FYI | Nov 21 2007
Sometimes in finance (as in life) you can be right but still be wrong. The key element between the two is often timing.
As every investor will know from personal experience, being right at the wrong time is one of the most ungrateful positions to be in. It gives you that inner deep feeling that you were able to figure it all out, and in a correct way -hey, you nailed it- it’s just that your timing could have been better.
Let’s just hope you didn’t believe too much in your own genius beforehand.
Being wrong at the right time is a much better situation. It’s like having the feeling that someone is looking after you, at least at this particular point in time.
One of the most difficult things for investors, I know from experience, is to sense the timing of a news story or analysis. Two opposite projections can both be right, if the timing is different.
How many economists would be held in higher esteem if only their timing would improve appreciably?
Consider the following projection:
“Our baseline expectation is that next year will see a soft landing for the US economy and a better balance for world growth. Central to this view is that:
o There will be only limited spillover from the housing downturn in the US to the consumer and savings rates.
o Europe and Japan will to some extent decouple from the US.
o And that inflation pressures will continue to moderate.
If we are wrong, then our concern would be that the impact of the housing market downturn turns out to be much more severe. If that happens, then the risk of a brief recession in the US, and quite possibly elsewhere, (…) would rise markedly.”
The above fragment is taken from the annual outlook into the next calendar year by UK investment banker Schroders, only it was taken from last year’s outlook for 2007, not this year’s.
This year Schroders Group Chief Investment Officer, Alan Brown found himself in the rather awkward position that he could have just copied his projections from last year, and wait to see if anyone would notice.
He certainly saw the humour of it all and used a quote from Nils Bohr, Nobel laureate in Physics to massage the readers mind at the beginning of this year’s outlook for 2008:
“Prediction is very difficult, especially if it’s about the future.”
Brown continues with a quote of his own which can probably serve as a benchmark for all the experts who have to cough up an assessment about how, why and where the world will end up over the next twelve months.
And by gosh will we, financial journalists and critics, have a good laugh when present projections will turn out to be completely wrong.
Says Brown: “Crystal ball gazing is a hazardous occupation at the best of times. This year, in the aftermath of the ‘credit crunch’, forecasting seems like a particularly hazardous occupation.”
Of course, Brown wouldn’t be an economist if he didn’t play his cards a bit safer this year. For 2008 he has lined up two very likely scenarios. One has his preference, but the other is still very well possible.
Imagine this, says Brown, while the whole wide world is getting scared about what’s happening in the US housing market and about what its effect will be on the US economy, the rest of the world is actually doing very well. In fact, consensus expectations for economic growth have trended down during the course of 2007 but only for the US, for the rest of the world the trend has actually been in the upward direction.
(I don’t know what data Brown is using, but it is our own assessment that this is no longer true. Apart from that Brown seems to be referring to growth projections for 2007 – let’s assume that is a typo).
Here’s the good news: equity markets have already started to anticipate slower growth and this means shares are by no means overvalued. This while earnings growth is still above long run historic trends, says Brown. This would support the thesis that prospects for equity markets in 2008 are still looking good.
Brown’s assessment is that once the current uncertainties have been wrestled with, the market will be able to continue its upward path and hey, we may even see some re-ratings here and there (expansion of PE multiples as investor confidence grows).
That is scenario number one.
There is a genuine possibility that the US economy is already in recession right now (or will be very soon), but we yet have to find out through the release of delayed economic data over the next few weeks and months. This would be scenario number two and if this were the case the prospects for 2008 wouldn’t look as upbeat as under the first scenario, Brown acknowledges.
It could possibly open up a negative spiral which would ultimately lead to a “very painful cleansing of the system”.
Brown says he prefers the first scenario, but his final assessments suggest he assumes the truth lies somewhere in between the two scenarios in that US housing, and the US economy, will be weak but central bankers will come to the rescue by cutting interest rates – not just in the US, but soon in the UK too and after that in Europe.
It is therefore very plausible, says Brown, that the US dollar will remain weak for a very long time. He doesn’t think the euro at USD 1.50 is out of the question, even though at some stage most of the dollar weakness is expected to shift against Asian currencies.
All in all, we’re facing dangerous times, there’s no question about that. One error at the wrong timing, be it by politicians or by central bankers, and we’re bound to see a recession kick in. But even that wouldn’t be the end of the world, says Brown, as it is his view that any recession will be a short two quarters one, not the complete end of the world as we know it package.
He draws support for this view from the fact that the global economy is changing, “the world no longer marches just to a US drum beat”, and from the fact that economies in Asia and Europe have become stronger on their own.
In summary, Brown would advise investors “bet against the end of the world happening any time soon and instead look forward to the holiday season and a profitable 2008”.
Earlier this week I wrote the following sentence:
“If it feels like a correction, smells like one and certainly has the look of it, it probably is a correction. You are witnessing one right now. “
This was not in disagreement with Brown’s view. Just a difference in timing.
Till next week!
Your editor,
Rudi Filapek-Vandyck
(as always firmly supported by the Fabulous team of Grahame, George, Greg, Chris, Joyce, Paula, Pat and Sophia)
