Snapshot in time 12th August 2011

Today is Friday 12th August 2011. The financial world has been rocked by massive daily movements in currency, debt and share markets.

Uncertainty

Healthy companies reporting increased profits have seen large falls in their shareprice – often just as large as the falls in comparatively weak and unprofitable companies.

The United States has just illustrated the inability of its government to govern, resulting in a ratings downgrade by S&P. In response, its Treasuries auctions have seen rates plummet to below those of the depths of the Global Financial Crisis. In other words, the global response to an acknowledgement of the US indebtedness and its inability to extract itself from this position has been rewarded with a reduction in its borrowing rate.

Too much cash, not enough yield

The sea of cash unleashed by central banks has washed from short-term opportunity to short-term opportunity, creating jobs and profits everywhere except where it is theoretically directed – increased employment and growth for the US, UK and Japan. The backdoor devaluation of US currency is blamed for creating inflation in developing countries, leading some such as Brazil to impose restrictions on money flow in an attempt to stop the rampant appreciation of their currency.

The price of gold and silver has doubled and doubled again in response to the decline in the $US and the printing of money by central governments around the world.

Tiny Switzerland has found its franc has become a refuge from US, UK, Japanese and EU turmoil. The franc has increased to the extent that there are today rumours Switzerland will peg its currency to the Euro.

South Sea Bubbles, Railway Booms and Speculation Abound

The prices of raw materials and basic foodstuffs have risen dramatically on the back of a geometrically increasing movement of people in developing countries from subsistence farming to urban lifestyles. This massive increase in demand has not been broadbased. It has impacted some sectors more than others, and the huge lift in prices in some areas leads to increased speculation and investment into other areas of potential.

Hard commodities such as iron-ore, copper and rare earths have all seen price movements in multiples of long term averages. Soft commodities such as wheat, corn and meat have all seen increases in price. Energy commodities such as coal, oil and gas have seen huge movements in price as the near term demand appears greater or smaller.

Pricing of Risk Ceases to Have Meaning

This is an argument that the “market believers” would vehemently disagree with.

The pricing of risk instruments globally is reflecting the relative risks of the economies and the markets and the participants in it. The daily liquidity enables those who want to be out of a market to get a pricing and those who want to buy in to be able to do so. However, that does not guarantee that risk is being priced correctly. It simply means that there is just as much access for the knowledgeable trader as there is for the terrified speculator.

IF markets were correctly pricing for risk, how do you explain the global holders of money agreeing to finance the United States government at the rate of 2.3% for the next 10 years?

IF markets are correctly pricing for risk, how do you explain the rationale of central banks continuing to rescue banks or even countries from tipping over, thereby stalling the major changes needed to bring finances back to order?

Changing times lead to changing needs but it is hard to see how the pricing of markets benefits from layer after layer of opaque cross guarantees that simply make it impossible to determine a straightforward measure of risk.

Speculation Cloaked as Investment

The idea of long term investing has taken a beating.

Commentary and analysis are telling people that buying a good long term investment and holding on to it is a pathway to doom. The new mantra is buy! sell! be clever! buy the best and avoid the worst! As usual, what is not said is the absolute certainty that not one single person can guarantee that they can do this. Be into gold and out of shares. Be out of gold and in to cash. Trade, trade, trade.

This works well enough for the financial sector itself. More trades require more systems and investment and people and experts and communications and equipment. However, the longer term value of all of this is highly uncertain.

The United States has endured the ‘lost decade’ in which returns have been nil for a full 10 years for sharemarkets and even for many in the residential property market. Australian investors in overseas shares have seen a similar result, driven by a combination of markets and currency. Australian investors in the local sharemarket have seen a nil return for around 6 years.

At times such as these, the arguments arise that this time it is different, and that there is a new paradigm that needs to be accepted. And so there is speculation as to what the new paradigm may be, and the best way of taking advantage of this.