Economists never know anything until about twenty years later. There are no slower learners than economists. There is no greater obstacle to learning than to be the prisoner of totally invalid but dogmatic theories. The economists are where the theologians were in 1300: prematurely dogmatic.
The days of the welfare state are over, but we are not going to abolish it. We have to find its limits. What are the limits? At what point does welfare do damage? This is the real question, and its brought up by the success of the welfare state. The problems of success are the basic issues ahead of us.
No matter who is in power, he would no longer believe in big government and would preach cutting expenses and would do nothing about it. This is because we, the American people, are at that interesting point where we are all in favour of cutting the deficit – at somebody else’s expense. It’s a very typical stage in alcoholism, you know, where you know you have to stop – tomorrow.
Peter Drucker, 1985 interview with Tom Richman of ‘Inc’.
America is facing conditions that are highly volatile. On the right, rage is all the rage. Progressives, meanwhile, are awash in disappointments, finding it hard to come to terms with the fact that this president is just not that into them. And America’s middle class is facing a very uncertain future. Wall Street may have its casino up and running again, but Main Street shows no signs of bouncing back anytime soon. Awful statistics – on bankruptcy, unemployment, home foreclosures – flash warnings that the middle class is under assault, and that America risks turning into a third-world nation.
Arianna Huffington’s contribution to The Economist’s ‘The World in 2011" published December 2010.
Mis-reading a putt is not a problem. If you then mis-hit it there is a good chance that it will go in the hole.
Our editor talking about golf.
People who make their living looking into crystal balls are destined to eat a lot of broken glass.
Larry Williams ‘Long-term Secrets to Short-term Trading’ , 1999.
OUR HEAD QUOTES EXPLAINED ( 90% of the message is in the head-note)
- Economists, central bankers and politicians who let us down badly in 2008 and 2009 are now leading us back to the promised land of prosperity. We should be careful, and remain watchful and sceptical.
- Ms Huffington has succintly defined the starting point for 2011, but may be being prematurely pessimistic as America has great capacity to re-invent itself, or to be delusional in perpetuity. Both conditions are dynamic not static, and if clearly recognised, can lead to progress and profits.
- To a large extent Ecinya got it right in 2010, but for some of the wrong reasons. More on this below.
- Just a reminder to you and to us that a view or thesis once expressed then requires constant vigilance to determine confirmation or divergence.
A SUMMARY OF OUR 201O OVERVIEW INSIGHT ARTICLES PUBLISHED 12/1 and 19/1/ 2010
In January of 2010 we said : "Though we regard the primary trend for 2010 to be UP, volatility will be a feature as the recovery will be complex. Most of the forecasters will have their moment(s) of directional accuracy, but will not be right for the entire year. Distrust any forecaster who just gives you a year-end index figure, which is a simplistic and lazy forecast, and relatively worthless."
"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."
Our overall macro conclusions were
- "Recovery with retracements, recovery comprising muted, subdued advance …….. 60% probability
- Double dip recession, more and/or new stimulus, secular bear overtakes…………..33% probability
- All other possibilities, new bull, depression, something we are unaware of……………7% probability"
REVIEW
We were looking for a 2010 SP500 low of 950-1000 and a year-end close around 1225. The low was expected in the first quarter of 2010. We missed the low by 2-7% which averages out to 4.5%, and we missed the timing of the low by 3 months. But we got the direction and the year-end number near enough to correct. So all is well enough, in hindsight.
Taking the current XAO level of 4830 and SP500 level of 1233 as data and assuming that will be near to the 2010 year-end close we can say a few things:
- Thinking in terms of waves within cycles….. in the 2010 calendar year there were 4 up-waves totalling 177 days, and 4 down-waves totalling 84 days.
- The current cycle began with the lows reached in March 2009.
- Assuming there is no change in direction the current up-wave is at day 72 of the 88 days that takes us to year-end… the markets were going up 68% of the time and down 32% of the time. ‘Markets’ here is defined as the XAO (All Ordinaries) and the SP500.
- Up-waves during the calendar year averaged 44 days, and down waves averaged 22 days.
- From the 2010 opening the XAO went negative 7%, positive 8%, negative 13%, positive 7%, negative 3%, and is currently positive 9%. At year’s end the overall peformance for the year will be negative circa 1%.
- Our global proxy, the SP500 was negative 5%, positive 13%, negative 15%, positive, 9%, negative 6%, and is currently positive 18%. From beginning to end for 2010 the SP500 is positive 11%.
Looking at the broader cycle from the March 2009 lows –
- The primary up-wave from the March 2009 lows is 453 days old and will be 468 days old by end 2010. The markets moved much slower in 2010 than they did in 2009.
- The SP500 rose by 80% over 289 days from March 2009 to April 2010
- Then fell 15% over the next 51 days to July 2010.
- On the same time frame the XAO rose 61% and fell 13%.
- By 2010 year-end the intermediate trend will be 129 days in duration and from the July retracement lows the SP500 will be up 20%, and XAO up 14%.
- All in all a pretty volatile and exciting period but not all that good for the ‘buy and hold’ methodolgy.
Please note that in the analysis immediately above we are not talking about technical analysis. We are talking about quantitative analysis of the market movements which are related to macro policy from central bankers and government impacting on the decisions taken by investors and traders. We are also talking about the micro decisions taken by corporations to repair their operations and balance sheets as well as the response of households to the changed economic circumstances. Of course not every household or corporation made it through the crisis.
Annual performances for the SP500 and XAO have been:
- 2003: +22% SP500/ +9% XAO
- 2004: +9%/ +23%
- 2005: +5%/ +17%
- 2006: +13%/ +18%
- 2007: +3%/ +16%
- 2008: -39%/ -43%
- 2009: +23%/ +32%
- 2010: as above +11%/ -1%
COMMENT
2009 was the ‘bounce-back/ crisis is over’ year, 2010 has been the consolidation/ transition year. The world did not end between July 2008 and March 2009. The ‘crisis’ passed. The markets are reflecting a recovery in confidence, monetary stimulus via generally low interest rate settings, fiscal stimulus for taxpayers and consumers, bail-outs for institutions deemed too big too fail, and quantitative easing by the Federal Reserve. In 2011 the real economy (the production of goods and services) needs to take over from the symbol economy (money and credit).
We will publish our 2011 Overview on 13 January 2011. We hope that between now and 13 January we can identify the questions and provide some answers.
We assigned a 60% probability to there being a recovery with some retracements and defined the 2010 year as likely to be ‘subdued’. That was near enough to correct BUT…. within the alternative ‘double dip’ possibility we mentioned ‘more, and/ or new stimulus’. As it turned out the 60% recovery possibility required more, and new, stimulus measures. So in effect the subdued result was stimulus driven and much more stimulus was required than we could ever have imagined. Even now there are rumblings that Spain, Belgium, and Italy may need bail-out assistance. Once the stimulus finishes can a sustainable recovery take hold? Mr Bernanke is clearly of the view that he is Atlas carrrying the world on his shoulders, and has said he will maintain stimulus settings as long as they are needed. Did Atlas have a beard?
From our 12 January 2010 document –
"WHAT WE LEARNED FROM THE 2009 CREDIT CRASH REMEMBERING ALSO THE LESSONS OF THE 2000 TECH/ TELCO CRASH
- In summary, not much really, except that Ecinya is inclined to be somewhat too optimistic on occasions. We were very pleased to have called the March 2009 bounce with a high degree of logic and accuracy, and to have anticipated most of the carnage of 2008.
- Countries must retain sovereignty over their banking systems.
- An independent central bank is an indispensable check and balance mechanism – additionally, APRA worked. The US central bank is not independent as are very few American institutions, being too closely aligned to the political establishment.
- American investment banks and hedge funds are untrustworthy.
- The US Treasury Secretary should be viewed with caution, especially if he emanates from Wall Street. Paul O’Neill, ex Alcoa CEO and not of Wall Street, got the sack for being an honest man.
- Auditors and independent directors are not fully accountable to shareholders.
- Commercial banking and investment banking/ stockbroking are a bad mix.
- Global forums are dangerously beguiling and need to be approached with care as they inhibit your sovereign status and thinking. The IMF is sleepy and belatedly competent. The UN is poorly structured and inept.
- America needs a fundamental change in attitude, having adopted the ugly twin sisters of crony capitalism and worship of celebrity status. Mr Obama and his team needs to be lesser celebrities and greater managers.
- Everywhere, language has become imprecise, euphemistically misleading and deceptive. Spin is rampant, a bushfire destroying social and commercial values. Be wary of cant. Television is dumbing down the populace.
- Australia came through the global financial crisis because of the Hawke-Keating-Walsh-Howard-Costello legacy. Mr Rudd has extinguished that legacy and extracted little or no sustainable value from it."
The above in retrospect –
- We decided in the second half of 2010 to be more aggressive with our Ecinya Market Barometer settings.
- Even more important, but Joe Hockey with his current bank bashing assault might provoke the Labor-Greens-Independents coalition into BAD policy.
- Our central bankers have done a splendid job in 2010 though probably with one rate rise too far. Rate rises should not take place on Melbourne Cup day.
- No change, absolutely no evidence that Wall Street has learned anything.
- Mr Geithner has never had a real job and has been a big disappointment. The Treasury Secretary is more important than the President.
- More work is needed here and executive remuneration is ‘over the top’ in too many cases. Note the 32% vote at yesterdays’s Ten Network AGM against the remuneration report.
- No change here.
- Definitely no change here despite occasional bouts of competence and clarity from the IMF.
- Oprah Winfrey is in town and is said to have been responsible for 1 million of Obama’s 2008 vote. Definitely no change here.
- This may be changing but watch closely the response to Wikileaks which may result in a media revolt or anti-democratic laws. America is the land of the free yet Presidential/ Vice Presidential aspirants Messrs. Huckabee and Palin have called the death penalty on Mr. Assange.
- This has now become the accepted wisdom in some areas but not yet acknowledged by Wayne Swan, the Greens and the Independents.
But we would add –
- Be wary of start-ups ( Clean Seas Tuna springs easily to mind).