Keep calm, and carry on

Share

Tumultuous times. Is it the case that more catastrophes are happening or are we simply being made more aware of them?

Wikipedia's copy of the newly famous WWII poster

An old message - but a good one

Food riots in Algeria, a stall-owner in Tunisia setting himself on fire and triggering a social revolution that is shifting power across the Middle East. Earthquakes wreak ruin and fear on China, New Zealand and Japan. Japan’s earthquake is one of the strongest recorded – shifting the main island by 2.4 metres! Parts of the Murray River catchment have this year received the heaviest rainfall recorded in 160 years of keeping such records. One of the largest cyclones ever hits Queensland immediately after the floods and leaves 75% of the state a declared disaster area (SBS has a map recording the “Summer of Extremes” here…).  

Financially, the global markets are emerging from the near meltdown that occurred following the bankruptcy of Lehman Brothers, with sharemarket prices gradually increasing as profits begin to recover. Ten year returns for many supposedly “growth” investments are close to zero and confidence in long term investing has taken a hammering. Commentators have called the end of long term investing. Institutions such as the Future Fund and the Californian pension fund Calpers have increased their exposure to short term speculation at the cost of long term passive holdings.

So much for the bad news. How about a little bit of quiet observation?

Over the last few days the currency and sharemarkets have been hit by a wave of panic activity, part of which emanates from activities surrounding the earthquake in Japan. Here is a picture of the Japanese sharemarket moves of the last few days:

Chart of the Japanese sharemarket as shown by the Nikkei

A dramatic sell-off in Japanese shares

You can see the extreme volatility being displayed. Analysts have pointed out that the Kobe earthquake in 1995 resulted in large movements of money, as insurers and others cashed in investments to obtain funds to deal with the quake, so such moves are historically to be expected.  However, this time the threat of nuclear radiation is adding even more turmoil, as locals panic buy in supermarkets and petrol stations, and investors (or speculators?) react to the possibility of a major nuclear event by scrambling to find anything “safe”.  

So, what is an individual to make of all this? How do we mere mortals stand back and consider the deluge of information? Time for all of us is a limited resource, so let’s just look at the immediate action steps that a logical person would take in uncertain times:

  • Check your own position – what is your financial stability personally? How exposed are you to the volatility of markets, interest rates, and currency fluctuations?
  • Check your cash reserves. Nothing provides security quite as much as the ability to pay bills on time, and a degree of certainty that you can continue to do so for some time – regardless of external factors.
  • Look at the stability of your income. Cash in the bank will quickly be eroded by living costs and unexpected needs, so a source of regular income vital in uncertain times.
  • Look to make sure any investments you have are aligned with your financial situation and your comfort with the risks they entail.

Of course, not all things are all that bad and a prudent person would also be looking to see whether there are opportunities being presented by all this fluctuation in prices. Long term investors with a genuine long term outlook will do all of the checks noted above, and if all is ok then they will see whether their long term holdings can be supplemented by good quality, income-generating assets during these periods.

Hence my republishing the World War II motivational poster shown at the beginning of this artle.

That’s about it from me for now… For those who have a little more time, set out below is some more specific commentary.


 

Now let’s just skim over some of the issues taking place at the moment.

Well, from a financial point of view, the turmoil will add to the volatility in prices for basic commodities. A lot of the recent financial fear presented itself in rising gold and silver prices – to the point where there is arguably a bubble in both these metals (be wary of any commentary on gold and silver – including my own – as these metals are de-facto holdings for risk stabilisation, political power and trading positions, and the pricing can move completely contrary to any ‘standard’ producer/user supply and demand equation). Analysts and commentators love a good story – and calls for oil to move to $200 and gold to move above $2,000 abound. It is helpful to keep in mind that a few years ago when oil moved from $80 to $120 a barrel there were similar calls for the price to go above $200. You may recall that it subsequently reached somewhere around $147 a barrel, only to fall to around $30 a barrel as the full impact of the GFC sank in.

Platinum Asset Management recently held a telephone conference for advisors where the suggestion was made that a lot of new supply for basic commodities (minerals) was put on hold following the GFC, as banks stopped lending, and capital to expand mines and plant became more scarce. This has allowed prices to be squeezed even further, with Australia benefitting as our terms of trade reach some of the highest levels ever. This is a significant boost to the country’s income and has helped cushion us from some of the worst outcomes of the GFC. However, the capital markets are very slowly returning to a more ‘normal’ state, and those extra mines and output will come on line eventually – increasing suppy and logically leading to a stabilisation in prices.

All of this has yet to pan out and so there is a huge divergence in possible short term outcomes, depending on where an analyst puts emphasis. Terminology counts a lot when trying to understand these issues. “Slowdown” is generally seen as a negative thing in Australian media, and usually applies to any discusson on Chinese growth. However, the Chinese economic growth to this point has pushed Australia’s capacity to breaking point, so even a drop to minimal growth is still likely to provide a strong underpinning to current work and output. It is hard not to come to the conclusion that there are speculators out there who are happy to just keep pushing prices and markets forever onward and upward, as if there was no end in sight.

Credit markets are slowly regaining some ‘normal’… Centro recently managed the sale of its USA malls. There are obviously arguments over how it was done and who benefits but the key point is that a huge property transaction was comfortably financed. That is a good thing. US interest rates on its bonds have risen. That sounds like a bad thing (long term interest rates going too high doesn’t sound very good, does it?) but they had reached levels that were simply not plausible, and gradual returns to rates that fairly represent long term risk is a good thing for financial markets. No-one wants a repeat of the 1994 debacle on interest rates.

The United States economy is slowly repairing itself. Put aside for a moment the likelihood that the system is still being run by the fools and charlatans who presided over the issues which led to the GFC, and the United States government trying to fix the system by handing out money to those who lost it in the first place…. If you can keep all that to the side then you see an economy growing, and company profits growing, and low levels of gearing (comparatively) and high levels of cash. All very good for long term investors. Not so good for the individuals who can’t find jobs but the US policy is to provide enough free money to convince those with money to start employing more of the people with less money. It is likely to be a long haul because politics in the US is more devisive than ever but when trillions of dollars are sent into the system, you’d expect someone to employ someone somewhere eventually…. (truly, have you ever heard of a more Monty Python form of economic policy?).

The Europeans are gradually coming to see that Germany calls the shots, and when everyone eventually agrees to whatever Germany wants then all will be good with the Euro. Again, politics get in the way of logical economic steps here but we can only hope that once the German elections have been fought and won then some serious attempts to actually deal with the problems facing Greece, Portugal, Spain and whoever-is-next will get under way.

The Australian sharemarket needs to lift 50% to reach its previous high point. The market has a long term (100 + years) history of eventually recovering and exceeding previous high points, so it is logical to assume that we could be looking at above average returns over the period from here to the next high point (if that doesn’t make sense then draw a wave diagram of a few market cycles and draw a line from any point roughly halfway from peak to trough through to the next peak and you’ll get an idea of what i am referring to). if we were to overlay the current post November 2007 (the high point before the GFC) against the 1987 sharemarket crash high point and subsequent recovery then you would notice that we are pretty much in-line with a standard recovery pattern.

At this stage, fear is probably stronger than greed. People will take short term positions to try to make money but only the stout of heart will buy for the longer term. That is a standard psychology at this point in a market cycle, and is one that financial advisors try to highlight so that individuals can make more informed decisions. Media and newsletter commentators won’t really highlight this as it doesn’t sell newspapers or newsletters, so it is hard for the individual to step aside and try to see the current issues in a true long term context – but i would encourage you to try to do so. It is good for your mental as well as your financial health!

Please remember the site dislaimer – nothing here is to be considered personal advice (and you must take no action based on anything contained in this site without first consulting a licenced financial adviser who will make appropriate investigation into your circumstances before making a recommendation) – even if I refer to “you”. I am just taking literary licence and stealing one of Rudyard Kipling’s little nuances. Refer to the disclosure and disclaimers page for more complete information.

Share

  1 comment for “Keep calm, and carry on

  1. Neville Ward
    March 20, 2011 at 3:12 pm

    Thanks, Michael.

    Methinks the worst response to share market volatility is “panic” after all it tends to feed the distortion. Seems to be like watching surf boarders doing their stuff from the comfort of the beach. Sit tight, grin and bear with it!!

Leave a Reply