Stategic Investment Outlook: 2010 Part I

Strategic Investment Outlook 2010.

Part 1) the Investment Environment

Following on from the Strategic Investment Outlook for 2008, I am presenting a strategic framework to structure my investments in 2010 and beyond. This outlook is much more difficult to judge and my confidence in being correct is much lower. Australian asset prices (both residential property and listed shares) have appreciated rapidly over the last 18 months, so the margin of safety in 2010 is significantly less than late 2008/early 2009.


Essentially the key question that I am trying to answer is:
Are we still in the continuation of a secular bull market? This is more from a global position than an Australia specific viewpoint. In my opinion a global outlook is imperative for the long term allocation of investment resources in Australia as Australia is a global follower it does not project sufficient power to be an engine of global growth. Sub, shorter term cycles, can exist in Australia that can result in a ‘timing difference’ between the performance of Australian investments and global investments, but this is not possible over the longer term. In simple terms Australia ‘still rides the sheep’s back’.
There are cycles within cycles but long run bull markets can persist for a number of years. I would argue that the current secular Bull Run has been in existence from 1983.

Secular bull markets are the key to a buy and hold strategy. Secular bull markets also enable debt to be a facilitator of return enhancement.

To see just how important a secular bull market is to long term returns (and how devastating high leverage can be in a secular bear market) view the following:

http://www.amateur-investor.net/Secular_Bear_Markets_vs_Secular Bull_Markets.htm

The above link is for the share market, but the underlying logic applies equally to the property market.

The most dangerous time for investors is when they misinterpret a cyclical bull market for the continuation of a secular bull market.

The catalysts that enabled the continuance of the current secular Bull Run have changed over time, but there were several key catalysts that enabled the market to continue to evolve but in a continuous medium term upwards movement. I believe that the underlying key catalysts were:
*long term decline in interest rates over 30 years
*structural jump in international trade (but one that is unbalanced)
* Structural advancement in the use of financial instruments.
* the enhanced realisation on the part of central banks that they could apply the Bernanke put during times of economic and financial duress.
* The proliferance of neo-classical economics and efficient market doctrine into political decision making.

These key catalysts have been operating in a mutually co-operative manner to re-enforce the secular Bull Run. But the major negative side effect has been the increase in asymmetric global financial risk.

The key question is can the current secular bull market that has been in existence since 1983 continue:

In my opinion there are a number of structural impediments that increase the risk that the current secular bull market is coming to an end. The following link highlights them very well:
http://pragcap.com/why-this-isnt-a-new-secular-bull-market-pt-2

Again this is focussed on the share market rather than the property market. But I don’t believe that over longer periods of time the two investment classes can diverge from one another. In the short term yes, but not over the longer term as they both rely on similar inputs. (I am not talking about degrees of relative performance, but rather a divergence, i.e. on a long term basis a positive/negative relationship).

My conclusion is I DON’T KNOW. But I think that structural investment risk is currently very high.
Part II to follow.
 
probly too hard to know. makes the specifics of the deal you are looking at even more important.

seems commodities are in a S Bull M, so would make sense if the rest follow?
 
Secular bulls cyclical bulls.......hard to say something is secular when the sects keep changing. :)

More and more, I am treating business sector credit as a leading indicator.

credit.gif
 
Secular bulls cyclical bulls.......hard to say something is secular when the sects keep changing. :)

More and more, I am treating business sector credit as a leading indicator.

credit.gif

I am with you and credit number are the key, even if you have to consider australia is a small part of the western world and credit number in other country are far more important for the world economy and world share markets.
anyway, i'll expect a big housing credit contraction this year with the end of the first home owner grant
 
Secular bulls cyclical bulls.......hard to say something is secular when the sects keep changing. :)

More and more, I am treating business sector credit as a leading indicator.

credit.gif


I think its more complicated than just looking as business sector credit.
Viewing business sector credit could well work for looking at the sustainability of a cyclical bull run, but i think for a secular bull market to be sustained there are numerous factors that come into play.

At the moment the only bullish condition i can see is the sustained cash flow from global superannuation.

Other negative factors are starting to work themselves out, but its the start of a long journey, definately not the stuff of sustaining a secular bull market.

I think its vital that one thinks global but acts local, rather than think local and act local.

The evaluative framework that i talked upon in 2008 applies just as much to now as it did then.
Thats the great thing about finding a new investment paradigm, it creates the back board against which a more detailed strategic analysis can take place.
Soros's New Paradigm for Financial Markets is appropriate because it not only recognises uncertainty but also recognises mankinds tendancy to both evaluate and then control his environment.
 
Thanks yes that chart is very useful.

I want to emphasis here that i am not making short term predictions. Making short term predictions are very dangerous because there are too many variables that can influence market pyschology in the short term.

In the short to medium term, the market is a voting machine, its only over longer periods of time that the market becomes a weighing machine.

For example looking at your chart, it is quite possible that equity markets will hit the top of the long run returns in the near future, especially if central banks keep global interest rates at artificially low rates for extended periods of time.

However the subsequent correction would be larger.
This situation would still be consistent with Soros's new Investment Paradigm.

There was a very insightful piece written by Charlie Munger (Warren Buffetts right hand man or partner) called 'basically its over'.

This is the link:
http://www.slate.com/id/2245328/pagenum/all/

Now the article is simplistic, but deliberately so, to create a point.
I printed a few copies and handed them to some friends to get their thought process. The majority thought yeah yeah yeah, another D&G article.

But i thought to myself that the article was incredibly insightful. It's not pointing to the short term, but it does highlight longer term risks.

Now Munger is not as famous as Warrenn Buffett, but the long term financial performance of his own investment firm has been very satisfactory. This is a key in my opinon when listening to his opinions. Many of the D&G'ers out there havent got a strong long term financial track record. I am not interested in listening to D&G'ers from left field, they are always complaining about the sky falling down. But their track record doesnt match their long term performance (or their long term commentary).

Again for the record, i am not suggesting moving to a cash position, there are opportunities still out there, but take into account the high level of strategic risk that exists at present and structure your investments accordingly.
 
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but take into account the high level of strategic risk that exists at present and structure your investments accordingly.

The trading ideas I've thrown around in the last 8 years have been trend reliant....and I think the short/medium future will probably be volatile and range bound, and a slight bearish range for anything outside energy and materials sector.

Over the w/e, I was backtesting a trend dependent mechanical system that has returned 22%pa for the last 7 years....very basic...catches most of the uptrend and misses most of the downtrend...... but when I throw in a hypothetical range bound future, it's useless.

I have a lot of respect for the US Conference Board "LEI" (leading economic indicator). Since 12/09, it has flattened a bit. I think the US consumer won't pick up consumption any time soon, nor the European. So any improvement in global consumption will rely on Asia.....

More and more I see a two speed economy in Australia. The mining sector will flow along at the pace set by emerging economies, but hard to see domestic consumption growing legs.
 
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There was a very insightful piece written by Charlie Munger (Warren Buffetts right hand man or partner) called 'basically its over'.

This is the link:
http://www.slate.com/id/2245328/pagenum/all/

Now the article is simplistic, but deliberately so, to create a point.
I printed a few copies and handed them to some friends to get their thought process. The majority thought yeah yeah yeah, another D&G article.

But i thought to myself that the article was incredibly insightful. It's not pointing to the short term, but it does highlight longer term risks.
yes, I agree it is interesting article.
The reality is also that country like UK and USA with the big CDS (the casino gambling) banking system gets very angry and scream of protectionism and moves against free trade when places like EU talk about banning CDS or other derivatives products
 
Kudos.
Thanks for posting your opinion and analysis.
It's great to know that some people round here actually have their own opinion and not just regurgitate whatever suits their wishful thinking.
 
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