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Investment Views
One of the things that makes us very different, is the amount of time we spend on research.
We have done very extensive, long term research of investment markets. Sadly, this does make us very different.
This historical research enabled us to avoid the dot com speculative bubble, largely enabled us to avoid damage from the Asian Crisis, has kept us out of investing in US stocks since mid 1998 and has caused us to warn our clients about the risk of economic depression for over 5 years (we first identified this risk in 1998 and have been studying the like path of this event ever since).
This historical research has caused us to diverge from many mainstream financial planning approaches to investing. In the mainstream they preach a dogma of TIME IN THE MARKET NOT TIMING. Our historical research tells us that this can be a very dangerous approach to investing because share markets tend to perform strongly for about 20 years followed by about 15 years of bad or poor returns.
Timing unfortunately does matter. And at times timing matters immensely.
Unfortunately, as soon as you acknowledge that timing is so very important, the investment decision making process becomes a lot more difficult.
Many financial practices take the view that timing is TOO HARD and therefore refuse to countenance it. Our view is that it is too dangerous (for our clients) for us to bury our heads in the sand about the difficult aspects of investing. Therefore we see no choice but to grapple with the difficult problem of market timing.
Key points from presentations to Australian Investors Association 20/10/07:
We believe we are in one of the riskiest periods for investors for many many decades.
We believe we are living through the biggest speculative period in history, characterised by a sequence of speculative bubbles. The first of these bubbles was the DOT COM bubble which peaked in 2000 - and this included a bubble in large growth stocks and in telephone companies. But since 2000, other bubbles have emerged (note: this was presentation was in Oct/07) such as in some metals prices like Nickel and uranium. The bubbles now probably includes US housing and probably property in the West more generally. This is a problem we have been intensely studying for the last 9 years.
We are experiencing the biggest debt bubble in history. Debt bubbles are usually the precursor to economic depression. However, the existence of the debt bubble tells us of the risk of economic depression, but not its timing.
We are also experiencing the biggest liquidity bubble ever. This liquidity bubble is largely the creation of central banks, seeking to prevent the consequences of a collapsing debt bubble. The liquidity bubble creates the risk of very serious inflation.
This is why THIS TIME IS DIFFERENT. Because from US, UK & Australian history over the last 200 years, there is no time I can see where there is both the precursors of economic depression and rampant inflation. This almost guarantees very severe volatility in markets at some point (including some massive downswings and probably some major financial crises over the next few years some time).
How do we deal with this challenge? Establish the facts as best we can at a given time, and implement plans accordingly. The precise path of the future is not yet defined because for example, central banks (particularly the US Fed) will influence the outcome and its timing through their actions. So we need to monitor the investment environment closely and fine-tune our strategy accordingly. That means that we will need to change tack from time to time. The best answer to that comes from John Maynard Keynes. John Maynard Keynes, replying to criticism during the Great Depression for having changed his position regarding monetary policy: "When the facts change, I change my mind. What do you do, sir?"
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| Some slides from 20/10/07 Australian Investors Association presentation |
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| Brief Puzzle paper from 20/10/07 presentation - on AIA web site. |
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| Some slides from 6/9/08 Australian Investors Association presentation |
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| Is there sufficient capital in Australian banks to help us ride through this credit crisis & financial crisis? |
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Challenge to investors:(14/11/08)
The Austrian School of economics argues that debt bubbles lead to economic depression: cause and effect. Their argument is very compelling. Further they argue that there is nothing central banks can do to stop this effect. Yes, central banks can prolong the unfolding and they can exacerbate the eventual pain but they argue that central banks cannot prevent economic depression.
From my research, it is my understanding that there have been 3 debt bubbles in the USA over the last 200 years. The current debt bubble is far and away the biggest. The previous two debt bubbles led to economic depression.
From my research, it is my understanding that there have been 3 debt bubbles in Australia over the last 150 years. The current debt bubble is far and away the biggest. The previous two debt bubbles led to economic depression.
So the 2 key questions you need to consider are these:
WHY SHOULD THIS TIME BE DIFFERENT? If for the USA and Australia, the last 2 debt bubbles led to economic depression, why won't this debt bubble lead to economic depression?
Further, since this debt bubble is far and away the biggest of the 3 debt bubbles both USA & Australia have experienced, why won't this debt bubble lead to a bigger economic depression than the last 2?
These are both interesting questions that deserve the attention of investors at this point in time.
Finally, one last hypothesis: Much of history suggests that for many investment markets, we will have a traders market for maybe the next 5 years or so. (i.e. not a long-term buy-and-hold investor market) If this hypothesis is correct, how will your investment strategy fare?
Is it absolutely certain that we will have economic depression? Very few things are absolutely certain in economics. To try to counter this risk of economic depression, central banks and governments have never in history been as motivated to take extreme and decisive measures to counter this risk of economic depression. If nothing else this action will change the course of events ahead. I am sure not even the central banks are confident that their actions will prevent economic depression. It is just possible that these actions might just prolong or defer the problem - or make it worse (there is significant historical precedent for such intervention making things worse). Alternatively, they might create extreme inflation. We live in interesting and very risky times and our global financial world is incredibly complex.
If you are not familar with the Australian & US debt bubbles, this is what they look like:
The chart of Australian Debt/GDP was sourced from Associate Professor Steven Keen, University of Western Sydney.
13/11/08 ‘George Soros, chairman of Soros Fund Management, testified at a House Oversight and Government Reform Committee hearing on Thursday. ’ He said ‘a deep recession is now inevitable and the possibility of a depression cannot be ruled out.’ Reuters report of Soros testament to US oversight committee.
‘History does not repeat itself, but it rhymes.’ If we fail to learn the lessons of long-term history, we condemn ourselves to learn the learns all over again.
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