Archive for February, 2009

Future is bleak for conventional investing

Tuesday, February 3rd, 2009

Around 24 months ago, the global financial market was an investors’ paradise. Any asset class that you dump your money in goes up in value. As we described in Epic, unprecedented inflation in June 2007,

Today, the world is experiencing an unparalleled inflation of asset prices. This is the first time ever that the world is experiencing asset price inflation in all asset classes (e.g. property, bonds, commodities, stocks and even art!) and in all major nations (e.g. US, China, Japan, Australia, UK, Russia, etc). We will repeat this point again: never before had such a universal scale of asset price inflation ever happened in the entire history of humanity! Today, even artwork is also in a ?bull? market (if you consider artwork as an asset class)!

Back then, we even receive solicitations from investing spruikers about investing in wine! Even useless artwork was considered an investment class. In such a climate, judging from the quantity of seminars, software, talks, books, network marketing schemes, conferences, investment products and so on, it was a dream of many to achieve financial freedom. Consequently, the financial and investment industry boomed by providing the masses the shovels to achieve their dream. During the gold rush, the ones who really got rich were the ones providing the shovels for the gold prospectors.

Fast forward to today, the opposite is true- we are now in investors’ hell. Every asset class is in decline in all the major nations, with the exception of US Treasury bonds. Businesses all over the world are failing. People are losing their jobs. The entire world is facing a synchronised recession. Some people who thought they could retire soon suddenly found out that their retirement have to be postponed (which is opposite to achieving financial freedom). The return on investments has become secondary concern to the return of investments. The use and abuse of credit to consume and invest has flipped to the shunning of credit and repayment of debts. In this climate, the financial and investment industry finds that selling shovels is a lot tougher than before.

In other words, as we said before in Fading glory of the financial services and ?wealth? management industry,

As far as we can see, the bull market (in real terms) on financial assets is over. What comes next is either deflation or stagflation. The implication is that peak glory (2001-2007) of the financial service and wealth management industry will be history.

Therefore, in this investor-unfriendly environment, tomorrow’s investors have to re-think their philosophy of what it means to invest. For some, it may mean that not investing is the wisest course of action. For others, it may mean investing outside the financial system. For some people, they may no longer see it appropriate to call it “investing.”

For us, it means that we are gradually shifting our focus in our writings to better reflect the new climate of tomorrow…

Another turkey from ABN Amro Morgans regarding China

Sunday, February 1st, 2009

Last Thursday, we saw this comment from Michael Knox, the chief economist of ABN Amro Morgans in the AFR,

It is probable that this slowdown in China is going to be relatively short-lived. China went through a period of very rapid credit growth in 2006 and early 2007.

The central bank reacted by pushing up the reserve deposit ratio to the highest in a generation. The result of that was that growth in bank lending fell in the first half of 2008. The slowing in the economy this produced can now be seen in gross domestic product and confidence in data.

The slowdown seems primarily to be the result of domestic central bank action. In the second half of 2008, the Chinese central bank dramatically eased monetary policy. It rapidly cut the reserve deposit ratio. The result of that has been an equally rapid expansion of loan growth. For the year to December, yuan and foreign currency loans were yp by 17.95 per cent for the year. Yuan loans were up by 18.76 per cent.

The money supply also grew rapidly.

The lag between Chinese loan growth and the economy is no more than two to three quarters.

This means that the re-acceleration of loan growth should lead to an equally strong acceleration in the Chinese economy in the second half of 2009. At last there is good news from China in the form of the re-acceleration in bank lending.

Let us write our version of why the Chinese economy ‘should’ accelerate in the second half of 2009:

It is probable that this slowdown in China is going to be relatively short-lived.

Adelaide’s temperature went down to one of the lowest in the first half of 2008. The result of that was that growth in Chinese economy fell in the second half of 2008. The slowing in the economy this produced can now be seen in gross domestic product and confidence in data.

The Chinese economic slowdown seems primarily to be the result of Adelaide’s temperature. In the second half of 2008, Adelaide’s temperature increased progressively to one of the highest in a generation at the end of January 2009.

The money supply also grew rapidly.

The lag between Adelaide’s temperature change and the Chinese economy is no more than two to three quarters.

This means that the re-acceleration of Adelaide’s temperature should lead to an equally strong acceleration in the Chinese economy in the second half of 2009. At last there is good news from China in the form of the re-acceleration in Adelaide’s temperature.

The background understanding of this sacarstic humour can be found at Does correlation implies causality?.