The reaction to US foreshadowed stricter regulation of the financial world has caused reported falls in stocks across the board. This is an interesting reaction to a scenario that theoretically promises greater stability, less risk, less volatility and less room for manipulation than presently is available. I would be interested in Ecinya’s rationale as to why it considers the market is correct in falling when, to the layman, the promise of a more reliable less risky market place should make the market rise- or could it be as simple as the manipulators cashing in to go and play theft somewhere else?.
Brian Bolton, an Ecinya subscriber, 26/1/ 2010.
While I can understand the logic of your views on the Greek crisis, and the sovereign debt issues washing over the PIIGS, where are the solutions?
Prince Geoffrey, an Ecinya subscriber 22/2/ 2010.
There can be no respect for the truth without respect for the language. Only when language is alive does it have a chance. As the powerful in legend turn the weak or vanquished into stone, they turn us into stone through language. This is the essential function of a cliche, and of cant and jargon: to neutralise expression and ‘vanish memory’. They are dead words. They will not do for truth. When journalists ignore abuses of the public language by people of influence and power, and reproduce without comment words that are intended to deceive and manipulate. When this happens journalism ceases to be journalism and becomes a kind of propaganda; or a reflection of what Simone Weil called ‘the superb indifference that the powerful have for the weak’.
Don Watson in "Death Sentence: The Decay of Public Language", 2003.
Perceptions of the potentially distorting nature of large donations – either cash or other resources – to political parties will degrade the public’s trust in the integrity of the political process.
Senator John Faulkner 17/2/ 2010.
CONTEXT
The questions "Where are the markets going?" and "What happens next?" are obviously constants, and opinions are always divided. In fact it is a reasonable observation that when there is a substantial consensus it is liable to be wrong. In relation to ‘crises’, they can be real or imagined, and sometimes even convenient. The written word sets an opinion in stone, but the writer will change his mind as the data and/ or circumstances change. Also each person must interpret advice in context of his own positions and his own aspirations, and tolerance for risk. This is why we talk of ‘strategy’ and "tactics’ under our weekly Strategy tab and run a couple of portfolios using real money which attempts to impose some discipline upon ourselves.
Our current reading of the markets: Our global proxy, the SP500 is above 1100, closing last night at 1115. In the 19 day downwave which (on our calculations) finished on 15 February, the downwave low was 1057, about 6% below current levels. At the same time we are seeing some improvement in the US data that indicates that the USA will enter spring in better shape than the gloomy periods of Autumn and Winter of 2009/2010. Wherever the SP500 goes, any fall of 2% in a day or 3% in a week will be viewed with some concern. This translates into an SP500 level of 1092.
In relation to the All Ordinaries index, the last downwave low was 4544 and as we go to press we are sitting at 4702, a mere 3.5% above the downwave low. The reporting season has been satisfactory, but not outstanding. In looking at 100 of the majors that have reported, about 28% have increased their interim dividend and a few companies have declined to give guidance. This suggests that though the worst may be over for most companies, caution is still a dominant theme. Also the interim report of Toll Holdings was a disappointment and as Australia’s largest transport operator is suggestive of a sluggish economy. Though Australia avoided a technical recession in 2009 this had more to do with Australia’s robust financial position going into the ‘global financial crisis’ than management of the crisis once it came to pass.
Summary: Our tactical position is ‘Going with the flow, without conviction’ and we are ‘comfortable’ and NOT ‘confident’, ‘bullish’, ‘very bullish’, and certainly not ‘euphoric’.
An Interesting chart
This chart plots the course of the SP500 over successive up/down waves. It can be seen that the up-waves are getting weaker, indicating momentum loss, but the down-waves are of short duration and dimension from 2009
Our response to Mr Bolton
Markets work in the immediate past, the foreseeable future, and some commentators have a sense of history. Re-regulation of the markets will not automatically provide greater stability, less risk, less volatility, nor less room for manipulation. The markets always reflect the prevailing opinions and mood, and are never ‘correct’, in a strict sense. There is always a buyer and a seller, and one of them is right or wrong. There will always be mispricing and differing opinions of ‘value’. There was, and is, plenty of ‘regulation’ to control excesses, both accidental and fraudulent. Rather, the problem was to do with the inability of American regulators to recognise risk and in some cases to not act upon information and insights that clearly pointed out the risks involved in the American markets, and global markets generally (Madoff, IAG, sub-prime, General Motors).
The SP500 peaked at 1520 on 6 November, 2007 and the All Ordinaries peaked at 6853 on 1 November,2007, and are still 30% off their peak, though about 50% above their retracement lows. As early as 16 April, 2005 Paul Volcker in his full page article in The Washington Post – "An economy on thin ice" said: "Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks – call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What concerns me is that there seems to be so little willingness or capacity to do much about it."
That Mr Volcker, a doyen amongst practical economists and central bankers, was ignored for so long, indicates that the failings were of personnel, not regulation. And he was not alone then, or subsequently.
Our response to Prince Geoffrey
As a European, Prince Geoffrey sees a lot of the world on his frequent travels and in one of his university honorariums gets to speak with many academics and people involved in economics and the markets. The Prince cries out "Don’t tell me what I already know!" But, I respectfully point out that if we know so much and don’t act upon it, then what do we really know? (This is said with love and affection.) The Prince has been caught with his pants down on some occasions as he sticks to his well-worn thesis: "I am a long-term investor". So Prince, here are Ecinya’s solutions, specific to Australia:
- Australia should move to a 4 year Federal parliamentary term with a minimum period of 3 years. Ecinya is not in favour of fixed terms.
- Australia needs to get back on track with tax reform. We fear that the Henry Report will fail to address real tax reform and fail to impress us, you, and others.
- Donations to political parties should be abolished and a pool should be established to distribute donor cash – please see the Insights article Crony Capitalism: Capitalism’s Cancer. Crony Socialism: Socialism’s Endemic Malady
- The GST should apply to all goods and services, including food, and a raft of state and Federal taxes and charges should be abolished such as payroll tax, insurance taxes etc The Australian Treasury publication of August 2008 identified 125 different taxes imposed on Australian households and businesses.
- Capital gains tax should be ammended to define all capital gains as income and taxed on a sliding scale based on the time assets are held with nil taxation applying after say 7 to 9 years. Too many assets, particularly property, are being held in long-term hands because of the tax liability that would crystallise on sale. Capital velocity is important in a dynamic economy.
- The perennial, and mostly self-serving, debate about capitalism and socialism should be replaced by the expression ‘balanced free enterprise’. Peter Drucker often talked about the end of ‘capitalism’ and that it had, in fact, ceased to exist. He said on one interview occasion "Although I believe in the free market, I have serious reservations about capitalism. Any system that makes one value absolute is wrong. Basically, the question is not what are our rights, but what are our responsibilities." Balanced free enterprise would involve a defined role for government in the economy – say in good times government, expenditure should not exceed 20% of GDP; in bad times, it might float up to 25%.
- Companies should report annually every 3 months with a full year statutory report at the end of each 12 months. Continuous disclosure should be rigorously policed.
- Yellow cards should be issued to companies who transgress, obfuscate, engage in misleading or deceptive conduct. Three yellows and you get a red, and a visit from the corporate regulator follows. Myer, David Jones and Transpacific should have received yellow cards over the past few years, in our view.
- ASIC should be properly funded.
THE MARKET GENERALLY LEADS THE ECONOMIC RECOVERY
Investors can usually rely on the stock-market to foreshadow economic recovery and this particularly applies when the bust is cyclical in nature. This current bust has been somewhat structural in nature with massive failures in banking, oversight, fraud, and careless corporate behaviour. In relation to forward economic estimates about 60% of global growth of US$1.5 trillion for 2010 is forecast to come from just 3 countries, 30% from China, 24% from the USA, and 6% from India. American bank credit is limping and banks are reluctant to lend to the small business sector. In Australia a glance at the RBA statistics indicates that year on year residential mortgage borrowing are up about 10%, property investment borrowing are up about 4%, but business loans are down about 9%.
We continue to talk about the three economies- the real economy being the production of goods and services, the symbol economy – money and credit-, and the political economy. Clearly, the symbol economy is lagging the recovery and banks are reluctant to lend. Our concerns with the political economy are all to do with misallocation of resources and we are witnessing the insulation fiasco. Shortly, the school buildings programme will become a front page headline and this will dwarf the insulation debacle for waste. All government waste is paid for in higher interest rates and higher taxes.