Ian Huntley: Dark Pools

INTRODUCTION

Ian Huntley now acts as a consultant to Morningstar having sold Huntley’s Investment newsletter to them some years ago. He is well known to our editor and both he and Morningstar have given permission for Ecinya to reproduce a recent article on ‘Dark Pools/ High Frequency Trading written by him on 1 November 2012. This is a topic that we are interested in, and interested in developing further views in the future. Ecinya is always concerned when markets adopt American practices that lack transparency and too often result in fears and tears for the retail investor, and indeed the market as a whole. We regard Ian Huntley as an earnest, experienced and honest commentator and observer of markets and take his views seriously.

 

Warning on Dark Pools, High Frequency Trading: Terrifying! – Review by Ian Huntley

The conclusion of Scott Patterson’s brilliant book Dark Pools is really all you need to know about the myriad algorithmic trading systems now running amok in our electronic stock exchanges, even worse now that Chi-X has joined the scrum using the most advanced electronic exchange techniques

Patterson describes one electronic advance: "In late 2011, for instance, NASDAQ rolled out a platform called Burstream that gave clients the ability to get data in six hundred nano seconds – six hundred-billionths of a second…In the options market nearly nine million orders flowed through the system each second, overwhelming computer programs and making a hash of trading information.

"That entire turnover was having a real-world impact on stocks. At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. And by 2011 it was 22 seconds, at least according to one professor’s estimates." One prominent high frequency trader claimed a holding period of 11 seconds!

Patterson describes how these high frequency traders competed with each other for speed to the market, installing better connections, fighting to install their robots as close to the exchanges as possible – moves the exchanges aided and abetted in their lust for turnover.

Sub-titled, The rise of A.I. trading machines and the looming threat to Wall St, the concluding sentences are brilliant. A.I. is the label for artificial intelligence used to drive programmed robotic trading machines. Patterson quotes Spencer Greenberg addressing a high powered tech savvy conference saying that few were more knowledgeable about using A.I. to invest than Greenberg – the reason he was keynote speaker that day.

Greenberg warned: "Machine learning can be disastrous in the hands of people who don’t know what they are doing." And illustrated: "A terrifying example of this comes from a poorly planned military project that a computer scientist once told me about. A group of military technicians were attempting to rig an algorithm to distinguish between photos of a forest without tanks and a forest full of tanks. After training the system, they found it achieved remarkably good accuracy.

"But when the researchers attempted to duplicate the experiment, it failed. They then realised, late in the game, that in the original situation they had taken the photo of the forest without tanks on a cloudy day, while the photo of the forest with tanks had been taken on a sunny day. The A.I. was simply accomplishing the mundane task of noticing the difference between a sunny forest and a cloudy forest – it had nothing to do with the tanks at all.

"The horrific results of such a flawed system being activated in the field could only be imagined."

One can only conclude all these high frequency robotic trading systems should be banned and all stock exchanges should be required to shut off all links to them. And ALL orders in Australia, institutional and retail, should be routed through the one exchange. Send Chi-X off, complete with its ultra-smart electronic exchange tooling, so much in demand for HFT and all the rest of it.

The operations of HFT and dark pools have turned electronic exchanges into yet another alphabetic derivative style soup, akin to the concoctions that brought on the GFC. **

** Bold highlights in the last two paras are by Ecinya for emphasis

Constructive debate and actions cannot take place if the underlying structure is weak

BACKGROUND

TAX REFORM is an on-going debate and it has now been re-ignited (GST, payroll tax, MRRT, carbon tax etc). Tax is always the most serious of debates as governments never spend or invest their own money, only that of their citizen taxpayers. Money spent or invested unwisely becomes ‘misallocated resources’. The result of misallocation of resources become ‘unintended consequences’. The greater the folly, the slower the recovery, or the deeper the recession.

Why is taxation now at the forefront of today’s debate? The simple reason is that actual government spending is increasing exponentially. Aspirational spending plans are increasing exponentially. With declining tax revenues, Federal and State debts are increasing rapidly. We have moved from surplus cash to deficit cash. And all of this is after a mining boom that seemingly has propelled Australia into the category of being ‘a rich nation’.

Our underlying structural budget deficit is a significant problem which Dr Stephen Anthony of Macroeconomics estimating that it will reach $120 billion by the end of the decade given current spending pledges.

A counter-argument to spending beyond your means that is trotted out on a daily basis is that our debt levels are low relative to GDP (gross domestic product), but that ignores the fact that our export base is deep and narrow, and our import base is deep and broad. Australia is hostage to world growth, particularly Asian growth, exacerbated by a small manufacturing base, declining productivity and the need to import capital which will demand a return over time.

Serious debates in Australia, particularly at the parliamentary level, cannot take place unless we address two important structural issues which appear to have fallen from the agenda.

They are –

  • The need for an extended Federal parliamentary term
  • Election funding reform.

 

 

EXTENDED FEDERAL PARLIAMENTARY TERM

It seems that modern Australia has been shaped by two governments that built upon the post-war foundations established by the long Liberal stewardship of Sir Robert Menzie (17 years) and briefly interupted by two outstandingly bad Prime Ministers in Gough Whitlam (3 years) and Malcolm Fraser (7 years). These two reforming and progressive governments were the Hawke-Keating- Walsh governments (9 years) and the Howard-Costello governments (almost 12 years).

Thus the Hawke to Howard era lasted for 20 years and the dominant thinkers and actors in this period were undoubtedly John Winston Howard and Paul John Keating. When Keating replaced Hawke in an internal coup the magic was gone and Mr Keating failed as a solo act, but without doing too much damage. Keating was lead violin with Hawke as conductor much akin to the Costello-Howard relationship.

Howard and Keating were the subject Paul Kelly’s excellent book, "The March of Patriots" published in 2009 embracing the theme that Keating and Howard were both rivals and unrecognised collaborators and seen together left an impressive legacy, but their work was incomplete and a little contradictory.

Modern politics and the emergence of less dominant, forceful, consistent, compelling and persuasive figures compared with the likes of Menzies, Hawke , Keating, Howard and Walsh means that period of constructive continuity may be a thing of the past. Both parties seem to be driven by poll results and hence expediency, and leaders are regularly turfed out by what appears to be relatively minor blemishes. Examples are Turnbull on climate change exacerbated by utegate; Rudd and his narcissism.

Ecinya’s structural pathway to better outcomes is that the Federal parliamentary term should be extended to 4 years with a minimum term of 42 months (3.5 years), or 5 years with a minimum term of 4 years., preferably the latter. The current 3 year term is too short and too often results in good policy badly implemented, or bad policy well implemented or, worse still, bad policy badly implemented. We are intuitively opposed to fixed terms believing that the government of the day deserves some flexibility in calling an election. The normal safeguard of an election brought about by a no-confidence vote, of course, would continue to exist.

 

ELECTION FUNDING REFORM

The paper we wrote on 11 August 2009 is reproduced below. We fully realise that it is imperfect and requires significant fine-tuning. But the danger is that if crony capitalism and crony socialism is not addressed then the malaise that is America will be inflicted upon us at some point in history.

 

Crony capitalism : Capitalism’s cancer. Crony socialism : Socialism’s endemic malady

Tue 11 Aug 2009

‘Crony’: A friend or companion

Collins Dictionary

It is a mixture of money and politics that Australians have become accustomed to over the last decade. But this culture of paying for access has become increasingly problematic in recent weeks as lobbying scandals make headlines nationwide……….

Dick Warburton, a former Reserve Bank director and prominent company director, has had enough. He is scathing about the fund-raising culture that has developed in Australia. The former chairman of David Jones and Caltex says "it has become a racket"……………….

Warburton, as an elder statesman pulling back from corporate life, can be frank. For most others it would be a poor business decision to speak out against a system that both major parties rely on to fill their election coffers……………..

"Access can now be purchased, patronage is dispensed, mates and supporters are appointed and retired politicians exploit their connections to obtain ‘success fees’ for deals between business and government," Fitzgerald told an audience in Brisbane last month.

Australian Financial Review 8/8/2009 "Democracy For Sale."

With Labor governments mired in cronyism as established fact all up and down the eastern seaboard, the emerging irony is this: it may yet be the Liberal Party that emerges to save what reputation for decency these shabby outfits have left.

The man most likely to restore Labor’s moral compass at both the state and federal level is Michael Ronaldson. Ronaldson is well known in Victoria, but less so outside that state. He was Malcolm Turnbull’s numbers man against Brendan Nelson. He remains part of the Opposition Leader’s inner coterie. Which means he’ll be a busy man this week.

He’s survived cancer and still smokes. That makes him a mug when it comes to his health and I’ve told him so. But he’s no political mug. A direct talker in the Australian tradition, he’s known almost universally on both sides of politics as "Ronno". He’s determined; when cancer felled him he was forced to retire from his seat of Ballarat. That was in 2001. He came back to Canberra via the Senate in 2005.

And he knows a crooked system when he sees one.

The "crooked system" I refer to is campaign financing. And as it turns out, as shadow special minister of state, it’s the system Ronaldson has responsibility for. When Labor’s moral warhorse John Faulkner asked for and was given the Special Minister of State portfolio by Kevin Rudd after Labor’s 2007 election victory, he was on a mission to clean up political funding in Australia.

Because, like Ronaldson, Faulkner recognises that all those rent seekers in suits, sitting sleekly around the likes of Joe Tripodi in Jordan’s Seafood Restaurant outside the ALP conference at Darling Harbour a fortnight ago, are bad news for the democratic process.

Glenn Milne writing in The Australian 10/8/2009

To talk about economics requires more and more, that one write about politics.

Paul Krugman "The Great Unravelling" 2003.

ECINYA TEXT

ECINYA has long believed that Australia had the opportunity to adopt the best of Britain and the best that America has to offer. Though we are fighting the ‘good fight’ and generally winning, the opportunity to adopt the worst of both of these countries’ cultures is alive and well. One of Ecinya’s enduring obsessions is that the 3 year Federal parliamentary term leads to poor policy formulation and, too often, poor execution. The daily battle between scarce resources and unlimited wants and needs in context of tight political deadlines all too often leads to poor outcomes. The formal expression of this is ‘misallocation of resources.’ In a parliament as dysfunctional as our current parliament, with a Leader of the Opposition on training wheels, and a Prime Minister full of bellicose bluster sprouting economic hog-wash in local and global forums and writing convoluted essays, the problem of misallocation of resources looms as potential policy failure.

Towards a solution

Crony capitalism is one of the factors that has brought the United States of America to its economic knees. We should be consciously aware of the American model.

The recent debate surrounding alco-pops demonstrates the dilemma faced by politicians. We assume the alcohol, pubs, gaming industry are keen supporters of democracy and offending them might be dangerous for many, although we doubt that sports sponsorship leads to binge drinking, except for the highly paid sports stars themselves, and that might be a function of their income rather than advertising sponsorship. The recent revelations of connected and vested interests in Queensland is but another example of a system veering towards the American model.

How about Australia leads the world in electoral reform, and its hand-maiden, electoral funding transparency

Australia creates The Electoral Bank Fund ….. it collects donations made by interested parties, corporations and individuals, which are tax deductible, and also the Treasury makes a contribution as well. The funds are invested and earn a return between elections.

Once the election is announced, sitting members receive an allocation of funds on some formula basis, and pre-selected candidates do as well.

Any such candidate can ask for extra funds provided he/ she puts up some adequate security. Moneys spent on winning or losing an election that are not reimbursed become tax deductible.

An independent candidate can also borrow funds on a secured basis and contest the election. They will have a portion of his/her loan dissolved, provided they win a certain number of votes. Perhaps they have to win say 5% of the votes to qualify for dissolution of portion of their loan. If they were to win outright, or to win say 25% of the votes, their loan would be extinguished in its entirety, subject to some defined limits. Bribing voters by cash payments would not constitute ‘allowable expenditure’. ‘Allowable expenditures’ would have to be subject to adequate audit and verification.

Candidates would not be able to use funds provided from any source, be it union, corporate or otherwise.

All fund raising activities would have to be accredited and the funds remitted to the Electoral Bank. Fund raisers could nominate a beneficiary of their efforts, but it would not necessarily be binding upon the Bank Trustees, except in the case of an independent where, subject to source, extra funding might be allocated irrespective of win or loss.

For relatively safe seats funding might be scaled to reflect the realities that a loss is unlikely so that contestable seats are ‘over-allocated’ funds wise.

Obviously, we at Ecinya, do not have the experience or the information to know how to design the system in its entirety to make it workable BUT this brief essay may contain the germ of an idea that might just work to keep our democracy healthy.

In passing, we note that the major candidates in the last American election spent over $1 billion: circa $730 million from Obama, about $330 million from the McCain camp and about 4 independents spent another $60 or so million.

In Australia, the last election was our most expensive ever, according to Google, and some $163 million found its way from the private sector back to the private sector.

Resources are scarce; if they are allocated according to patronage the outcomes will be sub-optimal. State governments are struggling for revenues and the Federal government has become significantly interventionist, ostensibly sanctioned by a dead prophet in John Maynard Keynes. It is relatively clear that the Federal government is keen to get to the polls on an exaggerated debate about climate change after winning the second-hand Toyota utility truck debate. Additionally, we are going to soon have a limited debate about the meaning of tax reform as the Henry report arrives before the next election, which will presumably be aimed at replenishing public coffers. Electoral funding and favours asked for and given, seems an important issue for taxpayer scrutiny, for in the end they pay the piper for his tune. The ‘tune’ is estimated to be something above $200 billion of public debt. If this debt achieves little because a lot of it goes to cronies, then that would be a monumental waste of resources.

The success of the exceptional Hawke-Keating policy, compulsory superannuation, demands corporate transparency. If we do not have transparency at the top of our political system, it is hard to imagine that it will exist in sufficient quality in the middle and at the bottom. Electoral reform and an extended federal term is long overdue.

 

Are we there yet? Does reckless lead to wreckage, or recovery?

THIS INSIGHT ESSAY

This paper is written with the aim of articulating where markets might be headed in the pre- and post-Christmas period and into early calendar 2013. The contemporary and simple truth is that none of us know what is really going on and the commentary has entered the speculative zone.

At such a time, and they have occurred before, primary fundamentalists like ourselves have to resort to technical and quant analysis. What is the market telling us? In short, the market is telling us to be careful. Also at such a time we are compelled to visit our rules. The Ecinya Market Rules and 3 others are contained in our section ‘Market Wisdom’.

Our hunch is that a correction in major index terms of around 10% is imminent and it could go further IF Kevin Armstrong is correct, as he is anticipating something more dire than we are. According to one of the Zurich axioms: "A hunch can be trusted if it can be explained". John Maynard Keynes thought that it was not uncommon to hit on a valid conclusion before finding a logical path to it. We know from past experience that all information is ambiguous, but we can still function, albeit uncomfortably, in a sea of uncertainty. However, the aim at such times is to articulate the uncertainties that can be recognised and then see how they play out.

Economics has moved from the ‘dismal science’ to the ‘fragile science’ and markets are being driven by recklessly experimental central bankers rather than corporate and fiscal fundamentals. Fiscal and monetary policy are natural dance partners, but only monetary policy is on the dance floor. Can Obama re-invent himself? Is Romney/ Ryan the answer? There are a lot of balls in the air and ONE BIG BUBBLE……. the Fed’s and the European Central Bank’s respective balance sheets. Can the people who were asleep at the epicentre of the chaos find a way out, or are there sufficient personnel changes occurring, or in prospect, to herald new beginnings?

We know that genuine investors at both the retail and institutional level are confused. We know that market turnovers are relatively light. In relation to our oft used acronym ‘ICE’ (Interest rates/Confidence/Earnings), we know that interest rates need to fall in Australia, are historically low in America, are volatile in Europe. We know that confidence is low in most parts of the world as job insecurity is high, income growth low, unemployment is high, American GDP is lacklustre at best, Europe is in recession, Asia is slowing. We know that corporate earnings are being driven more by cost cutting than sales growth.

Are we there yet? Does reckless lead to wreckage or recovery?

Reckless governments, reckless commercial and investment bankers have now been replaced by reckless central bankers with the grand-daddy of them all in the third incarnation of its Bernanke-led QEs – Quantitative Easing. The first two QEs have not had any discernible impact on the real economy. There are two economies – the real economy: the production of goods and services; and the symbol economy: money and credit. The symbol economy is the tail that has wagged the real economy dog for far too long. Governments have abandoned viable fiscal policy out of fear of not being re-elected. Central bankers, acting as quasi politicians, have ushered in an era of speculative hedge funds and myopic and or quasi- fraudulent investment bankers (Goldman Sachs being the most dominant and prominent) and the result is mispricing and malinvestment. The Fed balance sheet may be a ‘bubble’.

"Are we there yet?" is the statement that impatient children make on their way to an adventure or holiday destination. In market terms ‘Are we there yet?’….. our answer is NO on a risk adjusted basis.

"Does reckless lead to wreckage or recovery?" Our answer is that it leads to recovery, but we might (and probably will) have at least one more bout of wreckage along the way. Progress, recovery will not be linear; sustainable outcomes always require reversion to the mean!

DIVERGENCE …… Kevin Armstong regards Ecinya as being far too optimistic at this point in time. Refer to –

 

FORECASTS, PROJECTIONS, OPINIONS, WISHFUL THINKING, MERE GUESSTIMATES – our current listing

Economists

  1. Economists are slowly and deliberately winding back their estimates for world growth in calendar 2013 and 2014 (Westpac and other forecasts)
  2. Economists adjust their final positions slowly to avoid admitting the recurring error of their models and a desire to not deviate too sharply from the positive spin of upper management (Ecinya and Armstrong opinion)
  3. A world recovery needs a refreshed and re-vitalised America. Asia cannot carry a world recovery especially in per capita terms (Well held Ecinya opinion)
  4. The IMF calling a world recession would be a sign of a significant bottoming as this organisation is woolly in prospect and retrospectively wrong in a timing sense (Ecinya opinion, the IMF is a contrary indicator)

Australia

  1. Australia needs a federal election a soon as possible (Ecinya opinion though widely shared)
  2. Ms Gillard is our worst post-war Prime Minister and Mr Swan our worst post-war Treasurer (Ecinya opinion)
  3. Public debt is a big problem getting worse exponentially (Forecast by David Murray ex Commonwealth Bank and ex Future Fund Chairman)
  4. Messrs Abbott, Hockey, Bishop and Pyne are a weak front bench making the Libs vulnerable to electoral defeat (Ecinya opinion recognised early by Editor’s spouse and confirmed in recent opinion polls)
  5. Turnbull would make a viable Treasury spokesman provided he agreed with Abbott that the carbon tax and the MRRT had to go and an emissions trading scheme makes no economic sense (Ecinya opinion)
  6. Australia needs a genuine reform programme in industrial relations and Joe Hockey would be a good Industrial Relations minister (wishful thinking and Ecinya opinion)
  7. The NBN, the Gonski report, and the National Disability Scheme are unaffordable nonsense under an inept government and given the inherited problems of NSW, Victoria and Queensland (Forecasts and opinion)
  8. The Asian Century White Paper is a monumental con job (Ecinya and others opinion)
  9. Proper tax reform including the GST taxing food and changes to capital gains taxes and removal of many state taxes such as payroll tax would re-define the role of government in Australia and lead to a sustainable economic recovery and growth (Ecinya opinion)

America

  1. American economic statistics are showing signs of improvement (Ecinya data base)
  2. Obama has been an unfortunate failure as an economic manager and a victim of his own lack of fiscal experience (Ecinya opinion)
  3. His predecessor, George W. Bush, was an even worse economic manager (Ecinya opinion but shared by notable observers including Paul O’Neill who Bush sacked as his first Treasury Secretary)
  4. America needs a manager not another messiah, and Mitt Romney and Paul Ryan are the only potentially viable alternative product on offer (wishful thinking as it relates to ‘viable’)
  5. Obama looks like the experiment that Jimmy Carter was after Richard Nixon lost the trust of the American people (Ecinya opinion)
  6. IF Romney and Ryan win, the US market and markets generally will have a wishful thinking Christmas rally that may run into the early part of 2013 (Ecinya forecast, opinion and guesstimate)
  7. If Obama wins he will have to quickly refresh his economic team and move from homilies and folksy platitudes to truth and policy (Ecinya opinion)
  8. A sustainable bull market could start around SP500 in the range 1250 to 1350 on current reckonings in late March or April 2013 (Ecinya quant and technical analysis plus wishful thinking plus guesstimates)
  9. America’s woes are entrenched, systemic and structural, attitudinal and psychological, and will not be cured by daily rhetoric about American exceptionalism. A back to basics approach is required (Ecinya opinion)

Europe

  1. Europe is a basket case except for Germany – and some of the smaller cohesive nations – and something dramatic will happen in the new year (Westpac forecasts, Ecinya guesstimates and opinion)

Asia/ Middle East

  1. The Middle East is a significant problem with no signs emerging of stability or progress (statement of the bleeding obvious)
  2. China is a bigger worry than yet realised and unfolding political tensions and corruption allegations are a big problem (Opinion and forecasts starting to be widely reported)
  3. China needs to change the name of the Chinese Communist Party to something like ‘The China Central People’s Party’ (Ecinya opinion)
  4. India is slowing down (Westpac forecasts)

 

Comment on some of the above – imported commentary in italics

A test of SP500 around 1500 considered a pre Christmas possibility.

The Bo Xilai saga and the new revelations of the Wen Jibao $2.7billion of hidden riches is a big negative story. In The Sydney Morning Herald of 30 October 2012 it is reported under the head-note ‘China’s factions in struggle for power’ that China’s imminent leadership transition is descending into chaos, say some analysts, amid rolling scandals and signs of factional infighting between the current President and his predecessor. As Communist Party leaders converge on Beijing for a fortnight of crucial meetings centred around the 18th Pert Congress which starts on November 8, party insiders say fresh infighting has erupted over the future of the rising star Li Yuanchao. When Ecinya visited China in 2005 a prominent executive said "George, you must understand in China we have no small problems, only big ones." Editor asked ‘What is the biggest problem?" His response : "Corruption."

The word ‘Communist’ is a major impediment to improving relations with the west, and a change would signal that the 35 year resurgence of China was ready to take on a new impetus and more mature direction.

THE Gillard government white paper on Asia is a fraud. On every level, it is a con job. The government is having a lend of us. Its only admirable quality is its chutzpah……This pathetic and obsessive list making is a sign of a deep intellectual insecurity. It’s also a sign of government failure. Much of the paper itself, and many of Julia Gillard’s statements regarding it, are banal recitations of the obvious. By golly, Asia will have a big middle class by 2025 and that middle class will have a lot of money to spend. We hope they spend it in Australia. But beyond these windy cliches and vague generalisations, we are entitled to ask of this government: where’s the beef, Jack? The answer is, there is no beef.

Greg Sheridan The Australian 29/10/2012

Julia Gillard’s Asian Century White paper is a bizarre cocktail of the statement of the bleeding obvious, and a damning, if totally unintentional, critique of her government, its policies and its politics. Both the contradictions and content are so shallow that if it were a pool of water would pose no danger to a month-old baby lying on its belly, and is hardly surprising given the White Paper’s author – Ken Henry.

Ross Gittins The Telegraph 30/10/12

Reading the white paper called Australia in the Asian century is a very surprising and uplifting experience; it lists all these wonderful things that are going to happen to our nation by 2025…… There are 25 such wonderful points in the white paper, covering every aspect of Australian society and government, and all of them announcing some excellent thing that is going to happen, using the word "will". Isn’t it great? Why wasn’t I told all of this was going on? I mean to pull this off within 13 years, there must have been secret armies of people beavering away in Canberra on fixing our education, tax, and regulatory system for a decade already. Oh. they haven’t been? The white paper is just another wish paper? Damm.

Alan Kohler The Australian 30/12/2012.

Ecinya comment: Ms Gillard and Kevin Rudd spend an enormous amount of time and energy in the world of fantasy, hubris and outright delusional behaviour. We think it comes from the fact that having attained high office they believe their words have meaning well beyond their capacity to deliver and also spring from a fundamental misunderstanding of how business and economies work, function and create. Government is too often the province of people who have achieved little outside of the narrow sphere that is politics. Seymour Hersh described this delusional insanity in his book "Chain of Command, the road from 9/11 to Abu Ghraib" –

There are many who believe George Bush is a liar, a president who knowingly and deliberately twists facts for political gain. But lying would indicate an understanding of what is desired, what is possible, and how best to get there. A more plausible explanation is that words have no meaning for this president beyond the immediate moment, and so be believes that his mere utterance of the phrases makes them real. It is a terrifying possibility.

 

 

BACKGROUND

Much of the above are familiar themes as fundamental change occurs slowly…. some extracts from recent Ecinya Insights

Economic forecasts are being wound back fairly dramatically as practitioners have realised that they have got their 2011 forecasts wrong as Bernanke’s stimulus bounties underwrote the 2010 recovery. Take away the drip feed and the patient dies. As an example world growth according to Westpac Economics latest projections is expected to average 3.5% over calendar 2011 and 2012 compared with 4.2% just 3 months ago. The circa 1% difference is about US$700 billion in real terms. Fears of double-dip recession are expressed daily from reputable sources. America is struggling on all levels – fiscal, monetary, militarily, national identity; Europe has a banking and sovereign debt crisis, Japan is recovering from a natural disaster and years of almost zero growth, the Middle East and North Africa are at various stages of civil war. Strife abounds, which in simplistic terms means we are in the early stage of the opportunity cycle. Though there won’t be much evidence of recovery in calendar 2011, if policy makers work hard and politicians start to behave like adults and each communicate well, then the world should experience a normal recovery in the last 3 quarters of 2012. "Is austerity or reflation the pathway to economic recovery?" Our answer is – both are required, but with the weight on the reflation leg.

Ecinya: 7 October 2011 "Is austerity or reflation the pathway to economic recovery"

Today’s Comment: It turns out that we have thus far been wrong in that a normal recovery has not transpired in economic terms though in market terms calendar 2012 has provided opportunities for both investors and traders. A normal cyclical recovery should manifest itself sometime in 2013, but it would need to be driven by sound fiscal and monetary policy not yet in evidence.

 

Optimal outcomes demand that that ‘somewhere’ is at, or close to, where you want to go. Success hardly ever requires absolute precision and 95% of the time near enough is good enough. But keep in mind Peter Ustinov’s statement – ‘I love the guy who aims low and misses’.

CONCLUSIONS –

  • Europe can’t YET go forward.
  • China can’t go back.
  • America needs to work out where it wants to go.
  • Australia needs a federal election as soon as possible.

Ecinya: 13 April 2012 "All roads lead to somewhere"

 

In March 2007 when Premier Wen Jibao of China uttered the 4 ‘UNs’ at the National People’s Congress we assumed he was talking about the Chinese economy being ‘unbalanced, unstable, uncoordinated and unsustainable.’ Perhaps in his Confucian wisdom he was also talking about the global economy. Whatever, these 4 UNs have now permeated most of Europe and are well in evidence in the USA. and evolving in Australia. About 50% of world GDP is under threat or experiencing significant volatility. At a time of greater crisis, after the end of World War 2, led by the economic architecture promoted by Eisenhower and Churchill, the world recovered. The induced austerity of war-time shortages and putting the people to work in re-building Europe and other war-torn areas created large debt loads from the required massive infrastructure spend. Things changed because they had to as they must now. But all change is incremental and bad/ ineffective local and global leadership is not helping. A dose of truth, less innuendo and obfuscation might help.

Ecinya: 8 June 2012 "The four UNS: Unbalanced, Unstable, Uncoordinated, Unsustainable."

 

 

 

 

 

 

Kevin Armstrong: Confidence, Expectations and Markets

Kevin Armstrong’s Strategy Thoughts

November 2012

Confidence, Expectations and Markets!

Introduction

Over the last month markets have broadly meandered sideways and in so doing they have continued to deliver the ‘frustration’ that I discussed at length three months ago. Bulls on both bonds and equities have had both some good days and some bad days, and the same has been true for bears, but on balance there has been no resolution as to whether the action of the last few months has been the cresting of a bear market rally or an extension of a now fairly aged cyclical bull market in equities. Or the end of a very long term, secular, bull market in bonds. Amid such frustrating periods the most important thing an investor must do is avoid becoming frustrated. This may sound like a statement of the obvious, however, it is very easy to get swept up or down in whatever may have occurred over the last few hours or days. As the action of the last few months has illustrated, this is unlikely to prove rewarding. None of these frustrating movements have caused me to alter my outlook for asset markets and therefore my very cautious strategy has not changed. I worry about returns across virtually all asset classes and so continue to focus upon capital preservation. Having said that I do consider the recent action of commodity prices to be of some concern and I also worry about the apparent comfort that is being taken as a result of improving consumer confidence surveys.

In this month’s edition of Strategy Thoughts I explore both of these themes and conclude that there are likely some important cyclical and potentially secular messages in both of them. I also review the outlooks for gold and inflation (or deflation), not from an economic standpoint but from an ‘expectational’ one.

I have often ridiculed the efforts of investors to build an investment strategy and outlook based upon economic forecasts. This isn’t because I don’t believe anyone can forecast the economy, some analysts do have a decent track record, rather it is because determining what even a perfectly correct forecast will mean for investment assets is the real art. Markets throughout history have both risen and fallen apparently as a result of similar, or even identical, economic outcomes. The reason for this is expectations, and they are notoriously difficult to measure but ultimately they are what drive markets. A 4% GDP number may be seen as outstanding if expectations were for 3%, but equally it would be a disaster if 5% or more were expected. Still investors strive to construct an economic scenario upon which to base their investment strategy. This is because as human beings we hate uncertainty and so take comfort in a seemingly sensibly argued economic rationale, generally that comfort is misplaced, especially as the more comforting rationales tend to be the most widely held (we are herding animals) and therefore must already be reflected in the market. Another challenge is that expectations are constantly changing, often, and understandably, as a result of movements in the market about which those expectations are held.

Confidence surveys obviously attempt to divine where expectations are, this aim is admirable, but by the time they come out that ‘snapshot’ is frequently weeks out of date. Markets will already have reflected these changes. However, whilst broad consumer confidence surveys may only tell us what the markets already knew some weeks prior, surveys of CEO confidence may be of more value, but more on that later. First I want to look at gold and then some glimmers of hope, from an expectational standpoint, that the secular bear market that began more than twelve years ago, may be closer to its end than its beginning and possibly its middle.

Gold

In order to gain a useful perspective on the gold market it is important to take a long term view and it is also important to understand just what drives the price of gold. It obviously is not valuation, gold doesn’t pay any dividend or coupon and it doesn’t earn anything on a per share basis, it also is not inflation, contrary to popular belief borne out of the inflationary seventies, gold has risen through both inflationary and deflationary periods throughout history. And it is also clear that interest rates are not gold’s primary driver, the argument has been that the lower rates are then the less one is giving up to own gold and so its price should rise. This is a nice neat rationalisation, it seems to make sense, and yet over the last year, while it has become increasingly clear that the US Federal Reserve is going to keep cash rates at effectively zero for a longer and longer period, the price of gold has moved sideways to down. The price of gold is a perfect example of a market that simply reflects expectations, with no seemingly sensible valuation or economic rationalisations to get in the way it has to be levels of expectations, and their changes, that drive the price. This is why it is important to take a long term view of expectations for gold.

Ten and a half years ago, in a newsletter for The National Bank of New Zealand, I discussed the fact that a successful investor over the prior sixty years only had to make a handful of smart and bold investment decisions; own US shares from 1942 to 1966, commodities from 1967 through to 1980, Japanese shares for the decade of the eighties and then technology shares for the nineties. I concluded this section of the article with:

Financial assets generally have enjoyed massive price inflation over the last twenty years; it is therefore possible that once again real assets may start outperforming the still widely embraced financial assets.

I went on to raise some possibilities as to what might work in the decade ahead:

Commodities and precious metals have been amongst the most depressed assets since their bubble burst in 1980 and have long ago slipped off most serious investor’s radar screens. A marked change from twenty five years ago when they formed a part of any balanced portfolio. Prices in real, inflation adjusted terms for most commodities have plunged over the last twenty years even as demand for many of these products has grown. Eventually increased demand for any product in the absence of growing supply should result in price increases. With a growing world population, and a decreased focus on financial assets, resources and commodities generally may be the “previously depressed” asset that is next set to grow in price.

This assessment was largely based upon the fact that at the time no one wanted to invest in ‘real assets’ and gold in particular was seen as anything but precious. I pointed this out with this closing remark:

Most central banks around the world have been reducing their holdings of gold as reserves, this has undoubtedly had a depressing effect upon gold’s already depressed price. The price of gold has been bouncing along a little above $250 for a few years now having fallen from its high of $850 in 1980 and from an investors perspective has been largely unloved. It is interesting that over the last few months the price has begun to pick up at the same time as the world’s two fastest growing economies, Russia and China, have been buying gold for their reserves. The primary reason for their purchases has been their desire for diversification away from the very extended US dollar.

That was over a decade ago, how things have changed since. The dollar is anything but extended (on the upside) now and everyone it seems ‘knows’ the seemingly sensible reasons to own gold. This was highlighted in a recent CNBC article

"I think gold is going to go up against all currencies…central banks around the world are being too loose," Schiff said, arguing that the Dollar Index (Exchange:.DXY) "is going to be cut in half at a minimum. If we don’t change our policies, the dollar index could go much lower." On Wednesday, gold sank to a seven week low near $1,700 an ounce, only weeks after setting an 11-month high just shy of $1,800. "One day we’re going to look back at $1,700 with nostalgia," Schiff said. "People are going to be shocked at how inexpensive gold was when it could be snapped up for such a bargain price." (Emphasis added).

I think we can look back to the early 2000’s and be shocked at how ‘inexpensive’ gold was then, at least compared to current prices, but I believe it is more likely that gold is far closer to a peak than a trough and last year’s high may turn out to have been that peak. Certainly it has spawned an enormous industry in gold investment vehicles that barely existed ten years ago and is now spawning extravagant book titles.

A Wall Street Journal blog on 24th October was headlined:

Gold: Do We Hear ’36,000′?

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The blog went on to describe a soon to be released book;$10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven, by Canadian gold manager Nick Barisheff. The book forecasts that gold will hit $10,000 ‘before too long’.

The blog then went on to point out that similar extravagant claims have been made for other asset classes in the not too distant past.

“The resemblance may be purely coincidental, but the advance publicity for the book reminds us of what happened back in 1999, when a series of popular books forecasting sky-high stock prices came out one after another.”

The authors and publishers vied to outdo each other’s titles like drunken sophomores at a college football game yelling “We’re No. 1!” and “No, we are!” The low bid was Dow 36,000 by Kevin A. Hassett and James K. Glassman. Then there was David Elias’ Dow 40,000. Finally came Charles W. Kadlec’s Dow 100,000.

If history were to echo perhaps we have to wait for books proclaiming $50,000 or even $100,000 gold before calling a peak but perhaps such excess won’t take too long, in the equity market those titles came out in rapid succession towards the end of 1999. When Dow 36,000 came out in October 1999 it was forecasting that a market that had already quadrupled over the prior decade was going to quadruple again. Gold $10,000 is forecasting that a market that has risen six fold over the last decade is going to rise another six fold. Obviously anything could happen, but extravagant book titles tend to come out because they will sell, and what sells tends to reflect a comfortable consensus. They therefore reflect expectations that are already in the market. This certainly was the case with Dow 36,000.

Product DetailsProduct Details

In Dow 36,000 James Glassman and Kevin Hassett recommended that all investors should have 80% of their investment assets in the equity market and it seems Glassman followed his own advice and in his own words his 80/20 portfolio got ‘hammered’. Chastened by this experience earlier last year Glassman released ‘Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence’. In Safety Net Glassman is recommending a far more cautious and balanced approach, a 50% equities and 50% bond portfolio, not quite but close to the opposite end of the spectrum to where he was twelve years ago. Clearly Safety Net would have been a brilliant book to publish in late 1999, its advice would have been timely and extremely valuable to anyone that read it and would have ensured that so much of the pain that has been suffered over the intervening twelve years would have been avoided. But Safety Net would never have been published in those heady days of the late nineties, when everyone was going to be rich, because no one wanted to hear such a down beat outlook. What the public wanted, and so were given, were new racy high tech internet funds and books on how the sky was the limit. That was where expectations were then, and with such lofty expectations it is now obvious that disappointment was inevitable.

Now it seems, after twelve years of investment purgatory, expectations have travelled some distance back along the long term optimism / pessimism scale. Eventually, when the current secular bear market ends, ‘Never Again’ will be published, ‘why investment is the last thing anyone should do with their hard earned savings’ and maybe even Mr Glassman will oblige, and it will reflect expectations that have travelled all the way to the opposite extreme of Dow 36,000. We are not there yet, however, the fact that long term expectations have moved as far as they have is encouraging, at least from a very long term perspective.

In the meantime it should be enough to learn to avoid whatever books are hitting the best seller lists with extravagant forecasts, whether it is how to get rich in property, internet stocks or gold. These forecasts are far more a reflection of what has already worked, and a reflection of where collective expectations already are, than where future returns will be found.

To his credit Glassman has outlined why he was wrong about Dow 36,000:

“The world has changed since 1999. U.S. economic standing is now declining, and we have to account for risks not only to commerce but to the global order. In theory, historical averages show that stocks are a good buy if you can hang on through the miserable periods. But most investors find that excruciatingly difficult to do—a fact that I never fully appreciated in my 30 years of writing about investing. Fear, or simply a need for cash, triumphs, and people sell before stocks bounce back. I’ve gotten tired of telling investors to buckle up and hang on. Instead, I am urging them to adopt a more cautious strategy than the conventional financial wisdom—or "Dow 36,000"—would dictate.”

Expectations and emotions, or aggregate mood, are what drive markets over multiple time frames, not valuations and not economics.

Confidence

Consumer confidence numbers are one of the myriad of indicators that economists attempt to forecast, the thinking being that rising or falling results in these confidence surveys will give some guidance as to what the economy will do. On the back of that supposed ‘heads up’ on what the economy will do investors build investment strategies. The important question this raises is does confidence lead the market, and the answer unfortunately is that it does not; in fact given the delays in getting the results of these surveys out it actually lags the market a little. The results of confidence surveys do tell investors where markets are, that is whether they are rising or falling or in a bull or bear market, but that isn’t very valuable really as the market already provides the answer to that question!

A little over three years ago I wrote a Thoughts and Observations piece titled ‘Consumer Confidence – Cause or Effect?’ In it I wrote:

As well as the long term (secular) swings in valuation and confidence coinciding it is interesting to note that so too do many of the shorter term (cyclical) swings. This was particularly obvious during the long broad consolidation that the market went through from the mid 1960’s through to the early eighties. Each subsequent low point in the market occurred on sequentially lower confidence levels and at lower valuations; a similar pattern was seen at each successive peak. The important point is not that the market is driving consumer confidence or vice versa, rather that they both, virtually simultaneously, reflect a broader deep seated optimism or pessimism. Looking for changes in consumer confidence to provide some hint as to what markets might do is probably futile, just as believing that movements in the market affect confidence, they don’t. Both are driven by and reflective of basic levels of social mood, and its swings from pessimism to euphoria and back.

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This can clearly be seen in the chart of US consumer confidence. Since the secular bear market began Consumer Confidence has tracked the market, it certainly has not led the market. The long term, secular peak, in consumer confidence was recorded in February and again in June 2000, at about the same level as was seen at the onset of the prior secular bear market in the mid 1960’s. Confidence then fell through to April 2003 and bottomed, the market had bottomed several months earlier. Confidence then rose throughout the cyclical bull market finally peaking at a lower peak than the prior peak, in August 2007. It then collapsed, coincident with the market, to a record low level and eventually bottomed in March 2009, exactly when not only the US but virtually every market in the world bottomed. Confidence then rose from that depressed level and finally peaked in March 2011, around the time most world markets recorded their last cyclical peak.

The same pattern of confidence tracking the ebb and flow of cyclical bull and bear markets was seen through the last secular bear market from 1966 to 1982 and it is interesting to note that just as the price low for the market was seen at the depths of the 1974 cyclical bear market, not at the end of the secular bear market in 1982, so too was the confidence trough. Whilst cyclical peaks throughout that secular bear market were more or less at similar levels that was not the case in the confidence survey, each subsequent peak in confidence coincided with a cyclical peak in the market but at sequentially lower levels. The same pattern has been seen over the last twelve years. This means that the depths of the lows seen in confidence in early 2003 need not be revisited but it is equally unlikely that the highs of 2007 and 2000 will be seen until long after the current secular bear market ends.

Whilst consumer confidence may not tell us any more than ‘where we are’ there is one confidence survey that seems to give some insight as to ‘where things are going’, and that is the survey of the confidence of corporate chief executive officers.

What follows is the latest result of the CEO confidence survey from the Conference Board.

CEO Confidence Declines Again

04 Oct. 2012

The Conference Board Measure of CEO Confidence™, which fell in the second quarter, declined again in the third quarter. The Measure now reads 42, down from 47 in the previous quarter (a reading of more than 50 points reflects more positive than negative responses).

Says Lynn Franco, Director of Economic Indicators at The Conference Board: “This latest report reflects ongoing concern about the strength of the economy. CEOs’ assessment of current conditions remains weak and they have grown increasingly pessimistic about the short-term outlook. Sluggish growth and a persistent cloud of uncertainty have played a role in CEOs curtailing spending plans this year.”

CEOs’ assessment of current economic conditions has grown more pessimistic, with just 9 percent stating conditions have improved compared to six months ago, down from 17 percent last quarter. Chief executives are also more negative in assessing their own industries. Now, just 14 percent of business leaders say conditions have improved, compared with 22 percent in the second quarter.

CEOs’ optimism about the short-term outlook has also declined. Currently, less than 12 percent of business leaders expect economic conditions to improve over the next six months, down from 20 percent last quarter. Expectations for their own industries are also more pessimistic, with just 15 percent of CEOs anticipating an improvement in conditions in the months ahead, down from 25 percent in the second quarter.  

Clearly this outlook is materially bleaker than that of consumers and it has already been deteriorating for some time. Worryingly this is a remarkably similar picture to that evidenced by CEO confidence surveys in late 2007 and into early 2008. This was an excerpt from the Conference Board’s release in January 2008:

Business leaders’ confidence in the U.S. economy has dipped to the lowest level since late 2000.

The Conference Board Measure of CEO Confidence, which had declined to 44 in the third quarter of 2007, fell to 39 in the fourth quarter. The last time the measure fell below 40 was in the fourth quarter of 2000, when it dropped to 31. (A reading of more than 50 points reflects more positive than negative responses.)

Unfortunately little comfort should be taken from the relatively elevated levels of consumer confidence in the US; all it tells us is that the market should be close to its recovery high, which until a few weeks ago it was. The fact that CEO confidence has continued to decline, in a similar manner to the slide seen ahead of the GFC associated bear market, is of far greater concern.

Commodities

I have referred to economist A. Gary Shilling many times over the last couple of years and in particular I recommended his book ‘The Age of Deleveraging’. He recently made clear his outlook for commodities in no uncertain terms in one of John Mauldin’s ‘Outside the Box’ pieces:

“The weakness in commodity prices, starting in early 2011, no doubt has been anticipating both a hard landing in China and a global recession. In my view, the foundation of the decade-long commodity bubble is crumbling, and the unfolding of a hard landing in China and worldwide recession will depress commodity prices considerably, even from current levels, as disillusionment replaces investor enthusiasm.”

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I have shared his views on commodities, albeit perhaps less stridently, for many months. In April of this year I wrote:

No changes were made to our outlook on currencies. We continue to view the low seen last year in the US dollar as potentially a long term bottom and that surprises going forward are more likely to be on the upside for the US currency. In commodities we anticipate further downside and see last year’s peak in the CRB index as an important cyclical peak.

The weakness in the CRB is particularly notable given the strength in oil and raises some questions as to the durability of oil’s bull market.

Since then oil has fallen by about 25% and commodities indices have moved on balance sideways and rolled over recently. This leaves the peak seen in April of last year as the high for many commodities, just as it was for many stock markets around the world, as I discussed last month, and it raises the question whether the widely feared central bank induced inflation is as big a threat as so many currently believe.  

Last week CNBC ran the following story;

Fed’s Lacker: Latest Stimulus Will Boost Inflation Friday, 26 Oct 2012

 

Over the last four years the inflation versus deflation debate has swung from one extreme to another several times and each time the fear of one or the other grew to such a crescendo that major headlines were being made. The fear proved to be misplaced and gradually a fear of the opposite outcome grew.

Even after markets rolled over in late 2007 and into 2008 the major fear was inflation:

Inflation fears and oil prices pinch markets, June 11, 2008 New York Times

 

Soaring corn price fuels food inflation fears, June 11, 2008 Times Online

 

But as markets continued to collapse that fear receded and the fear of outright deflation emerged:

First inflation, now it’s deflation fears, Nov 11, 2008 Reuters

JUST four months ago, soaring commodity costs were the biggest economic worry as the oil price raced to a record high. Now the buzzword is deflation, which is altering both the economic outlook and the way governments need to respond to the threat of a deep recession.

This reversal was seen in just a handful of months. Finally as markets bottomed and began to rally gradually the deflation fear fell away only to be replaced by the threat of inflation again:

IMF Warns on Inflation, Growth Risks, Feb 6,2011 WSJ

 

Inflation leaps to 8-month high, pressure on Bank, Jan 18, 2011 Reuters

 

Inflation rise sparks fears of long-term spike, Jan 17, 2011 The Australian

 

Bond Market Flashes Inflation Warning, Feb 7 2011 WSJ

Jump in U.S. Treasury yields signals market fear that Fed is behind the curve on prices

How to Profit From Inflation, Feb 5, 2011 WSJ WEEKEND INVESTOR

The Scourge of Rising Prices Hasn’t Hit Home Yet, but the Underlying Signs Point to Trouble Ahead. Here’s What You Should Do Now

These fears have continued to grow and the fear behind them has only been stoked by the same ‘QE to infinity’ that is inspiring the many gold bulls discussed earlier. Throughout this secular bear market, that is nearly thirteen years old now, I have consistently believed that deflation was a far bigger threat than the kind of inflation that so many of us lived through in the seventies and early eighties when gold had its last great bull market and blow off, this continues to be my view. It is worth repeating a comment that the octogenarian market commentator Richard Russell wrote during the spike in inflation fears four years ago:

In the investment business, it pays to be suspicious of the obvious. If it’s obvious, every dim-wit knows about it, and it seldom pays to follow what every dim-wit knows and is operating on. 

Example – Everybody know that inflation lies ahead. Again, be suspicious of what everybody knows. 

This is very sage advice, and not only about the prospects for inflation, it gets to the heart of what I have consistently maintained drives markets; expectations. It is when hopes are dashed and fears prove baseless that markets reverse, not when the news goes from good to bad or vice versa.

I said don’t believe in the Music Man!

One ‘expectation’ that I have been very dubious about has been that central banks can and will do ‘whatever it takes’.

Two months ago in the September edition of Strategy Thoughts I discussed at some length the concern I had that investors seemed to have absolute faith in the power of central bankers to prevent an investment market catastrophe. I was astounded that this faith was so strong despite the Global Financial Crisis, the worst economic and investment market collapse in seven decades, being less than a handful of years ago. I suppose one might try to argue that things would have been worse if not for central bankers but it seemed three months ago, and continues to now, that investors’ expectations over central bankers’ ‘power’ are far too optimistic. Last month Dallas Fed chairman Richard Fisher, who has been outspokenly critical of the ‘Bernanke doctrine’ commented in a speech:

 “It will come as no surprise to those who know me that I did not argue in favour of additional monetary accommodation during our meetings last week”.

“I have repeatedly made it clear, in internal Federal Open Market Committee deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing into uncharted waters. We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure plausible stories as to what we will do when it comes to our next tack of eventually reversing course.”

“The truth, however, is that nobody on the committee, nor on our staffs at the board of governors and the 12 banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course.”

“And nobody –in fact no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves.”

“No central bank –not least the Federal Reserve – has ever been on this cruise before.”

As the slide down the ‘slope of hope’ continues this blind faith, or hope, will gradually, and at times rapidly, evaporate and be dashed. When the next cyclical, and possibly secular, buying opportunity arrives central bankers will likely be despised for the terrible job they have done rather than celebrated as being able to do ‘whatever it takes’.

Conclusions

Overall my views on most asset classes and markets have not changed since early last year. It was then that most equity markets rolled over and began sliding down their next cyclical bear market, their next slope of hope. Very few markets have rallied to higher highs on this most recent rally but the widely followed US market obviously has. Nonetheless I continue to believe that a cyclical bear market globally is continuing to unfold and that preservation of capital continues to be more important than chasing returns or yield, particularly in what is likely to continue to be an environment more characterised by deflation than inflation.

None of these conclusions are arrived at as a result of my economic outlook, I don’t start out with such an outlook, but obviously if my scenario for investment markets eventuates it is likely that more challenging times lie ahead rather than the continued, albeit weak, recovery that so many hope for. Markets are driven by people, their hopes and fears and expectations, and as such reflect aggregate social mood. The beauty of markets is that they reflect this virtually instantly, in real time. The same cannot be said either of confidence surveys or economic numbers, both of which suffer from substantial lags.

Final Comment

It has been commented that many of my remarks tend to be quite US centric, this is a fair observation but not one that I currently take as a criticism. The world does still look primarily to the US for leadership, and not just in the area of financial markets. This reliance upon the US for a lead on what may happen next, at least in the area of markets, was brought home today by the frequent comments on the TV and radio to the effect that with the US markets closed due to Hurricane Sandy it was difficult to know what other markets would do. It will certainly be interesting to see just what happens when markets open once more on Wednesday US time.

Kevin Armstrong

30th October 2012

Disclaimer

The information presented in Kevin Armstrong’s Strategy Thoughts is provided for informational purposes only and is not to be considered as an offer or a solicitation to buy or sell particular securities. Information should not be interpreted as investment or personal investment advice or as an endorsement of individual securities. Always consult a financial adviser before making any investment decisions. The research herein does not have regard to specific investment objectives, financial situation and the particular needs of any specific individual who may read Kevin Armstrong’s Strategy Thoughts. The information is believed to be-but not guaranteed-to be accurate. Past performance is never a guarantee of future performance. Kevin Armstrong’s Strategy Thoughts nor its author accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading securities is always risky so you should do your own research before buying or selling securities.