Joe Hockey’s Economic Fables

Markets are off to a good start for the week after a ‘Goldilocks’ type employment number in the US on Friday sent stocks soaring. Apparently, the April jobs gain of 223,000 was not so strong as to warrant an interest rate increase, nor so weak as to worry about a faltering US economy.

As a father with two young girls, comparisons to Goldilocks are highly annoying. It’s got to be one of the weirdest children’s stories going around…and it’s got some competition.

Basically, the story starts with little Goldilocks roaming around the woods by herself. She comes to a house in the middle of nowhere and breaks in. It’s a house of three bears. She then proceeds to eat porridge and break a chair, before heading upstairs to crash out on the little bear’s bed.

Upon returning from a walk, the bears find Goldilocks sleeping. She wakes up, freaks out, and flees, never to be seen again.

The moral of the story? I have no idea. But what I do know is that the bears run Goldilocks out of town.

Similarly, the bears will freak the Goldilocks types out in the US in the coming months. The US economy is slowing again…the only question is how much.

A good measure of underlying demand, ‘final sales of domestic product’, declined by 0.5% in the first quarter of 2015. In the third quarter of 2014 growth was robust at 5%. It then slowed to 2.3% in the fourth quarter and is now contracting.

The negative figure may have something to do with the harsh winter weather (the first quarter was negative last year too) but any way you cut it, the US economy is hardly strong right now.

You wouldn’t know that from the performance of the S&P500 though. Despite the threat of higher official interest rates, and despite the slowing US economy, the S&P500 continues to flirt with all-time highs.

The only negative you could draw from the recent performance is that it’s done nothing for the past few months. Which is hardly a negative. Sometimes markets need to tread water before making their next move higher.

Fundamentally, I see no real reason why stocks should push higher in the short term. In the US, stocks are fully priced and profit margins are at record highs. But this market hasn’t really marched to the tune of the fundamental beat for a while.

It’s more interested in the tune played by central banks, and they’re continuing to do enough to keep the speculative feet moving.

Which brings me to some fascinating research I come across on Friday from Quant Trader’s Jason McIntosh. Jason wanted to find out whether you were better off buying a stock that had hit a three year high (and was more than 300% higher than its low point) versus buying a stock that had just hit a three year low.

Now, if you’re like most people, your gut instinct would be to buy the stock that had just hit a three year low. After all, it’s got to be cheaper than the stock that has already rallied 300% from its low, right?

It turns out that you’d be wrong. Jason back tested the results over the past 15 years and discovered that buying the stocks hitting new highs was a far better strategy than buying the stocks making new three year lows.

As to the why, well, that’s really what Jason’s product and trading style is all about. You can learn more about Quant Trader here. Or, if you want just a taste of what Jason does, you can check out some of his work in Sound Money Sound Investments, where he provides charting analysis alongside the work I do on a company’s fundamentals and valuation.

Jason’s data says you should probably stick with your winners right now, despite the environment for Aussie stocks taking a turn for the worse last week. It certainly was a bizarre week, with stocks having a very bad run despite the cut to official interest rates.

We’re off to a better start this week though. The strong lead from the US plus another interest rate cut from China over the weekend will keep the market in the green today.

Yes, dear reader, China is slowing down too. On Sunday the People’s Bank of China (PBoC) cut the one year lending rate by 25 basis points to 5.1%. ‘China’s economy is still facing relatively big downward pressure’, said the PBoC in a statement accompanying the rate cut.

Indeed it is. You can’t have a massive credit bubble without having to contend with the bust. So far, China is doing a good job in making sure the economy slows gradually.

But it’s still slowing, which won’t do any favours for Australia’s economy.

With the Federal budget due tomorrow, this week will be all about the Aussie economy. Most of it will be noise. As an investor, you’d be better off not reading the news for a week. It will be a wall-to-wall sales job by the government countered with wall-to-wall criticism from the opposition.

In other words, completely depressing.

The sales job started on the weekend with Treasurer Joe Hockey dismissing concerns about a recession. Instead, he reckons Australia is on the threshold of its greatest ever era.

Never mind that over the past decade, Australia experienced its greatest ever commodities and mining boom. Following on from that though, our Treasurer reckons we can now take it up a notch. Okay…

He doesn’t explain how this will happen apart from saying we must ‘earn’ it. I don’t know about you, but I would think most Aussies would cringe at this type of rhetoric. I’d rather be told the harsh facts.

That is, we’ve had a very good time of it over the past few decades and now we need to steel ourselves for tougher times. We can’t rely on others for our good fortune anymore…we must rely on ourselves. That means working harder, working smarter, and not relying on the government to make life easier…because there is only so much government can do.

I know, I know, rhetoric like that from our political class is a pipedream. Instead, we get a budget and economic narrative from Hockey that is about as shallow as the story of Goldilocks.

At least Joe will be able to make an easy transition from spinning economic fables to children’s fables when sooner or later, he finds himself out of a job.

Regards,

Greg Canavan+,
for Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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