Go placidly amidst the haste and noise remembering what peace there may be in silence.
The Desiderata, Max Ehrmann, 1927
Chaos is not dangerous until it begins to look orderly. A hunch can be trusted if it can be explained. It is unlikely that god’s plan for the universe includes making you rich. Optimism means expecting the best, but confidence means knowing how you will handle the worst; never make a move if you are merely optimistic.
Extracts from The Zurich Axioms by Max Gunther, circa 1980
The good news is that we have not fallen off into another Great Depression. With the degree of stimulus there seemed little chance of that, and we have consistently expected a global economic recovery by late this year or early next year. The operating ratio for industrial production reached its lowest level in decades. It should bounce back and, if it moves up from 68 to 80 over three to five years, will provide a good kicker to that part of the economy. Inventories, I believe, will also recover. In short, the normal tendency of an economy to recover is nearly irresistible and needs coordinated incompetence to offset it – like the 1930 Smoot-Hawley Tariff Act, which helped to precipitate a global trade war. But this does not mean that everything is fine longer term. It still seems a safe bet that seven lean years await us.
Jeremy Grantham, a distinguished US Fund Manager, October 2009
Clearly, the central bank of Zimbabwe has overdone it. But if the central bank of the USA has overdone it few seem aware of it. The secret is to give people more money, but not so much more that they realize all they’re getting is pieces of paper. Paper money may be a fraud, but it still represents purchasing power. When more units of it appear, people assume they have more purchasing power. And when they spend more, the merchants think there is more demand and increase production. Pretty soon there is a boom.
Bill Bonner writing on fiat money, 2007
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
US Federal Reserve statement 4/11/2009
ECINYA COMMENTARY
From 19 October 2007 to 9 March 2009 the All Ordinaries index and the S&P 500 (our global proxy) were in a primary downtrend for 355 days of 55% and 57% respectively. From 9 March 2009 the primary uptrend has lasted 178 days and the All Ordinaries is up 51%, and the S&P 500 is up 59%. Our Insights column of November 3 was written against the background of an S&P level of 1042 and XAO of 4546. As of last night these numbers are 1108 and 4773, a ‘bounce’ of 6% and a ‘bounce’ of 5%. Our expectation, and our hope, back in early November was that the markets would fall by about 8-15% which in our generalised view would have the indices more in line with our fundamental perspective.
From those levels, the economic and earnings fundamentals could re-assert themselves and an orderly market advance would follow with a focus on sustainable economic, earnings-per-share, and dividend growth. Balance sheets would have been restored from new share issues and the earnings recovery.
But it now seems to us that the global stimulus has barely impacted the real economy – the production of goods and services – and instead flowed in abundance into the symbol economy – money and credit. Bankers, the architects of the ‘great recession’, are back in bonus and it seems that a government debt bubble, in guise of nation-building without analysis, is manifesting itself. Politicians, central bankers, the IMF all in charge of sustainability and stability, were asleep at the wheel. These same institutions with little semblance of change are now meeting in various places to pronounce a new era of global co-operation abroad, amid ‘co-ordinated’ stimulus at home. The choirs are singing from the same hymn book. Only Mrs Merkel seems to embody a sense of truth and responsibility. The rest are today’s heroes, saving our women and children from the burning building that they set alight in the first place.
The fact that we are likely to emerge triumphant from ‘the great recession’ is not currently in doubt……. but our hunch is that the markets are too far ahead of that emerging recovery. We want a ticket at the game, but we don’t want to pay too much to participate in the applause.
It is Tuesday about noon, and last night in the US our global proxy rose to 1108. CNBC TV said that this was due to ‘better than expected, indeed strong, retail sales’. We looked at our daily US market site, Nasdaq.com, and the commentary said ‘retail sales data for October comes in a bit mixed, while business inventories for September decline less than expected’. With these statements seemingly in conflict, we visited DismalScientist where the data is set out in great detail and discovered that retail sales month-on-month rose 1.4%, but if you exclude autos then they rose 0.2%. Further, if you go into the year-on-year numbers, retail sales fell 2.6%. Knowing that our stockmarket is dominated by US brokers and that there is a 2 day nexus between New York and the XAO, sometimes leading by a day and sometimes lagging by a day, we were disturbed on Monday our time that our market was strong in the afternoon. This strength was vindicated by the overnight strength in the US. But today, our market is lacklustre and yesterday turnovers were exceptionally light. We are uncomfortable.
Additionally, on a more macro and longer-term perspective we are finding our modelled assumptions are not throwing up a large number of buying opportunities and so our conclusion is that about 80% of our stock universe is effectively on hold. In February/ March 2009 the position was largely reversed with about 60% of our stock universe on ‘buy’. When we first published the new ECINYA pages on 28 July 2009, 39% of our stock universe was on buy/accumulate/spec buy. Today that number is 18%.
STRATEGY
Our strategy is to be over-weight cash; about 30% in investment-accumulate mode, 43% in special situations, and about 12% in speculative stocks and 15% in cash.
TACTICS
Going with or against the flow, with or without conviction, comprises the 4 pillars of our tactical positioning. The fifth pillar is ‘Ambivalent, uncertain, relatively clueless’. This is where we are today, at this moment.
LOOKING TO OUR QUOTES ABOVE
The Zurich Axioms are just old-fashioned cynicism, but contain significant truths.
We are not as pessimistic as Jeremy Grantham about his home country, America, but we can understand his relative pessimism, and his caution.
Bill Bonner reminds us that central bankers (and fiscally reckless parliaments) can create illusions of wealth and economic activity.
Ben Bernanke is part of the Greenspan-Rudd school of double-speak and speaks and behaves like a politician. In his defence, perhaps, he cannot tell us the truth, simply because as Jack Nicholson said in the movie " A Few Good Men’, "We can’t handle the truth!!"
SO
Our hunch is to avoid chasing the obvious momentum and wait for better, and more sustainable, official and anecdotal data to emerge. Beating low expectations is hardly progress. As Peter Ustinov once said: "I love the guy who aims low and misses."
BUT AUSTRALIA
…… is in relatively good shape because the Howard-Costello fiscal legacy has given us deep pockets and our central bankers are independent and are raising interest rates. Additionally, we have the China story to under-pin our economy and that appears to be relatively sustainable.