such.

    But either way, I really must make a point of having a chat to a pretty cluey bloke who I know has very definite recollections of the 1970’s stagflation days. And another bloke I know who can give me a few hints on just what happened in at least one bit of the Oz property market around that time. He’s good for anywhere between about 1955 and now I’d reckon. The ABS is pretty useless – They didn’t start keeping stats on it until 1986 – Amazing! Even I can remember that far back. And apart from the odd minor flat spot and downward blip to be held through, it has pretty much been a one way push.

    Just checked the Oz CPI. 0.8% for the last quarter. A tad higher than they’d like maybe. Way more than a tad if anyone digs in and looks I think. Just about everything is going up. Except the cost of borrowed money, petrol and holidays. That sounds about right. The local take away curry shop bloke gave himself a 20% increase a while back. It would have cost me about 25% extra on house insurance if I’d played the game this year – As in the cost of a replacement building is up maybe 15% and the insurer had awarded themselves a 10% increase, and the local council rates charges sure haven’t dropped, and neither has the electricity bill. And I bet my car registration won’t have dropped when it comes in either. No, unless one is up to their eyebrows in debt, really has to drive a car a lot and holiday regularly, they’d probably be inclined to think inflation in Oz is running at 10% pa maybe? And the economy seems a bit quiet to me. Could very well be stagflation in the making.

  • 20 Pete // May 13, 2009 at 12:11 am

    Ned: Nice post, interesting ideas and some interesting history.

    Don’t worry yourself too much with the trading. You can start ‘practice’ online trading accounts with fake portfolios and see how you do. Another way is to invest a very small amount of money and see how you go. When I started trading I went in with the intention of primarily learning and secondarily making profits. It wasn’t such a bad approach, especially if you can get your head around the emotional side of trading whilst you are still using small amounts. Examples of emotions that I felt or mistakes:

    *- panic that I was going to miss out
    *- greed (the biggest one!). Spend big, get big gains!
    *- expecting what I ‘want’ to happen, not what ‘will’ happen. You feel stupid.
    *- not learning to cut my losses (when I finally did learn, oh man did this save me some major drops. Eg, buying at $9, selling at $8…share slowly goes all the way down to .40c).
    *- cutting my losses too soon (jumping on the panic train)
    *- selling a great stock too early (not thinking about the fundamentals and instead cashing in on a good profit. The stock made an extra 100% gain… 🙁 . That one would have been a great stock to set a stop-loss on.)
    *- considering myself ‘wise’ in my selection of a stock (later I realise that some of my decisions were so freakin lucky its not funny. I was just lucky that the sector was in a bull market. One stock I bought into heavily for 56c, sold for 63c, was a nice small and very lucky profit. That same stock then got smashed by the GFC and is now longer trading. I was lucky that read DR and others when I did)
    *- not understanding that markets are fickle and jumpy sometimes
    *- assuming that other investors are ‘smart’. Just because some people have bought some shares and the price of a stock is up, does not mean a single thing. For all you know they could be rich kids playing with their first portfolio that Daddy set up.
    *- buy low, sell high (haha). Don’t buy at the market peak of a stock. Unless you are sure that stock has further to go. Imagine being the fools that bought Rio shares at $150? Or Fortescue shares at $15. There are too many examples to name from the GFC actually.
    *- be patient. Share prices can fluctuate a lot. If you see shares going up one day, is no real surprise to see them down even further another day. Figure out the price you would pay for a stock and don’t exceed it.
    *- be calm. Learn to let stocks go. ‘Oh no’, so you didn’t buy that stock when it was 10c, and now its $1. Tough. Move on to another stock, theres plenty.
    *- ignoring the bad signs and jumping aboard for the good times. Eg, investing in a stock that you know has some bad bits, but you just have a ‘hunch’ will do well anyway. Generally not worth the risk…better off at the casino. All you are ultimately doing here is using the ‘greater fool theory’.

    Learning to trade in the current environment could be fairly brutal. At the start of a suckers rally is not too bad because gains are more favourable. So if you do have a dabble, look out for the clout at the end of the rally. Also be cautious of market shocks – markets are pretty jumpy at the moment. So many stocks soared after the carbon trading thing was postponed. Seemed a bit irrational to me.

    I read up on stagflation a while back (thanks Wikipedia). I think that hyperinflation (due to QE) trumps stagflation, simply because it can destroy the economy and currency (which is terrible)…but then an alternate currency (eg another countries currency, or gold backed?) could be introduced to start from a clean slate.

    Most of what I just wrote is pretty stupid though. Hyperinflation as a solution? Hardly! But stagflation is pretty bad. I really think the actual solution to stagflation is a restructuring of the entire economy. Finally producing something meaningful instead of being stagnant. Getting some positive cash flow into the country so that a good economic base can be built upon. Although restructure costs capital…and capital is expensive in times of high inflation.

    It reminds me a bit of one of those old sayings, something like “I drink because I’m sad…and I’m sad because I drink”.

    My personal feelings for the Australian economy: Most of us have no idea of what we are getting ourselves into right now and the ramifications that will be felt in future years. It’s all “nice party, i’m off home to bed now” obliviousness to the heavy hangover waiting the next day.

  • 21 Ned S // May 13, 2009 at 10:26 am

    Pete – Thanks – I’ve saved and printed your post above. I’ll keep it stashed away for the day I do start trading maybe. A practice account would probably be a very good idea – For learning the real basics (like what a stop loss is and how to set one – I never knew they existed until quite recently – but I have been watching and doing a little bit of learning along the way.) And it would be useful for getting a feel for whether I might be able develop the necessary mindset I’d say.

    QE and hyperinflation – Everything says it is dangerous territory to play in for mine – But I’ve got to learn a bit more about the concept of the “neutrality of money” and why economists seem to have changed their minds over it and in what contexts before commenting more on it I guess.

    There’s a lot I could say about the budget that would reference concepts like moral hazard, malinvestment etc. But will confine myself to just one practical comment:

    Re inflation it is interesting to note that the government is going to come up with a Pensioner and Beneficiary Living Cost Index they measure the rate of inflation against as well as the CPI, for use in making adjustments to aged pensions and the like when it is warranted – That just could be a very interesting index to watch for anyone who tries to live within their means. Sounds like an extremely brave move to me actually – I’m not a pensioner but I can only applaud a bit more transparency in what really is going on in the economy if that should be an outcome.

  • 22 Ned S // May 13, 2009 at 11:05 am

    Greg and Pete – As you know I’m not a participant – More a quite interested observer. But this is an interesting article for mine anyway:

    (It’s American but it still seems potentially quite relevent to me.)

    Although there is no rule that says markets have to behave rationally from what I’ve read.

    One thing I do like about Oz stocks is that we are hitched to Asia.

    One thing that I don’t like about Oz stocks is that I’d guess a lot of money gets force fed into them through compulsory superannaution contributions by default which makes them a “false” market in some ways – And just maybe one that could be subject to a few shocks if some of that money stops going in as unemployment increases – Although one would guess, at least some of that effect will be offset if the markets say, Hey, these are “good” job losses – The type that mean business is restructuring?

  • 23 Greg Atkinson // May 13, 2009 at 11:47 am

    Ned S – thanks for the article. Honestly I think it is going to be hard for stocks not to recover with all the money being thrown around. I have been looking into the Crash of 1987 and the recession of the 1990’s and see a lot of parallels. Same old story, stock market crash, recession, government spending and then inflation.

    I am a fan of Australian stocks with overseas operations/exposure (especially Asia) but I am not a great fan of Australia domestic type stocks. The simple reason for this is that Asia has enormous growth potential and even modest growth in China will keep the demand for resources chugging along. Quality miners will probably do well, high cost low profit miners will probably go bust or be taken over. other goods and services exports into Asia should also do well.

    But in Oz I think we know what is likely to happen. The budget forecasts will be wrong, the deficit will blow out and at some stage taxes will need to be raised and/or government spending will have to be cut in a big way. This will result in less money spinning around the domestic economy and I do not reckon commodity prices are going to soar back quick enough to save the day.

    Anyway I posted some clips from the time of the 1987 Crash today…these might be good for you to look at as they also contain some pretty sound investment tips as well.

  • 24 GoWest // May 21, 2009 at 11:02 pm

    Are we seeing a selloff and investment into gold (in the US) prior to the crying (reportin) season?

  • 25 Greg Atkinson // May 27, 2009 at 9:32 pm

    GoWest..actually I think gold prices might drop back a little and people move into stocks if the situation in the U.S. does not appear to be getting worse.

  • 26 Ned S // May 28, 2009 at 8:04 am

    My favourite freebie “rational” bullion commentator reckons gold could go a lot higher some day but seems pretty wary of the sources that demand is coming from these days and points out “the metal is trading some 65% above its long-term historical average.”

  • 27 Greg Atkinson // May 28, 2009 at 6:30 pm

    Ned S – thanks for posting the link. (I have tried to make it easier to post links now) Anyway there is no doubt gold is trading at a premium price, the question is if this higher price can be sustained.

    The fact is that investment gold is not the biggest consumer of gold although we are seeing record demand for gold for investment purposes. Demand for gold for use in industry and for jewellery is well down so overall gold demand is not up quite as much as gold bulls make out.

    There has to be a limit to investment demand unless all money eventually is sitting in gold bars in a vault somewhere. At some point the demand for investment gold will come back down simply because other asset classes will become more attractive.

    I know gold bulls will not agree with me, but people can look at the gold charts themselves and see that gold is very often not a good place to have your money. Personally I am quite confident that if you had a $1000 to invest for a few years that you would be better off in BHP stocks as opposed to having some gold under your mattress.

    Just for the record: I do not have any interest in gold at the moment except for a very small amount in a small cap gold miner that is in serious trouble. I do hold shares in BHP and have for many years.

  • 28 georgia // Sep 20, 2009 at 2:42 pm

    Could someone provide some thoughts on the following:

    Q.1 What are the chances of the US Gov defaulting on it’s bonds? If so, will we see the Dow Jones Index crash?

    Q.2 If the US Gov does not raise taxes, how will the Gov bring down it’s debt?

  • 29 Greg Atkinson // Sep 21, 2009 at 5:38 pm

    Georgia I have no idea what the chances are that the U.S. will default but what I am pretty sure about is if that happened the Dow would tumble.

    Regarding Q.2 I think it is safe to say that the U.S. Government will be looking at not only raising taxes but also making some big expenditure cuts. Already cuts in defense spending have been flagged and I am sure that one of the positive that will come out of this mess is that the U.S. will need to scale back defence spending in a big way for many, many years.

    Already the plans for a missile shield in Eastern Europe have been cut back/shelved and this will not only save the U.S. money, but also keep the Russians happy. (and prevent a totally useless NATO versus Russia mini arms race)

  • 30 Pete // Sep 21, 2009 at 7:26 pm

    Q1) Here

    Q2) Here

    US won’t raise taxes significantly, because it will be too scared that it will stifle it’s growth. Just like our Gov. won’t raise taxes significantly, because it is scared of the same, and losing votes.

    But military spending cuts sure add an interesting element to the mix – I totally agree there.

  • 31 Ned S // Sep 21, 2009 at 9:24 pm

    Thanks Pete – Interesting links – Certainly put the chance of US default in perspective and its options for paying down debt.

    I’m not convinced they US will journey heavily down the raising taxes path either – They are more capitalist than us.

    But Oz will move down the higher taxes road I think – Over time. We are more socialist and have been getting more that way for many decades.

    The Yanks don’t actually seem to be very good at socialism. They get all confused and want to turn it over to private business to make a buck out of if the subprime debacle can be taken as any guide.

  • 32 Greg Atkinson // Sep 21, 2009 at 9:26 pm

    Pete I think you mean the Government won’t raise taxes in a way that gathers a lot of attention or looks like they are raising taxes 🙂 For example I would suggest that an ETS is simply a tax and so by stealth taxes will be raised right under our noses.

  • 33 Pete // Sep 21, 2009 at 10:19 pm

    Haha, I couldn’t help it 😉

    Actually I am inclined to flip-flop and agree with both you and Greg that they may well find some other ways to tax us.

    The scary thing is, all these taxes are taking away incentives for the real backbone of the economy – businesses – to operate.

    The downward path to socialism looks awful at this point 🙁

    We all know it doesn’t work (no pun intended).

  • 34 Greg Atkinson // Sep 24, 2009 at 7:26 pm

    Pete the use of “fear” is a powerful tool in the hands of astute politicians. At the moment our elected “friends” can scare the public with tales of economic and climatic doom!

    But never fear, increased taxes are the answer and while they tell us about the evils of CO2 they continue to jet around having meetings.

    But just to show they really do care our politicians in Australia have put party politics aside and decided they really do deserve a 3% pay rise. Judging by what I have seen during question time the clowns should be taking a 3% pay cut!

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