FYI | Nov 06 2013
By Peter Switzer, Switzer Super Report
One of the greatest mistakes you can make in this finance and investing caper is to fall for the old defence of an improbable explanation or argument that “this time it is different.”
Catching up recently with an old media buddy of mine – the AFR’s editor-in-chief, Michael Stutchbury – at the Rupert Murdoch speech for the Lowy Institute, I couldn’t help tease him about his crusade against the housing bubble.
He referred to the history of low interest rates and inflation but that’s when I let him have it with: “This time it could be different!”
I even hated myself for falling into this trap, as both Michael and I have been exposed to the same economic and market theories, as well as real world experiences, but I have a gnawing feeling that, this time, it is different.
So, what’s different from the history that Michael and I have shared?
The case for
First, we’ve never come close to a Great Depression. Second, we have never seen a monetary expansion of this kind worldwide. Third, we’ve never seen economies respond so slowly to monetary stimulation. Fourth, the economic crunch from the GFC has been the worst for Europe in our lifetime. Fifth, we have never lived with a powerhouse called China, that not only provides demand but pushes inflation down by lowering the prices we pay for retail and industrial goods.
Sixth, consumers are repairing their personal balance sheets and de-leveraging like never before, or at least in our lifetime. Seventh, Australians are saving at historically high levels. Eighth, even with low interest rates, inflation remains subdued. Ninth, in a place like Sydney, where most of the housing bubble talk is focused, the average house price over the past 10 years to 31 July, according to RP Data, was just 2.5%!
We are due for a housing recovery and we are due for a bit of inflation and then some rise in interest rates, back to something like normality over the next two years. For me to be supportive of some rate rises over the next couple of years, shows how different it is, right now.
It won’t be different forever – inflation will eventually come from this monetary madness used to help us avoid a Great Depression, and on that I think I can say “Mission Accomplished”, without having parallels made of me to George W. Bush.
The correction
This brings me to the correction — is it different here too?
Geoff Wilson of WAM says one is overdue. I think so too, but what could make us wrong?
The US and China keep improving economically and there is a swag of data from both countries this week, with a jobs report in the former and manufacturing in the latter, which should excite markets.
Over the weekend we learnt that the ISM manufacturing report was the best in two and a half years, so the economy is ticking over positively.
Generally, US company reporting has been positive, with 355 companies in the S&P 500 having reported, and 68% beat earnings on a consensus basis, while 53% beat estimates on expected revenues, which all says the US economy is doing OK.
As I’ve said before, the Congress could make things worrying in early December, with another shutdown possible in early January if the Budget Committee fails to agree on a plan. And this could roll into January, but if an agreement does come up, then the market will keep sneaking higher.
The first real chance of a correction could be in March or April, when I think QE3 tapering starts, but this will lead to plenty of buyers coming into the market on the basis that the Fed would be tapering because the US economy is getting stronger.
Why is this inability to correct happening? Or why does it look like a correction could be delayed? And why, when it comes could it be shallow, provided it’s not driven by a screwy or weird unexpected event? Well, it could be because this time things look to be different!
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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