FYI | Nov 13 2013
By Peter Switzer, Switzer Super Report
Regular readers know I’ve been wrestling with the history of stock markets, which suggests a correction or pullback is overdue. However against this, last week I argued, with great trepidation, that “this time is different!”
Despite my bullishness since March 2009, these are the kinds of words someone like me, a cautious investor, fears ever uttering, let alone writing or believing!
I ran my theory that the differences of today — QE3 in the USA, Draghi’s monetary stimulation in Europe, stimulatory Abenomics in Japan and the resilience of the Chinese economy — makes this stock market we are dealing with very different.
The biggest blast from the past is wrapped in a cliché that old heads have argued — “don’t fight the Fed”. Against this, however, you have the history of people eventually laughing at those who, at various times, have said: “This time it is different.”
So, let me get it on the record by saying that this excessive money supply expansion will, one day, cause problems, such as inflation, big budget deficits, etc. and this could lead to gold spiking and stock markets falling – but this happens anyway. In a decade, you expect one market slump, sometimes two market slumps, as we did in the ‘noughties’, with the dot.com bust and then the GFC.
Right now I’m heartened that Macquarie’s head of equity strategy, Tanya Branwaite — a serious economist, who gets stocks and that’s why the millionaire’s factory looks to her — is tipping a slow grind higher for the world and local economy.
So that underpins my optimism that this monetary stimulation policy can translate into economic improvement, and this should underwrite stocks heading up.
Goldman Sachs’ Richard Coppleson is predicting a 9% plus rise to June 30, while Bell Potter’s Charlie Aitken is banking on 6000 by the end of 2014.
The weekend spike in stocks, with Wall Street sending the Dow into record territory with the index up 167.8 points to 15,761.78, keeps reminding me that there’s still a lot of money on the sidelines and not in stocks. In fact, the numbers are “very different” than the usual stats on those usually invested in risky equities.
One thing I know for sure is that a correction or two or three will come before we see another crash — that’s what usually happens. In 2007, there was at least two big sell-offs but it was the one between July and September, where the 14,000.4 level was left behind with the Dow dropping to 13,113, that was the warning for what eventually happened in November.
By October 10, the index went to 14,164.5 and the rest was downhill from there.
I think we are a long way from this kind of scenario and that’s despite Marc Faber of The Gloom, Boom and Doom Report telling CNBC that the global financial system is “in a worse position than we were back then” in 2008.
Why? He says China did not have the debt issues it has now. That’s true, but it doesn’t mean we have a debt challenge like the sub-prime mess, which not only endangered the world financial system but effectively blindsided too many key players, from the big banks (which did not know their exposure) to the credit ratings agencies, who misrepresented the dangers to the regulators and who might have over-relied on the likes of Standard & Poor’s and Moody’s.
As I argued last week, this time it’s different, and while I know I will one day be warning you that “this correction looks serious enough for me to change my ‘buying the dip’ strategy,” now is not that time!
We’re still in the scepticism stage of the bull market, and if I add Branwaite’s slow grind upwards to where our stock market is — still below its all-time high even if I adjust for the mass capital raisings post-GFC, which might have taken the 6800-level down to 6300 — then I’m not for quitting stocks yet.
I think there’s a good chance of the market melting up for some time, as David Darst of Morgan Stanley suggested on CNBC. But as he said, if that should happen, then I might become a little cautious and take some profit.
But this hasn't happened yet. This is now, and while I think Faber will be right one day — he has warned of market doom in 2010, 2012 and 2013 — if you had listened to him you would have missed out on a lot of moneymaking opportunities since March 2013.
The S&P/ASX 200 index has gone from 3145.5 to around 5400, which is 72% plus five years of dividends, which would put those optimists back in the black on a total return basis.
Let’s see a correction before we start worrying about a crash!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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