Insights

October 14, 2014
Charlie

Fortune Favours The Prepared

In the fields of observation, fortune favours the prepared mind.

L Pasteur 1854.

 

Last month we talked of endgames – how the complexity of positions and factors can make it difficult to know when it has started. Being more of a feeling than a definition, it is thus more of an art than a science. We suggested that options are starting to run out for those controlling the various interest rate policy levers (the Central Bank Coalition of Blind Hope) and stated “the trajectory of global investments is unsustainable and will be corrected in due course”.

The problem is not so much that the local sharemarket is expensive, more so that global indicies are, especially the US and Europe, propelled by uber-low interest rates. Despite many anecdotes of the real economy in the US doing well, remember that the real economy largely works in real time, whereas the stockmarket looks ahead and discounts future earnings. The market always leads, that’s why it has been rallying for five years [March 2009 low] despite the real economy being in the doldrums for most of the time, bar recently. The US stockmarket is riding for a fall, and will do so when stimulus is removed (S&P500 down 1.6% over the month, worst month since 2011). Don’t confuse the two.

The issue with the local sharemarket therefore is that the fairly tight correlations we have historically observed are very likely to hit our market with a similar downdraft. The “decoupling” myth (ASX goes higher while S&P500 falls) happened for precisely six weeks in 2008 before gravity took hold. It won’t happen this time either.

For these reasons we have been seeking to bolster client portfolios with constituents that have low or no correlation to long-only Australian equities, and will continue to do so.

To close with a great quote from John Hussman’s most recent piece:

“I should be clear that markets peaks often go through several months of top formation, so the near-term remains uncertain. Still, it has become urgent for investors to carefully examine all risk exposures…to make certain the long position you have is the long position you want”

The Day The Carry Trade Died

I met a girl who sang the blues, And I asked her for some happy news, But she just smiled and turned away, I went down to the sacred store, Where I’d heard the music years before, But the man there said the music wouldn’t play D. McLean, 1971 The [Read More]

November 14, 2014