14 Jun 2011, 9:16pm
economy shares:
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  • I’m a glass half-empty sort of guy on the economy, but…

    The Daily Fail seem to be in a particularly dark mood where they presented this graph of the June 2011 OECD composite leading indicators as desperate evidence that growth has dropped.

    June 11 Composite Leading Indicators

    Obviously there was a near-death experience in 2009, but given that some people thought that the first half of the 2000s was a non-inflationary constant expansion, it looks like we’re off to the races economically somewhere in the world…

    I don’t know what they’re smoking, but it looks like these leading indicators are at their highest than at any point in the last ten years with the possible exception of 2007. There’s a country breakdown in the PDF which basically says get out of emerging markets and into the USA, Germany and the UK are okay-ish.

    The Mail seem to have confused the economy as experienced by the proletariat with the economy as measured by company results (the CLI graph is not the same as company results FWIW). Jobs are haemorrhaging and wages are below inflation so the popular experience of the economy is pretty rough.This is particularly the case in the UK where we pay too much for our houses, and then often don’t get round to paying down the capital of the mortgage spending the nominal increase in value on cars and holidays.

    However, companies seem to be in reasonably good shape as long as they aren’t exposed to the consumer and given the amount of lolly my modest ISA is paying in dividends they seem to be making money too. It is just that the spoils of war are increasingly going to people with money rather than people who are in debt, with the latter being most people in the UK.

    Now whether that is a good thing or not is a perfectly reasonable thing to challenge, however, it seems the money is being made even in the bombed-out West. Indeed, the United States which comes across to me as an indebted basket case appears to be growing well, it’s just that people there don’t feel it either. Conversely, there appears to be fire in the engine-room of some emerging economies – it almost looks as if the West has managed to craftily outsource some of its recession, if the turning points of these composite leading indicators really do correlate with growth a little while later. I experience that too – my Brazilian ETF is quietly dying in a lost corner of my ISA, and it’s hardly like the pound is strengthening against the Real to make this happen.

    So I’m a glass-half full sort of chap on this, unlike the Mail. Of course, it’s all damn lies and statistics, but it squares with what I am seeing when I look at the companies I own a trivial sliver of. Some of the buggers in my potential candidates watchlist have raced away from me before I could rustle up the wedge to buy – I have £7k of my ISA unused this year, but I’ve been concentrating on building cash reserves with NS&I of late. Hopefully the Greek denouement will bring things back down to earth a bit ready for me to take a second bite at the ISA cherry in the autumn, when I’ve saved some wedge.

    These companies are making money. It’s what capitalism does, but capitalism doesn’t say it’s going to spread the money evenly across the populace like manna. Some of the horrible time we the people have been having is because we borrowed like drunken sailors during that apparently NICE era from 2001-2007, and it’s payback time. I’m not sure that capitalism is going to help us do that.

    And no, I haven’t changed the medium term view that resource crunches are going to be bad news, particularly for general stock market index growth. However, I note that companies made money before the gift of ancient sunlight allowed us to run year-on-year growth. They just didn’t make so much of it… This is short term noise compared to that backdrop. Anyway, Peak Oil is a timebomb, and I’ve been reliably assured that timebombs don’t go off. I hope the man’s right about our healthy future 😉

    Time for a contrarian buy of HSBC N America S&P500 tracker, maybe. I still can’t see the United States as anything but a hopelessly indebted bombed out shell with very serious medium and long-term problems. But on the principle that the darkest hour is before the dawn, and that I have hardly any exposure to the US, I may sport some of my remaining ISA allowance there later this year, or even trickle it in up to 3k if I can convince myself I really don’t pay any per-transaction dealing fees on this with iii. Though I have reservations on the way index tracking works on top-slicing markets like the FTSE with the FTSE100, the US market is huge – the HSBC tracker holds 500 stocks, and seems to provide damn good sector diversification. No sector is > 15% by value, compared to the 1/5th of the FTSE100 in financials and 17% oilies.

    Guess there has to be the standard disclaimer – this is not suggesting anyone buy the S&P500 unless you already want to. The US is an oil-dependent empire in Spenglerian decline, though it has a gutsy and enterprising population so if anybody can run on empty they’ll find a way. Don’t do it to yourself 😉 I am mad, but in the end if I trash £3k on the US then it won’t kill me – it’s a mistake I can afford to make.

     

     

    Never count the US out. If you remember the darkness of the late 70’s and early 80’s, everybody was writing off the USA. Everybody was buying gold. The Japanese Yen was king and everybody,including the Japanese, thought we’d all better learn to speak Japlish.

    American multinationals are everywhere.Coca-Cola,Pepsico,Gilette,Colgate, these consumer staples are available in the remotest village of the least developed region in the least developed country in the world.It doesn’t matter much what happens in the States.

    I live in a desert town in the middle of nowhere (150 kliks from The Empty Quarter) and a Pizza Hut just opened up around the corner. These companies just keep making more and more money, no matter what happens in the States.

    “It is just that the spoils of war are increasingly going to people with money rather than people who are in debt, with the latter being most people in the UK.”

    This is a compelling narrative: the savers (owners of capital) are beating the spenders. I wondered how this can be observed in the GDP stats, and I think it can:

    http://timetric.com/index/8hCqrqUySLGHpzuslM502w/

    Hi ermine

    I’m starting to seriously look at the ASX200 but it helps to have some AUD’s rather than converting devalued £’s. You may have seen my chart previously comparing the FTSE100, ASX200 and S&P500 PE10. The S&P500 looks the most overvalued of the 3 on this metric.

    S&P500 dividend yield today is around 1.8% compared to the ASX200 at around 4.3%.

    Cheers
    RIT

    @g you’ve highlighted that I’ve fallen into the trap of identifying the S&P with America’s domestic challenges, these guys are more than that. It’s like the FTSE100 being bigger than the UK, but writ large, thx for picking that out!

    @Lemondy, that timetric site is remarkable, more usable than the ONS site for the ordinary curious punter anyway! The trend isn’t friendly to the UK households, it would be nice to push the start back somewhat. Also interesting that there tends to be an upswing in the household share of GDP in recessions, I guess it’s the flip side of company earnings dropping in recessions rather than something desirable per se.

    @RIT yes, I’ve been using your valuing the GBP to try and inform myself as to whether I should really consider acting on this as well as your international equities.

    The trouble is the interpretation. I have to take a view as to the low value of the pound, is this a permanent effect of QE and discovering we aren’t as rich as we thought we were or is it that we’ve tripped up earlier than others, who will join us in the doghouse eventually. I venture to the former. Likewise the dollar shenanigans and what will happen there relative to the S&P, and relative to me buying that in GBP.

    The overall result of the extra thought today was to classify that decision into the ‘too hard’ department. I will sit back and keep my ISA UK focused and rely on my pension AVCs which are in a global:UK 50:50 fund with a US exposure, as the US part alone > my ISA.

    And it looks like the Greeks are going for a rumble, which should hopefully knock stock markets for six 😉

    @guv,
    Remember, Moodys, S&P et all were all giving AAA ratings to Lehman, AIG and every dog on the street even a few days before they failed and pulled the carpet under several countries for the next few years!

    And in some committee hearing afterwards, said rating agencies pitched up and said, it is “just an opinion of ours” (like that Daily Yell’s for instance), so you can’t hold us accountable! No contrition… P.S: Who was left holding the can though?

    Call me paranoid, but honestly I have lost my faith with going entirely by these numbers and graphs alone.

    To me, only one of these two strategies make sense in today’s world.

    A] I am seriously looking at lifestyle strategies to align with this kind of thinking. Heads I win, tails I still don’t lose!

    B] Or get in line with understanding how the “big boys” think (getting some of the advanced financial math books and trying to get a certification on your own) and follow some of those strategies…. It will go against some of my own authentic self-beliefs, but one old proverb goes “to remove a thorn, you must use another thorn!”

    @g,
    God bless the USA and all that…. but you are missing out a lot of variables in your assessment…..

    1. All modern companies run a huge credit line, e.g., Search “Kingfisher fuel bill”

    2. They run J-I-T inventories, coupled with huge cold-storage chains — shooting in the foot, in an era of expensive/peak oil!

    3. Are dependent on people willing to “spend-spend-spend”. — Behavioural economis’ flip side anyone?

    4. “a desert town in the middle of nowhere” — Seriously I am reading “broken window fallacy” at every phase of such a mindlessly stupid “expansionist operation”, right up to when they WILL eventually shut it down in the very near future, for not being “profitable enough” to the shareholders! If only we stop treating such “noise” as “indicators” I submit we’ll all take a more clear-eyed look at the mess we are.

    Despite what I’ve written, I agree with your sentiment “Never count the US out”! Although, in my mind, darker scenarios than what you have in mind play out in terms of geopolitics! 😐

    @ surio
    I realize that oil is going to cause major problems in the future, but my point is we have been in “deep recession” in the world before, in my lifetime, and “the noise” is caused by the despair created when people’s lives are disrupted.Americans are really depressed and for good reason.

    However,American multinationals are everywhere and other parts of the world are still growing and developing.What’s happening in USA economically doesn’t necessarily affect the bottom line of Coke or Gillette. Yes, oil will affect this in the future but it will affect everything. In the meantime, these companies continue to make money if only because of the fact that they have huge market share.

    BTW, some of us could see these days coming back in the 70’s, ie peak oil, global warming etc. It’s not exactly news. It’s just the chickens are coming home to roost.In the meantime,as for investment,you do your due diligence and forget “the noise”.

    @g,
    I LOL’d at “It’s just the chickens are coming home to roost”. Nicely put.

    > American multinationals are everywhere
    Unfortunately, yes :-(. I am not exactly a member of the Friedman’s “Flat World Society” :x, so forgive my dripping response.

    > and other parts of the world are still growing and developing.
    Agreed, and sometimes it appears as if procreation is our only recreation! And the problems of overpopulation will result in scrambling for access to basic needs which would take money away from the “growth model” inclined American corporations…

    > “the noise” is caused by the despair created when people’s lives are disrupted.

    Actually I sometimes do feel sorry at the dreadful turn of affairs, but ermine would sternly remind me to stop my misguided sympathies, for the pursuit of instant gratification by infantilised masses is a self-inflicted injury!

    @Surio, I see where you’re going with that, however I’m still of the old-fashioned opinion that fundamentals still matter in some cases, more specifically income generating stocks. With growth-focussed operations opinion matters more.

    Or get in line with understanding how the “big boys” think (getting some of the advanced financial math books and trying to get a certification on your own) and follow some of those strategies…

    Jacob ERE and you may be up to that but I ain’t got the smarts. I’m of the opinion that what matters in making money is avoiding groupthink and keeping your head in a crisis, and retaining some common sense.

    It’s hard enough to do and I’ve screwed up on all three counts simultaneously at times. But I think I’m getting better. If success needs stuff like understanding of the Black-Scholes equation I’m sunk. It’s been over thirty years since I did my Physics degree 😉

    ermine would sternly remind me to stop my misguided sympathies, for the pursuit of instant gratification by infantilised masses is a self-inflicted injury!

    Too right, knock yourself out, prisoners are not to be taken in that battlefield. I thank you for the pithy summary of their desperate situation 😉

    (Read in Culshaw’s Bush impersonation)
    My fellow pessimist ermine,

    > I’m still of the old-fashioned opinion
    > that fundamentals still matter

    Should have quantified, shouldn’t I? 😕 Yes. this point I have no problems with. There are good companies filling a need and definitely it is a way to go. Like I recommended to Jacob, Borsodi is a good place to know my thoughts on “civilisation” as well. But I really am beginning to lose patience with the gloom (or for that matter boom) pundits these days!

    > all you need are…..
    > avoiding groupthink and keeping your
    > head in a crisis, and retaining some
    > common sense.
    Yes. I would second that. But as I seem to observe, with considerable dismay of course, all the three are more difficult than mastering Black-Scholes “HNyuk, Nyuk, Nyuk”!

    > Too right, knock yourself out […etc…]

    I know you’d have said that to me, if I hadn’t said it first, guv ;-)….. SG, Yourself and ERE Jacob are my “stern inner voice” compass from time to time. Thanks a lot for that.
    (@Macs, you too. But since we are mostly in sync, I didn’t explicitly make it obvious)

    Well, Surio, how did you know I was about to drop in on the thread? Apart from that ‘spooky action at a distance’ thing 🙂

    I must say the whole glass empty/glass full paradigm leaves me cold. What the optimists and pessimists both fail to account for is that the glass is not a state, but a process. By which I mean, it all depends – is the glass filling up or is it being drained? Unless you know this you cannot judge whether it is half full or half empty.

    Not to sound too bearish, but I see the glass is draining right now. And as the supermarkets do in times of inflation, the level is being maintained by reducing the size of the glass so it still looks ‘half full’. If they shrink the glass fast enough it can even look like it’s filling up even as the water drains away – ie the illusion of growth. But we all know, we’re depleting both glass and water.

    Right, I think I’ve tortured that metaphor enough 🙂

    I’m definitely feeling a bit nervous with all the stuff going on around Greece at the moment – default seems almost certain, with grave contagion issues for the wider Euro zone, and even UK banks are more exposed than I’d like. I’m looking nervously at my S&S ISA and it’s been solid red the last few days.

    So I’m undecided now, and probably ought to hold on for grim life, and hope the coming dividends buy me extra new shares in the dip…. but I also keep thinking that the way things are going on the macro scale, one day it really will be ‘different this time’.

    One thing I do know, though, and that’s I’m not buying any Indexes – I fear a lot of the indexed assets are synthetic, and I don’t trust them. I’ll stick to simply holding slices of companies in good old fashioned boring shares. Because that is how capitalism *does* distribute the wealth — to the owners 🙂

     

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