2010 will be a difficult year simply because we had a complex recession with misleading and deceptive behaviour from many institutional and market related sources. Political correctness, self-interest, and convenient informal conspiracies have combined over the past decade to induce complacency and to mute criticism of behaviours that were near to fraudulent at worst and criminally careless at best, in relation to this credit crisis and the last tech/ telco crash. These institutions include bankers and brokers, government ministers, long-term fund managers, hedge funds, companies, the accounting profession, ASIC, the ASX, the IMF, and central bankers. Thus the natural tendency of market participants and informed commentators towards scepticism has been in retreat, and, to varying degrees, we have been slapped in the wallet by yet another harsh dose of reality. The commentariat has polarised into rampant bulls on one side of the debate, and negative zealots on the other. The response of the thoughtful should be to develop a strategy around viable data, consonant with an effective review and monitoring process. Only the nimble can outperform the swirling mass of ‘noise’ that hits us on a daily basis.
ECINYA 2010 Outlook, published 12/1/2010.
This is not a normal cyclical recession; this is a structural economic crisis. The United States is not a viable economy in its present form. Capitalism is being corrupted by government debt and paper money.
Richard Duncan, author of "The Corruption of Capitalism" on CNBC TV 23/2/2010.
America today has elements of all of the discredited ‘isms’ of yesterday hidden behind the facade of a supposedly free-enterprise economy and democratic system, though only about 26% of the population vote for any administration in office, and even less if the gerrymander is analysed in greater detail. The ‘isms’ are fascism, capitalism, social welfarism, big government conservatism, legalism, religious dogmatism, and powerful cronyism amidst pervasive elitism. The American elite has created national and international kaffirs, and within America itself second class citizens not encouraged to vote, who are as below the rule of law as the elite is above it. Success has bred excess: America has come to believe that its profligate behaviour in relation to energy consumption, poor wages in many areas of its economy, unfunded pension liabilities, a second class education system for many of its residents, the same in health; corporate welfare, tax shelters for those who can afford them, an excess of legal mantra over common sense and good sense, rampant debt creation largely involving other people’s savings, excessive speculation via derivatives and other exotic financial instruments, poor public and private accounting, has led to a country often seemingly out of control and exposed to regular crises, few of which are anticipated and after the event the response is shambolic.
ECINYA 2006 Outlook, published 13/1/2006.
The New York Times reported that one contract in 2001 involved Greece selling forward future lottery receipts and airport landing fees, for cash to write down debts. Josef Proll, the Austrian Finance Minister, said: "All the suspicions there are, suspicions of faked accounting…. must be cleared up. We’ll have to investigate."
The Times (London)16/2/2010
The 2010 YEAR AFTER JUST 8 WEEKS
We are comfortable with the Australian market, but less comfortable with overseas markets in Europe and America, particularly the latter. The latest reason given for market fragility is "the Greek debt crisis". For reasons outlined below we find this a difficult rationale, but the fact that it gets widespread acceptance as a valid reason indicates the fragility and volatility of the economic and market recoveries.
Our strategy is to sell the rallies, take a good proportion of our dividends, move from short-cash to longer cash. In our view not enough is happening in the global economy to convince us that a decisive move to the upside is in prospect. We are focused on stock selection and taking short-term profits to increase cash levels from time to time. Our guess is that markets will move within a range before slipping decisively mid -year and then staging a rally of reasonable significance towards year-end. Event risk is not priced in and we are viewing the Israel-Iran stand-off as potentially explosive.
TECHNICALLY
Our market focus in index terms revolves around the SP500 and the All Ordinaries (XAO). The nexus between the two is constant, almost irrefutable, and if there is a change in directional relationship it mostly involves currency. To 22 October 2009 the indices rose 25% over 74 days to 1092 SP500 and 4818 XAO; the retracement that followed lasted 9 days and the indices fell circa 5% to 1046/ 4547; next upwave was 8% over 51 days to 1150/ 4889; next down wave to 15 February 2010, 7% to 1075/ 4570. The current upwave is just 5 days old at +3% to 1108/ 4732.We are watching support around 1100 for the SP500 and anticipating resistance around 1120. In XAO terms we perceive support around 4700 and resistance around 4800. Remember our market is substantially cum dividend.
BUT WHAT OF THE PIIGS?
The PIIGS are Portugal, Ireland, Italy, Greece, and Spain. Collectively they account for around 35% of European GDP and about 6% of total global GDP. Though the numbers may be a little ‘rubbery’ we have created the Ecinya Triple Misery Index which is the aggregate of the unemployment rate, plus the percentage to GDP of the domestic deficit and the current account deficit. On an unweighted basis all of the PIIGS looks very miserable indeed. However, if we weight them on the basis of their share of global GDP the United States is the stand-out economy of concern. In this regard the quote above from Richard Duncan underscores how important it is that America gets its house in order and addresses some of the obvious imbalances that exist.
We need the American eagle to fly!
TIME IS NEEDED
There is a global recovery underway, but it will take time for confidence to return, for banks to start lending again, for companies to re-construct, for governments to get their balance sheets in order etc etc. The Bush-Blair global legacy is being unwound and residual damage has been done to Gordon Brown in the UK and the Obama focus on healthcare has raised questions about his administration’s interest in matters economic. Brown faces an election this year and Mr Obama has to get through the November mid-terms. Australia also has an election this year and many concerns are being raised about the apparent waste in the Australian stimulus packages.
In looking at economics, the traditional thesis has been to talk of two economies: the real economy and the symbol economy. The real economy is the production of goods and services; the symbol economy is money and credit. We have always believed that the latter existed to facilitate the former. However, with the growth, in particular, of derivatives and a greater global focus on equities and investment generally, the emergence of third economy distortions have complicated the process and the analysis.
What then is this third economy? It is ‘the political economy’, an expression that has emerged over the past few months. The symbol economy and the political economy tails oft wag the real economy dog. Currently, governments are embracing very significant debt loads to prop spending up and unemployment down. Unemployed persons mostly become angry voters.
Debt is said to invoke necessary discipline, simply because you have to pay it back, or risk foreclosure, or a credit downgrade which increases the cost of future debt. Private debt is said to be more disciplined than public debt because it requires you to earn income and profits to service your debt obligations, including interest payments. Public debt on the other hand usually results in governments raising taxes, or more debt, in the hope that inflation over time, or an election loss, will hide their profligate behaviour. The problem with governments, of course, is that they face the electorate on a regular basis which encourages unsustainable pre- election policy followed by the need to pay for it post-election. A lot of the cost of poor policy and poor policy execution is higher interest rates.
Hence the ‘voodoo economics’ of which we speak is that Ecinya remains to be convinced that de-leveraging the private sector by leveraging the public sector is sound economic policy. Australia has gone from a domestic budget surplus of just under 2% of GDP and zero debt to a domestic deficit of 3.6% and 19% govt debt to GDP ratio, respectively. The domestic deficit is a swing of $50 billion. Wow! Though these deficit numbers are relatively low and well short of the USA at 10% and 55% respectively, it still means that we are exposed to any downturn in the global economy and vulnerable to the unexpected, such as event risk and, say, an oil price spike.