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).





  2 comments for “Investment Market Turning Points

  1. March 19, 2012 at 11:14 am

    Ah my question is this:

    A comment from Liam W.

    The US has been in deficit for more that 20 years, England has only just started to finish paying off war debt yet remains a productive economy, Italy, ha Italy has a relatively successful democracy (despite having more that 50 governments since WW2) and is the on the top 10 economies in the world.

    So does it all really matter? Yeah your broke and have a lot of debt, your government is a basket case but the work keeps turning.

    Governments come and go but ideas are forever (JFK I think?)

  2. March 19, 2012 at 11:46 am

    Hi Liam,

    Yes, that is a tricky one, isn’t it?

    I can express it another way for you…

    “If Australia has shown the best resiliance over the GFC, has huge future growth (potential as well as currently under way), $450bn of investment projects on board, room to lower interest rates to deal with difficult economic conditions, stable government, strong law, proximity to growth Asian economies, low federal debt, low unemployment, a strong banking sector, world-leading commodity companies and an educated and stable employment pool – then why isn’t that being reflected in our market valuations, when compared with economies such as the USA – which even their most positive economists see as facing an extended period of low growth and high unemployment?”

    A fellow called John Robertson comments on markets in an article on the website he contributes to ( something along the lines of your comment, Liam. John Robertson has researched growth in economies during the period of England’s global decline in dominance, and the emergence of the US. He has then correlated that with equity markets, and guess what? Both equity markets showed similar returns over this tumultuous period. In fact, the UK’s total return was somewhat higher.

    Clearly, there are many facets to such complex things as markets and economies, and it would be foolish to point at that massive matrix and suggest that any one factor was the only issue that let from point A to point B. However, there are a few basics that can be used as a rough guideline when considering markets and their gyrations around long term trends…

    One basic that sounds inherently logical to me, is that over a rolling multi-business-cycle time period, the returns from equities should outperform the returns from debt. i noticed that this Weekend’s Australian included an article that suggests super funds remain unconvinced of the merits from increasing their exposure to debt at the cost of equity. A fellow from one of the major banks was suggesting that the super funds have the mix wrong, and that past experiences illustrate that point. We don’t have time to look at the entire raft of research into that point (a quick Google search will provide you with months of reading on such matters) but we can look at the ideas behind such thoughts.

    IF equity markets fail to deliver returns above those of debt markets THEN you are looking at rather catastrophic outcomes. There may be a corner of the universe where such things have happened but IF those who borrow money consistently fail to make enough to cover their cost of funds, and repay the lender THEN you are going to be looking at a dramatically difficulut economic environment.

    THEREFORE, it makes sense that the REAL returns being generated across markets are going to be dependent more upon the balance of cost of funds vs potential for reward than they are by those broad economic measures.

    To clarify my point…

    Capital will look to obtain the best return that it can. In a “bad” economy there will be general gloom and misbelief in the ability of even soundly run and profitable companies to generate growth or returns. This will make those companies cheaper than similar companies in economies that are pervaded by very positive and hopeful economic “moods”. Even a “bad” economy will still offer oportunities, and there will be people and corporates that are able to operate profitably – regardless of the overall economic climate. Look at Apple, and its incredible performance to become one of the world’s largest companies. It has acheived this regardless of the US entering a multi-generational benchmark recession, massive unemployment, a crippled banking sector and a decimated housing industry.

    So yes, there is a point to the comment “…does it really matter?”. The point is that some of these things don’t really matter for some people.

    Individuals, companies and markets will continue to grow over time, unless there is a catastrophic event that triggers George Soros’ version of a change in agreed paradigm. Many people have been so terrified of the potential for catastrophic outcomes in the last few years, and this has made it seem that risk was not worth taking. Once that idea of impending disaster no longer forms such a large chunk of popular thinking then there will be room for the longer term trends of risk premiums being added to growth assets.

    So it does matter if the world spirals into hyper-inflation, deflation or some other form of global meltdown, and it does matter for those who are exposed to a small number of companies or industries, as they may or may not participate in any growth that exists or presents itself. But outside of these areas, the global mix of economic conditions in my opinion is not of that much importance to the average person. It certainly does not hold that economic factor A always causes market outcome B. That’s the kind of “mainstream media commentary” that really does not matter. It can be difficult to stand back and look at long term trends – especially in periods of extended market downturns such as we are currently looking at – but these are all part of long term growth investment, and that is the part that is so very hard to keep in mind in difficult times.

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