Hunting season Issue 51 | Sunday 30th August 2015
Courtesy of Peter Thornhill
As he sighed wistfully he thought, ‘it seems like only yesterday’; another GFC so soon. Will it be the same as the last or different?
I can say, with considerable conviction that it won’t be different. The drivers are the same, moral hazard being ramped up by thoughtless governments and fear. Fear is based on ignorance; knowledge is power!
One would have thought though, that with the GFC so fresh in people’s minds we would not have reacted in the same way. It never ceases to amaze me that this sort of thing happens again and again yet still we never learn.
To paraphrase George Santayana: “If we don’t learn from the past we are doomed to repeat it”. Groundhog Day anyone?
Below is the familiar pattern of stock movements and dividends paid superimposed on a term deposit and the subsequent interest payments over the last 35 years.
The GFC saw a drop of 50% in prices, similar in percentage terms to the share market correction of 1987 and also the reaction to the first Gulf war in 1990. Although the GFC decline looks more substantial it is only because the same drop of 50% was applied to an index that had grown steadily over the intervening 21 years.
At the time of the GFC and during the six years since, I have reminded audiences that we would recover from the GFC as we have from all previous falls throughout history. This would then be followed by another correction as greed, stupidity, speculative activity and misguided government intervention drove the prices up again.
My rationale for this view is that the stock markets of the world ultimately reflect the profitable endeavours of the human race (the unprofitable endeavours inevitably fail). For markets to collapse totally requires that all human endeavour comes to an end and I find this rather hard to imagine.
However, I am surprised at the speed with which we have forgotten or, perhaps, never ever learned this lesson.
Sadly, my rational view of the stock market is, I suspect, shared by a minority. Everyone else, including many institutions, regard it as a casino
I will admit to one aspect of current conditions that we haven’t experienced for some time, so one could be forgiven for not remembering, and that is low interest rates; it has been roughly 5000 years since we have had rates at the present levels!
All this courtesy of misguided governments who, wishing to appear in control, have driven them down in an attempt to appease our injured feelings and repair personal balance sheets resulting from our appalling financial behaviour.
They are incapable of allowing us to suffer the consequences and this has led to the rise in moral hazard over recent decades.
Here in Australia company balance sheets are generally in much better shape than they were prior to the GFC and it is clear that fear is driving the present gyrations, not fundamentals. If I may quote a miniscule number of headlines from recent media:
Market bounces back but FEARS China will drag down the world
FEAR indexes surge to highest since GFC as China slide spooks markets
The day began with investors FEARING the worst as the market fell to a fresh two-year low.
Global economies are experiencing something unique these days, and the FEAR gripping Chinese shareholders right now is just one element.
FEARS remain that the share market fallout could bleed into China’s already slowing economy.
FEAR driving sideshow but no need to panic here
This latest share market rout has everything to do with FEARS that China and a bunch of developing economies are running out of puff.
$A drops to six-year low as ‘FEAR takes over’ in global markets
Chinese FEARS spark region-wide rout
The scene was set by Wall Street as steep falls on Friday showed FEARS over China had invaded the thoughts of investors in the world’s biggest economy.
And so it goes on, ad nauseam!
Readers will no doubt be aware of the preponderance of comments relating to China amongst the above. I guess it makes a change from the ‘European crisis’ or ‘Middle Eastern crisis’. However, it did focus my attention and sure enough, the usual tripe appeared.
An article titled “Stock shock leaves a trail of victims” in the Australian newspaper caught my eye. The example given was a white collar worker in Beijing who sold his house in March this year to INVEST (my emphasis) in the Chinese equities market.
Predictably, he has seen his ‘fortune’ abolished in a few months. He told the journalist that he knew the risks when he joined with friends to invest nearly 2 million yuan in the volatile market but was still angry with the consequences.
He is now worried that his decision to invest in equities could have long-lasting consequences. “I am old enough to get married and you know here that girls prefer guys who own their own houses,” he said. “I didn’t tell my Mum that I sold the house; she would be too mad.”
What right did this lunatic have to feel angry I ask myself? I feel angry with the journalist who included the word ‘invest’ in the article to describe the stupid speculation that this young man indulged in.
The saddest footnote to all this pathetic reporting was an article titled: Global market rout means surge in fear indexes. With a sharp correction on Wall Street earlier in the week the US ‘fear index’, otherwise known as the Chicago Board Volatility Index, surged as much as 90 per cent to levels not seen since the height of the global financial crisis.
What is bizarre is that fear has now become a tradeable commodity!
To try and put a positive spin on all this can I just say that none of this has anything to do with investors or investing. I would venture to suggest that the only likely action taken by investors would be to top up or add holdings to their portfolio.
As an investor personally and anecdotally from conversations with others I can confirm this. I am on record, when asked in an interview during the GFC what was on my wish list for coming weeks I responded with ‘another GFC please’. The interviewer was clearly nonplussed and asked why. My response was, ‘I would like to buy some more CBA at $26.00 and Wesfarmers at $13.50’!
As this irrational process of short term rise and fall continues I ask people to heed the words of that famous Australian philosopher Chopper Read and, ‘toughen up princess’.
As the human race appears incapable of recalling the past, consider again the chart above and merely be prepared to take advantage of the ‘fear factor’ and step up to the mark and wait ’til you see the whites of their eyes.
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This email is not advice. This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended. All expressions of opinion by the author are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the author’s articles is accepted by any other person or entity.
