Just back from Thailand – how does the market and economy look?

Markets were up again overnight, well at least equities and risk assets including the AUD, as the market recovered from the recent volatility as we thought it would. It poses an interesting question about time frames and one that investors should always remember. That is, don’t mix up your time frames. If you are a short-term trader or investor than last weeks volatility was part of the job, it may not have been fun but that goes with the territory. If you are a long-term investor then last weeks volatility is noise – it’s no fun either but it’s not part of the territory so you should stay out of it.

This is a really important point because I believe that for long-term investors it is the alignment of their time horizon, investment goals, risk tolerance and, crucially, asset allocation that will make most of the return on their investment for them. When I was doing the currency strategy thing full-time at Westpac and NAB I was constantly being asked by traders, corporate and institutional dealers, corporations, investors, hedge funds, journos and so on  “where is the AUD going?” Each of these inquisitors has a different outlook and set of goals so the only answer I could give and did give in answer to this question was “what’s your time frame”.

I simply couldn’t answer the question without receiving the answer to this one first.

And so it is at the moment that if you had of gone off to an island in Thailand on Thursday the 4th of August and landed back in Australia this morning you would be none the wiser of the ructions that flowed through markets over the past week. You would have saved yourself the emotional turmoil and angst of last week’s sell off, and bounce. If a trader you would have saved your self the confidence sapping topping and tailing (buying at the high and selling at the low) that so often goes hand in hand with the markets we saw recently. If an investor you would have slept soundly without the fear associated with the question of whether this was the start of a crash ans should you sell. You could now look on the market with fresh eyes.

How would the market look?

Most likely you’d look at the S&P 500 and say that it looks like a good bottom is in and perhaps there is another 50 points at least in it near term. The Dow would look similar and the US 10 year note pretty much the opposite.

You’d look at the AUD and say, mmmmmm, good actually excellent bounce, but some near term resistance and wood to chop – jury is out on that one.

On the ASX200 the bounce looks even more spectacular as you can see in the chart above. As an investor you’d be pretty happy with all of that above, markets look like they have and are consolidating from the recent lows. And you’d probably bet that given how strongly and quickly markets moved off their lows you might buy some next time the markets get down there and you’d probably bet that others will too.

But after looking at the charts and the price action it’s time to catch up on the news – that’s not such a happy feat of revision.

  • You’re probably baffled at what’s going on in Europe and wondering with Germany and france ruling out “Eurobonds” how they are going to dig themselves out of the quagmire longer term when the EFSF money is used up. You can see Italy is trying its hand at austerity but wonder why it hasn’t learnt the lesson of Britain and Ireland with regard to economic impact.
  • You also wonder if the riots you heard people talking about by the pool while you were away had anything to do with the weak UK economy. But you note World Bank boss Robert Zoellick’s comments that a comparison of this kind is an insult to hundreds of millions of people living in real poverty all over the world who just get on with things – so it must be something else. 
  • You’re probably not too concerned about S&P’s downgrade of the US Government’s rating given you know that Uncle Sam can always repay its debts by printing more Greenbacks.
  • You’re probably worried now that the global picture is looking much darker – you’ll notice that foot traffic through Walmart is down recently with new products failing to attract shoppers.
  • You’ll notice that the consumer confidence numbers in the US tanked last friday and that the New York Fed’s empire manufacturing index, released overnight, is signalling a recession in the US.
  • As an Australian you can’t wait to see the minutes from the RBA Board meeting from this month, released today, so you can try to get your arms around why the economy you live in (Thailand was cheap flights, high AUD, and cheap accommodation) is different to the one the RBA seems to think exists.

So your fresh eyes and fresh look at the market leaves you with the sense that markets have bounced nicely and may go a little further yet but that the structural imbalances that underlie the global economy continue to fester. So your cautious stance with regard to your asset allocation in your portfolio doesn’t change. you still have more than 50% in cash and fixed income investments – and your happy to stay that way.

 greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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