The price action you’re watching in the Aussie stock market is a continuation of the pattern of the last few years.
Stocks rally on hopes of recovery, growth, low interest rates, and stimulus…and then they falter when the reality of the debt overhang reasserts itself. Shares bounce back and forth in a range, with public statements and policy changes being the catalyst for quick, tradable rallies.
What a miserable market.
The sell-off you witnessed in stocks, oil and gold at the start of April were driven by three factors.
First, Spain’s $3.35 billion bond auction on April 5 was underwhelming. This reminded everyone that Europe’s governments have more debt than they can ever repay or grow out of. Strike one.
Next, the Fed is not planning any new bond buying (Quantitative Easing) soon, according to the minutes of the March meeting of the Federal Open Market Committee (FOMC). At the time, Goldman Sachs analyst Jan Hatzius thought the Fed was bluffing and would buy more assets by June.
Well guess what? Just two days ago, Dr Ben Bernanke, Chairman of the Federal Reserve Bank said:
‘We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives. Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support.’
Yet, investors looked discouraged. Strike two.
Third, European Central Bank President Mario Draghi told a press conference that the ECB would be vigilant in addressing “upside risks to price stability”. This comment was mainly for the benefit of Germans who are worried about inflation. In reality, if Draghi was really worried about inflation in the Eurozone, he wouldn’t have expanded the ECB’s balance sheet by 30% since he took over as president.
That’s not to say he hasn’t been somewhat successful in drawing the whole sovereign debt crisis out. He has. The two Long Term Refinancing Operations (LTRO) have provided liquidity to the European banking system. That’s made the debt crisis less acute and urgent. But it’s done nothing to make it go away.
Debt Must Be Repaid
Spain’s recent debt woes have reminded everyone that the debt can be restructured, but eventually it must be repaid. Lower growth and higher taxes over many long years is what Europe’s leaders have served up to the people. Draghi’s job is to prevent a Lehman Brother’s style collapse.
Talk therapy for the economy won’t work. The fact that central bankers have resorted to getting in front of microphones to try and influence markets with words shows you how ineffective their policies are. And now the public’s patience is wearing thin. We have reached the political stage of the crisis in Europe.
My view is that the Fed and the ECB fully intend to buy more bonds and provide more stimulus to financial markets. In terms of political and social support, though, they can’t print new money and buy government bonds until stock prices have fallen and there’s a new sense of crisis. This whiff of panic is what makes people go along with something that obviously doesn’t work.
My investment strategy, and my recommendation to you, is to reduce your dependence on financial markets as much as you can. When you ARE in the market, look for businesses that can grow earnings without borrowing money. And more importantly, buy companies that own real and tangible assets that the economy needs no matter what.
For investors, this market is terrible.
It’s dominated by random swerves in monetary policy and a global debt overhang that won’t go away any time soon.
Dan Denning
Editor, Australian Wealth Gameplan
From the Archives…
Small Caps – A Way to Bet on Developing Markets…Without Investing Overseas
2012-04-013 – Kris Sayce
All Transactions to be Conducted in the Presence of a Tax Collector
2012-04-12 – Simon Black
How You Can Use Government Intervention to Profit on the Stock Market
2012-04-11 – Kris Sayce
Australia – The Pacific Pawn in USA Versus China
2012-04-10 – Dr. Alex Cowie
If Ron Paul Were US President…
2012-04-09 – Mark Tier
