Investment Market Turning Points

Financial Planning Perth : Hercules at the Crossroads

The future really is an unknown, so how do we identify turning points or watershed moments?

One of the frustrating aspects of investment markets is the fact that turning points aren’t known until well after they have happened. By the time everyone agrees that the sharemarket/bond market/ property market/ commodity market has turned, returns have already plummeted or skyrocket’ed (i chose those words specifically for their inflammatory nature). Let’s consider that idea in the context of the last two days, as a continuation of an earlier post (which included the same magnificent artwork).

US Debt Market Turning Point?

To start, we have to beguile ourselves to accept the ridiculous logic of the US debt ocean being considered a pool of safety in a turbulent world. Once we get over the mirth of pondering that one, we can look at what is happening in that part of town.

Financial Planning Perth : 30 year bond yield for US debt turning point

Does this mean that the fears of global financial meltdown are receding?

You can see from this chart of the US 30 Year bond yield that the actual turning point for the current movement “upwards” in bond yields occurred on the 3rd/4th October 2011. From that point, the yield has gyrated betwixt and between but there is a definite trend of rising rates. Given that the Federal Reserve has been reinvesting its maturing short term securities into longer term debt under “Operation Twist”, we can make an assumption that this is predominantly caused by folk reducing their “flight to safety” and getting out there to take a little bit of risk, by buying into growth markets.

So, is this a turning point? i for one, certainly do not know whether or not it is – but it is definitely worth watching right now, as the flow of money in and out of that US debt ocean is a strong barometer of what the hot money is doing at any given point in time. Let’s again peel our faces off the looking-glass, and think about Michael’s Uncertainty Principle. Unless the US is headed for a multi-generational, Great Depression level free-fall – those interest rates are unsustainable in the face of historical inflation levels. Have a look at the last 20 years of interest rates that the US has paid on its 30 year debts…

Financial Planning Perth : 20 year history of the US 30 year bond yield

Unless the US Economy is headed for collapse, it’s reasonable to expect that these rates would be unlikely to continue to fall to zero.

Fascinating stuff, huh? We know that the US debt pile is ginormously hugemungous, so even a lift from 2.8% to 4.8% represents a very large increase in the interest cost to maintain that debt. Apparently, the economic logic of it all is that the US will be able to pay that increased debt cost because the conditions that cause it (better growth conditions, improving employment data, housing market uplifts and the like) are supposed to increase the economic prosperity, resulting in a better tax intake, and lower unemployment support costs for the Government. It all sounds so pleasingly simple.

Financial Planning – Sharemarket Turning Points

Please accept that i have absolutely NO IDEA of when sharemarkets will turn from the recent pessimistic outlook or when Australia’s sharemarket will return to its previous high point or even if it ever will. These are all simply observations and thoughts – so don’t be tempted to act on them because they are not personal advice – and never can be.

Having said the Great Disclaimer in just one of its many forms, we should now turn our attention to Australia’s sharemarket, as measured by the S&P/ASX 200 Price Index, which is the usual barometer of Australian shareprices.

This chart is a bit busy – but i want to highlight two key points:

  1. There may or may not have been a turning point back in the depths of the European Union banking crisis of late 2011, which may or may not be a reversal of the drop that has taken place since the April 2011 high point.
  2. Think for a moment about 12 month returns, and how they are NOT STATIC. That is, they are a rolling measure – by the time you receive your annual report from a fund or investment, that rolling 12 month return will be different. It could in fact be materially and substantially different – so it is important to be very careful about interpreting an active marketplace on the basis of fixed date reporting.
    Financial Planning Perth : Australian Sharemarket trends as at March 2012

    Whether or not a trend is started or broken, it’s important to remember that investment markets are ONGOING. They do not stop at the end date of a chart.


In other words, some people will be making decisions based on their annual statements – or website reports of the last 12 months’ returns (simply because this is the defacto default measure – not because it has any relevance to anything at all), and in doing so will be getting a completely inaccurate picture of what their money is doing or where markets may or may not be trending (remember “trending” – not “going”. We don’t know where a market direction is going, we only know where it has been and where the current trend, if continued, will send it).

Commodity Price Turning Points

This is something that Western Australia, and Australia as a nation, cares about quite a bit. i’m actually not going to give any thoughts on that one as time is short. However, if  you are interested in looking at whether last nights large movement out of commodities has any impact at all on long term commodity prices – and hence the health of our national accounts – then you may want to read this note, released today by the Reserve Bank.

It’s interesting, in a completely nerdy way, and suggests that speculation is not a key driver of long term rates. if this is true then it will give comfort to those who like to close their eyes to short term price movements.

Financial Planning – Beware the Ides of March

Just thought that i’d add that classic line into the post. For dramatic effect. Not for any valid financial reason – it just seemed a neat idea because today is the 15th of March (all questions of Roman/Julian/Gregorian calendar accuracy and conformity being put aside in the interests of populist calls-to-authority).





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