I keep six honest serving men, They taught me all I knew. Their names are What and Why and When, and How and Where and Who.
Rudyard Kipling
There are those who do not know, and those who do not know they do not know. I belong to the former camp.
J K Galbraith
(1) It is unlikely that God’s plan for the universe includes making you rich. Success in the stockmarket requires effort, discipline and patience. (2) "Research" is to contemplate the possibility that, intuitively, you may not know the answers, and worse still, you may not even know the questions. Information insightfully interpreted will help avoid being caught in a position where you can lose a lot for reasons not understood. Try to avoid making the facts fit the theory, especially in relation to timing. Speculation is not investment.
Buffetology: Can we understand the business? Does it have a sustainable competitive advantage? Do we like the people? Are we getting it at the right price?(10) In the medium and long term the stock market indices fluctuate around the upward trend in earnings per share.
Ecinya Investment Rules #1, #2 and #10.
(1) In many respects we, on our side of politics, still live with the attitude of capitalism being a system that will always exploit workers, and will always exploit consumers. But the truly equitable thing now is to say that the problem with capitalism is that there are not enough capitalists, and that the best social justice policy is to make the ownership tent as big as possible. (2) The miserable lot of the Third World’s poor results from a history of corrupt governments; it has nothing to do with Mc Donald’s or Coca Cola. The true enemy of the poor is the corruption of the state. Capitalism is actually part of the solution
Mark Latham former leader of the Labor party 10/10/2001 and 2/5/2001
We’re enjoying sluggish times, and not enjoying them very much.
George Bush Snr, 1992
The economic cycle in simple terms, is the process of moving from an excess of consumer and investment spending to stability, and then to deficit. New spending begins the next virtuous cycle. If income is pressured, so is spending. Lower taxes and lower interest rates drive the recovery phase.
The Ecinya pages 23/2/2001
THE ORIGINAL ESSAY WAS WRITTEN IN FEBRUARY 2009 and was re-produced on 1 September 2009 as it appeared to be more pertinent at that time when many (some of them self-serving) were exaggerating the ‘global financial crisis’, which now seems to have been not much of a crisis at all. All that was required was to simply throw large levels of fiscal and monetary stimulus at the problem. Keynes had done it before so that it was an old recipe. But it still seems to us that not enough current attention was being given to the basics – structural, systemic, and attitudinal – especially in America. The cult of ‘the free lunch’ had returned. The imbalances that provoked the ‘crash’ seem omni-present.
Australia is in relatively good shape, growing at circa 4% on a cum-stimulus basis and probably around 2.5% on a post-stimulus basis The underlying reason is our proximity to Asia where the Chinese economy is expected to achieve growth of 8.5%. But all of these figures are relative. In ‘normal’ circumstances the world should grow at around 3% per annum which means that world output doubles about every 24 years. Australia’s domestic economy enjoys high per capita GDP, a stable banking system, generally sound infrastructure, relatively full employment, a stable housing sector etc. But as a major trading nation we cannot expect immunity from the global economy.
Part of the original essay said:
"This has been written to attempt a brief articulation of a major concern that far from saving Australia from the ‘global financial crisis’ the actions, rhetoric and policies of the current Australian government are going to totally immerse us in it, or delay our recovery from it, or both. We are just 1% of the global economy. Time is needed to see where the stimulus packages of China, America and Europe will lead the world. Current local policy prescriptions seem to be pre-emptive, excessive, and poorly targeted."
"Ecinya has suggested that payroll tax relief, personal tax cuts being brought forward, and some relaxation of capital gains taxes for long-term residential property holders upon sale would provide sufficient short-term relief. We are totally opposed to the $950 per person hand-out which apparently will cost about $11 billion and we don’t understand the pre-occupation with direct infusions for commercial property as opposed to working through the banking system. We are strongly in favour of infrastructure spending, but the schools programme is blatantly political and can unfold more slowly than currently envisaged. Some of the ‘green’ programmes seem also to be politically inspired."
"On the rhetorical side we have suggested that ‘balanced free enterprise’ replace ‘capitalism’ and ‘socialism’; that ‘beneficial trade’ replace ‘free’ trade; and that the Chinese Communist Party change its name to the ‘China Central People’s Party’ to mitigate cheap shots from the west during its past 30 year transition and integration into the global economy."
Ecinya Insights article 1/9/2009
The principal contribution that monetary policy can make to economic well-being is to maintain low and stable inflation. I think it is true to say that if you wished to forecast the path of the Australian economy, and you were able to have foreknowledge of only one economic variable, the one you would choose would be the path of the world economy. That is not to say that we have no influence over our own destiny – we can make the situation better or worse than it would otherwise be – but we cannot escape the influence of the world business cycle and the other factors that feed off it.
Ian Macfarlane, former Governor of the Reserve bank, 14/6/2005
CONTEXT
Our global proxy, the SP500 is now 12% off its intermediate peak of 1217 reached on 23 April and the All Ordinaries index is 13% off its intermediate peak of 5024 reached on 15 April (our editor’s brother’s birthday who has lived in North America for nearly 40 years). Swans are flying everywhere and only the colour is confusing, some are white, others grey, and some are said to be black, but colour is often in the eye of the beholder. Prior to this retracement the SP500 was 53% off its March 2009 low and our market at the same date was 37% of that corresponding low. The current down-wave is now 22 days old with elevated downside momentum.
It is a time to go ‘placidly amidst the haste and noise’.
But just a bit of background. The IMF and OECD have upped their growth forecasts for the next year or so. These are the same people who were oblivious to the sub-prime fiasco, the depth of the Greek ‘crisis’ and the Euro currency ‘crisis’. We rate their prognostications at low levels. The Goldman Sachs story is alive and well and we expect further revelations and conjecture about their role in world markets and certain economies. The current rates of growth being achieved around the world are driven by stimulus and sustainability is an open question. US housing and commercial property is not ‘out of the woods’. There are stories circulating about downgrades of US government debt. The market technicals are weak, and gold, said to be a ‘safe haven’ is strong. The oil price is weak suggesting lower levels of global activity and this is even more pertinent as the northern hemisphere is entering its summer driving period. Commodity prices are volatile to the downside, currencies are volatile, the Gulf of Mexico oil spill is devastating.
The North Korea – South Korea ‘skirmish’ has just entered potential black swan territory. Black swans are random events as we all know.
The cacophony of the bears is now loud and the bulls are muted with technically driven zealots calling the "end is nigh".
At home our budget deficit and the resulting sovereign debt appears to have not achieved much at all of a lasting nature and the Federal government and the states (apart from Western Australia) have relatively empty wallets. A "responsible budget" means that you have depleted your coffers and cannot afford to buy votes. The Reserve Bank has responded to rising housing prices and poor fiscal settings (though they don’t mention the latter) by raising interest rates as the rest of the world generally has falling, or relatively low, interest rates as they fight various degrees of recession. Then just as interest rates are slowing down the economy, Mr Henry decides that it is a good idea to tax our best performing sector and our only sustainable growth state.
Question (Q): What to do? Answer (A): bring out the six serving men. Start finding questions to begin the search for answers.
WHAT
Q: What is happening? A: the glass is suddenly half empty, not half full. In depression the thesis is "Where is the glass?" Though we are far from depression, the ‘double-dip’ talk has re-entered the economic debate.
Q: What signals should we be watching for? A: All Ordinaries moving back towards 4500 in good context, the SP 500 moving back above 1110, takeovers occurring from the people not caught -out in the crash of 2007/ 2008. Plus a BIG BACK-FLIP on the Resources Super Tax.
Q: What will lower interest rates mean? A: That they are needed and that growth is slowing excessively. Retail sales look to us to be pressured with ‘sales’ everywhere, and not all are seasonal.
WHY
Q: Why is it happening now? A: Because the PIIGS problem is now in the open, there has been a change of government in the UK and they are preaching ‘austerity’. America is unwell.
WHEN
Q: When will it all be over? A: We do not know because many thought it was over anyway. But it seems to us that if the world is about to face higher taxes it needs to have low interest rates.
HOW
Q: How will growth emerge in a sustainable way? A: When housing recovers, when unemployment peaks (but watch for government employment making the stats look better than they are), when confidence returns. Calm is required.
WHERE
Q: Where should we focus our attention? A: The USA, China and Asia generally, the UK, Brazil and Australia.
WHO
Q: Who was responsible? A: Ronald Reagan, Alan Greenspan, George Bush II, Dick Cheney, Hank Paulson, Moody’s, S&P, Fannie and Freddie, Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Morgan Stanley, various UK and European banks.
FINALLY
The global financial crash occurred in the northern hemisphere and the only real damage to Australia related to the banks access to capital. The government guarantee was good and necessary policy. The spending was, in an overall sense, bad policy badly implemented. The problem now is that the market weakness will/ is finding its way into Australian households. Anecdotal and observable evidence suggests the local economy is slowing appreciably.