I’m A Market Bear
Yes, I am. But I feel like my own dire outlook has only come to pass with the GFC, which really started to unravel as the credit crunch in Aug 2007. It’s now been over 2 years of watching this stuff, and gee, I’ve got to tell you it’s been interesting to say the least.
of course, shares are rebounding since March this year, which is a little weird if you ask me. It’s as if people have decide the coast is clear and they should go bargain hunting. It’s the kind of opportunistic move that we should applaud except since June, the rate at which things are heading up is causing me to wonder. At the end of June when it hit 4,000, I thought the All-Ords in Australia would be lucky to get to 4,500. In recent weeks, it’s zoomed past that figure and it’s hovering around 4,700. Everybody’s in a buying mood but really, is it justified?
As it stands I sold out in Mid September because I figured that either October is going to be flat, or it’s going to be a hideous crash. I can’t see October going without a correction because really, the rise in the last 3 months is way optimistic – in my humble opinion.
Except there’s this article here in the Economist.
In general, the bears take the line that the unprecedented actions of governments and central banks (enormous fiscal deficits, near-zero interest rates and “quantitative easing”) may have jolted the global economy temporarily into life, but they have not resolved the underlying causes of the mess. In particular, they worry that consumers and companies remain excessively indebted, and that deleveraging will quickly stamp out any recovery.
Their usual template is Japan. Its example inspired Mr Edwards to come up with the “Ice Age” thesis in the 1990s as he mused on how assets should be priced in a world of low nominal GDP growth. He thought that the dividend yield on American and European equities would eventually exceed the yield on government bonds. This had come to pass in Japan in the late 1990s and again in the early 2000s, but had not occurred in most Western countries since the late 1950s. It implied a huge derating of shares.
“The bulls’ view of the world was that low bond yields and low inflation should cause high price/earnings ratios,” explains Mr Edwards. But in his view the bulls were ignoring the corollary; that low inflation would lead to low earnings growth. When investors cottoned on to the subdued outlook for profits, as they did in Japan, the effect on share prices was dramatic.
Mr Edwards admits that he consistently underestimated the determination of the authorities to prevent a bear market. As they cut interest rates in response to each market wobble, the result was a series of bubbles, first in technology shares and then in housing.
The other bears agree, and see the recent market rally as simply the authorities’ latest attempt to prop up asset prices. George Magnus, an economic adviser at UBS, a big Swiss bank, says: “This recovery is entirely dependent on the unprecedented largesse of governments and central banks. Things may be better than last autumn when there was an imminent threat of a financial collapse but the recovery is built on very short-term foundations.” In particular, businesses emptied their inventories last year; manufacturing has enjoyed a rebound in recent months as companies have stopped slashing stocks, but Mr Magnus argues it is not self-sustaining.
And it’s true. Housing prices in Australia have stayed steadfastly high through all the GFC. Okay, the ultra-high end of the market has taken a hit, but prices remain ridiculously high in the cities. They’ve been assisted by the fact that the governments in NSW, both State and Local have been choking supply for some time, but the bottom line is that the Federal Government itself doesn’t want property prices to drop so they’re propping it up with the First-homebuyers’ grant. And the grant is actually supporting the property prices more than helping people buy any house, so it’s a complete misnomer.
Here’s the thing. If you can’t buy a house and interest rates are so low you can’t expect good returns on term deposits, what are people going to do but buy stocks? So the new asset bubble is shares and we’re seeing it right now. Just how much of a bubble is it right now? Take a look at the CBA. In the 2 years since the GFC kicked in, it dived down from $60 to $25 and is now back at over $50. ANZ peaked at $30-odd fell to $12 and is at $25.
I know our banks did well not to be smashed by the credit crunch, but seriously folks, the GFC did burn a hole in the pockets of the CBA in the form of Storm Financial. They all had exposure to stuff happening overseas. They weren’t totally quarantined. Unless you believe the GFC is totally over, you shouldn’t be looking at these banks’ shares as being close to worth what they were at the peak before the tumble. They’re still holding on to the mortgages of people who bought grossly over-valued houses, who are refusing to countenance a price correction.
Let’s face it, nobody’s untangled the mess of toxic debts owned by banks around the world. They’ve just simply handed over money to banks to ride out the cash flow problem. Why the hell would you think the GFC is over?
What’s really unfair is that as a Market Bear I would have shorted all these banks but the Federal Government put a stop on that. Let me be frank: I would have sold short on Macquarie all the way had it not been for the protection afforded to them by the Federal Government. Think about that. The Federal Government protected Macquarie Bank from a bunch of ordinary punters calling it right. If that doesn’t tell you the market is being artificially propped up by the Government, I don’t know what does.