Back to Abnormal Markets

The fact that the S&P ASX/200 is still down 20% from its 2007 high should not get in the way of a good story. And the good story shaping up for 2014 is that everything is back to normal. The crisis is over. You can come out of your bomb shelter. Happy days are here again.

Growth is the new debt, as far as buzzwords go. The International Monetary Fund reports that the world’s economy will grow by around 4%. Europe and the United States are on the mend. And China will chip in with its regular annual growth rate somewhere between 7.2% and 7.8%. And with growth will come sales and profits.

And let’s not forget new shares, either. Australia had the fourth-largest initial public offering (IPO) market in the world last year. $6.4 billion worth of new shares floated in 2013, and nearly 70% of that total came from companies that went public in the fourth quarter. Nothing says ‘animal spirits’ like a new rush of equities for the public to buy.

Shares are so popular now that we wonder if this will this be the year that Aussies focus on shares instead of property. Property had a great year last year, at least in the capital cities. After a 15.2% rise in 2013, the median house price in Sydney is now $775,000. Melbourne prices rose by 8.5% for a median price of $625,000. In fact, prices were up in all eight cities for an average gain of 9.9%. Another couple of years like that and the median Sydney house price will be a million dollars.

Until then, why not combine both passions? There were two property related floats in the fourth quarter. GDI Property Group Ltd (ASX:GDI) went public at 88 cents a share in late December. Industria REIT (ASX:IDR) went public a few weeks later. Between the two, they raised almost $750 million in new capital.

Here’s the thing, though. Every normal narrative needs at least a semblance of sensibility to it. In the tech boom, it was the promise of revolutionary profits. Back in the 1960s and 1970s, you had the ‘Nifty 50’ stocks. Those were stocks you couldn’t go wrong with because the world was growing and big corporate blue chips were bound to profit from it.

What is today’s narrative? That the way to profit from a property boom is to buy property shares? Or is it something simpler? If it’s just that stocks should go up as long as central banks keep interest rates low, that’s not a very convincing story.

To be fair, it worked a treat last year. But it’s not really investing if you’re just following the Federal Reserve. Last week we called it cooperating with an occupying power, like Quislings.

Perhaps this was too harsh. But frankly we welcome the return to normal. It means our mailbox is now full of invective from readers telling us how wrong we are about everything. We even get the occasional ‘Yankee go home’ email, always a sign of confidence in the normal.

Yes, judging by the tenor of the mailbox, normal is back. Today feels much more like 2007-when all the theories about sound money and deficits and gold were the province of cranks, wingnuts, and wackos. Back then, it was only circus-freaks and fringe dwellers that were willing to suggest that something was deeply flawed in the world’s financial system.

Something unusual happened over the next few years. Mainstream economists and pundits realised they had no idea what was really going on in the financial world. All of their academic theories and textbook arguments collapsed more swiftly than a sub-prime lender. As a publisher of contrarian ideas, we found it harder than ever to be contrarian. Suddenly everyone was a doom and gloomer.

Enter Ben Bernanke’s Fed. In fact, enter a whole cavalcade of central bankers and economists. They came armed with digital printing presses. And they’ve been so prolific in pumping up stock prices since 2009 that all the doubts about debt vanished under a sea of green numbers. Bernanke is now so secure in his opinion of himself that he spent a good part of his farewell address lecturing emerging markets on the structural reforms they need to make.

Seldom have so few who know so little about money deceived so many and done so much damage. When you look around at the world created by the Fed, don’t ever forget it’s been created by people who know nothing about operating a business in the real world. The entire financial system – indeed the entire global economy – is now in the grip of an experiment by academic bankers.

If you think that’s progress, or that’s normal, or that’s safe, you need to quit drinking the Kool-Aid. No one knows exactly how this experiment in managing an economy with asset purchases will blow up. But that it will, well, there can hardly be any doubt about that.

The good news is that financial markets are finally interesting again. The re-emergence of the normal position (that everything is okay) allows us to re-assume the mantle of abnormality. Tomorrow, we’ll take a look at some of the most abnormal markets to watch in 2014.

Dan Denning
for Markets and Money  

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Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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9 Comments on "Back to Abnormal Markets"

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Dulong Ttil
Japan has adopted an assertive Monetary Easing Policy, which drives the YEN downwards successfully. The immediate result shows that their Export and Tourism industries have picked up swiftly. Japan is now enjoying healthy export growth and has much more tourists visiting Japan. With the sound and robust stimulation by Japan’s Monetary Easing Policy (which in fact mainly injecting more printed notes into the market by their Central Bank), the Nikkei has soared from 10,398 to 16,291 just in 2013. Nikkei marks its best performance in forty years, and also the top performer among Asian markets in 2013. Analysts name this… Read more »

“The entire financial system – indeed the entire global economy – is now in the grip of an experiment by academic bankers.”

In the early part of last century Montagu Norman of the Bank of England said, “that the Hegemony of World Finance should reign supreme over everyone, everywhere, as one whole super-national control mechanism.”

Japan is a train wreck with Abe as the kamikaze pilot having pulled on his uncles colours. The conjuring of a lower Yen a success? Look at the chart. Australian merchandise manufacturing was decimated over a thirty year period where the underlying banana republic started mainlining the laundering of the USD for the US banksters and brand owners; and also for the Chinese selling to US (and Australian) consumers who couldn’t afford what they were buying and the domestic consumer economic shopfront activity that it created. We imported deflationary prices in merchandise to countervail our inflationary asset, services and… Read more »
When will Australia confront the flock of elephants in the room called IR, including Union controls, deals, threats and then of course, rampant funds mis management? Its not just the hi $A, its Aussie workers’ pay, conditions, leave, OT, sickies culture etc that has been killing this country since Gough came to power. Look at teachers’ conditions, what, 12 wks leave, plus 10 days sickies, plus 3mths /10yrs LSL, plus pupil free days plus public holidays. You gotta be kidding me. Compare with anywhere in Asia and we wonder why all our Drs, lawyers, dentists etc are Asian now… Good… Read more »

yep Ross, would be interested to see a chart Oz manufacturing capex with inflation adjusted.
“But it’s not really investing if you’re just following the Federal Reserve”.
The Fed and many other pieces of the puzzle emanate from a shadow political world. Our de-industrialisation for example was always going to happen, since the Lima Declaration in Peru. Australians rarely talk about these things. It will be claimed later that they agreed to it. But I guess people intuitively know it’s houses and holes for us.

Lachlan, the Lima declaration was seen as inevitable due to the west’s perceived inability to sustain so many intelligence led war fronts and the conscription to back escalation to make those fronts credible. Theyt were having trouble sustaining the divide and conquer principal (that was to get even harder post communism outside the useful idiot Islamic world). Lately we have reached saturation point again on both political and military intelligence led ops. Together with the later military programme escalation the Lima declaration was also probably the last nail in the international communism coffin. The standing force burden disparity between east… Read more »
Ross in relation to some of your comments above I post below part an interview with Zbigniew Brzezinski. A paper containing it here: Q: And neither do you regret having supported Islamic fundamentalism, which has given arms and advice to future terrorists? B : What is more important in world history? The Taliban or the collapse of the Soviet empire? Some agitated Moslems or the liberation of Central Europe and the end of the cold war? Q : “Some agitated Moslems”? But it has been said and repeated: Islamic fundamentalism represents a world menace today… B: Nonsense! It is… Read more »

Lachlan, ZBIG does amuse himself telling how it all works for his masters. “My plan is horrible, we screw good people, but there it is….”


Ha ha, yes Ross, he’s great value for curious people. Always important to weigh up his pride into our judgements too of course.

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