Hard not to be bitter…

It’s pretty easy to blame the US for the Global Financial Crisis (GFC). Even if they weren’t completely to blame, their housing slump and sub-prime debacle were a mighty big contribution.
You remember right? All those sub-prime mortgages where banks would loan money to just about anyone, and not only that but some were non-recourse (ie. if the bank forecloses and doesn’t get the full value of the property, there’s no further requirement for the homeowner to pay the balance of their loan). I’m no Julia Childs, but I see a really good recipe there – for disaster! Maybe something like this:

Mix way too many sub-prime mortgages with an over-supply of housing in some areas, and make a well in the middle. Gently fold in rising unemployment and a generous splash of foreclosures due to interest rate hikes. Pour into a tin lined with a collapse in residential housing. Bake at 180 degrees Celsius and test with a skewer and if gross domestic product (GDP) is falling it’s ready. Cool for (let’s face it, about 4 years) and what you have is a perfect GFC yeah?

So it’s a little hard not to be bitter watching their sharemarket screaming towards its highest point in history. In October 2007 the Dow Jones index reached it’s all time high of 14,164 and as I write, it’s at 13,125.

Of course that’s good, I’m not really whinging about their success BUT, in the words of Moving Pictures (or Shannon Noll if you didn’t get to experience the 80s), “What about me?”

In good old Oz, our ASX All Ordinaries index reached 6,854 points in November 2007, and where are we now? 4,348 as of yesterday. Still a long way off our all time high! Seems a tad unfair?

So what should we expect from sharemarkets going forward?

Prior to 2007, business cycles were reasonably long in duration, but it would seem now that they have shortened (eg. 3-5 years) in response to world monetary difficulties (probably euphemistic for some of the European countries). And of course there’s political and religious unrest, not to mention government instability in various geographic regions. So this relatively shorter business cycle began in mid-2009, and economists are forecasting that it possibly has another 12-18 months to run.

Anyone who listens to my radio program will have heard me say that “volatility is the new black”. It’s here to stay for at least this cycle. I did some research a couple of months ago and at that particular time our sharemarket had experienced movement of more than 1% in a single day 97 times in the 12 month period. WOW!! (By the way that’s an expression of amazement, not the Woolworths ASX code). Fortunately most of those times were “upward.”

Sooooooo, market volatility will continue for some time and we’re concerned that government stimulation packages haven’t been enough to sufficiently boost flailing economies. Depending upon a number of factors (eg. presidential and congress elections in the US next year, a programmed change to the political leadership in China, a continued thrust to hold the European Union together) there’s the possibility of a world recession in late 2012 – 2013. So my recommendation is to make sure you protect on the downside by taking a more tactical approach to portfolio management. For example, the current circumstances would seem to call for some strategic defensive positioning. In particular, holding enough equity exposure to take advantage of any market rallies over the next 6-12 months, but also putting measures in place to help protect against “downside” risk.

Alright, well that’s as technical as I’m prepared to get, it must be time for some cheese and bikkies (yes that’s my excuse for a glass of wine).

Talk soon.
C

Where is Bruce Willis when you need him?

My brother and I meet in the lunchroom each day to do the Herald Sun quiz. Sometimes when the clues for the “Who Am I?” are too easy, we make up our own. A few weeks ago Dean gave me the clue “we owe him everything.” Of course, too easy, that’s Bruce Willis.

You know what I’m talking about right? That feeling you get when you sit down to watch a movie and you see Bruce’s name in the credits. It’s relief. It’s conviction. Coz, you just know that it’s all going to be ok.

So where is he right now? The USA are up to their oozit in debt (oozit is a highly technical term, so don’t feel badly if you’re not familiar with it), Standard & Poor’s reduced their credit rating from AAA to AA+, and a minority government is not helping matters (MS Palin, you need to come back and answer me some questions ma’am….).
So exactly how did the US get themselves into this mess?

Well, the Treasury of the United States of America reached the legal limit of its debt in May of this year. In the past, this has never been a real problem because Congress (House of Representatives and the Senate) just kept increasing the “debt ceiling” as required, so that Treasury could continue to borrow in order to run the country and service the nation’s debts.

This time is different. In November last year, the Democrats lost control of the House of Representatives, and this has caused some major headaches, including a standoff regarding raising the debt ceiling. This came to a head when Treasury announced that as of 2 August 2011 it would not be able to meet all of its obligations, including social security cheques (due the following day), interest on its $14.3 trillion of bonds (due 15 August) and a host of other payments.

Of course, an agreement was reached at the last minute, reminding me of a famous Winston Churchill quote “You can always count on Americans to do the right thing—after they’ve tried everything else.” However, I’m still trying to work out if any party actually came out of the agreement as a winner.

I should mention that other than suburban Melbourne, America is my absolute favourite place in the world, and I love Americans. BUT (yes this is one of those some of my best friends are buts….) they’ve possibly been getting a tad too big for their star spangled britches.

I’ve no doubt that the government will act swiftly and sensibly to get their house in order (yep, a very deliberate pun), but it won’t be a smooth ride so fasten your seatbelts.

The big question on everyone’s quivering lips at the moment is – are we heading for GFC 2? Will all this uncertainty and tea party politics send us back into recession? Of course, no one knows the answer to that, but I think it’s highly unlikely.

The sharemarket is over-reacting at the moment (and how!!), but hopefully it will settle down soon and we can all breathe out.

In the meantime, Bruce if you’re reading this blog, it sure would be great if you could yippee-ki-yay yourself on over to save the day. Oh, I just realised, America can’t afford him right now….

So after a real rollercoaster of a week, let’s end on a fun note. Here’s one of my fave Bruce Willis quotes from Die Hard 2 - the lesser of the Die Hards let’s be honest, but still very watchable:

“Hey, well, as far as I'm concerned, progress peaked with frozen pizza.”

Ahhhh it makes me giggle. And after the past few days, I’m hearing ya Bruce, I’m hearing ya.

Add your favourite Bruce Willis movie quote in the comments section below, and I will award a nice bottle of red wine for the one I like best*.

* Please note that judging is completely arbitrary and subjective.

Talk soon,
C