Before you swap all your stocks for gold bars and start running for the hills, have a look at the following chart of the All Ordinaries index over a slightly more useful time period than commonly gets shown:
Yes, it’s a substantial drop, but it’s a piddling amount compared to the rise over the past few years.
Look, it’s The Worm!
It’s Kevin Rudd’s fault.
He is so evil, he has spooked investor confidence all around the world, and he even managed to start doing it before he got elected.
That’s how bad he is.
And it’s the luvvies’ fault.
Robert, none of the previous squiggles on your graph is as pronounced as the recent one. I acknowledge that that fact in itself means little. And indeed the market could squiggle northwards today leaving the world wondering what all the fuss was about. The events of 1987 were of that nature. (I notice that your graph doesn’t go back to 1987.)
But there are some quite good reasons why our present squiggle is more pronounced.
1. There is a fundamental reason. The world may be coming to terms with the possibility that the US consumer will no longer be able to go further into debt to buy up the excess productive power of the world, especially China. Perhaps Chinawill find some other consumers to replace the Americans, but at the very least, that readjustment will take some time and will be reflected in lower demand for commodities. And that’s where Australia comes into that story. (Americans used their homes as collateral for their plasmas, etc. Now many millions of homes are being repossessed because they can’t make the payments.)
2. There is a technical or financial reason. The US financial system is in a dire condition. The market collapse in Credit Default Swaps (yeah, yeah, I now it sounds boring, but its worth googling) threatens to destroy large parts of the US financial system. If that happens, then the monetary value of shares will fall and stay low for some time. The folks who have jumped out of equities markets now may in future look less like panic merchants and more like financial geniuses. (The dodgy debt on those overpriced, unsustainable house loans makes up a large part of the now collapsed market in CDSs.)
Thus fundamentals and technicals are related to, and feed off, each other.
There’s a lot of very legitimate fear out there.
The market is up 6% today (as of this minute). Could be a suckers’ rally, of course, but there it is.
What worries me is how this downturn, whether temporary or longlasting is going to affect the mum and dad investors persuaded to enter the share market by JWH’s grandiose ideas about capitalism. It would appear some of them have lost badly on this, and one wonders how many of them would sit it out, which I suppose is the thing to do. Or whether because they’ve borrowed money from banks, they’ve been forced to sell at a loss. Money, whether gained or lost, sure does strange things to people’s heads.
Paul, I’m afraid that it was PJK and the Labor Party who effectively forced us all into the share market through compulsory superannuation. JWH is responisble for a lot of things, but unnecessarily exposing an unsuspecting Australian public to the equities market is not one of them.
Wait, I just had a thought: if the superannuation guarantee had been upped to 15%, as PJK wanted, it’d be worse! (no that is not a serious comment).
Many mum and dad investors will lose badly if they entered the market very recently and propose to exit it very shortly. If they invest for the long term, ie. sensibly, they will come out ahead.
BBB
I can’t stand that phrase “mum and dad investors”. I imagine it’s meant to distinguish average folk from institutional and wealthy investors. But why does it have to have that cloying connotation? Can’t you be single and be in the market?
Many millions of homes being repossessed? The last figure I saw bandied about was 0.3% of all homes in the United States are in foreclosure; granted, that was Dec 27th, I suppose it could have jumped out of fractions of a percent by now.
“Mum and dad investors” connotes naive investors; those who pay big bucks to take bad advice from shonks; buy at the top and sell at the bottom, etc.
Forget about the Mum and dad investors, and just for once, let’s not talk about JWH.
In fact the number of people encouraged to buy shares in a serious way by their love and adoration of JWH would, if they exist, not have any real world effect at all. The real threat to the system that has resulted from the politics of the last 25 years, is that if there is a medium to long term drop in the relative value of equities, then a very large swathe indeed of the increasingly hard working and decreasingly well remunerated working class, have just watched their retirment nest eggs permanently reduce in value. I wonder what they will think about all that when the dust settles, and more to the political point, who will they blame?
We have had asset price inflation for the last ten years across a variety of asset classes, and now it appears, the music has stopped, for a while at least. What is less well understood is that the real remuneration of those who have borrowed to sustain that ‘prosperous’ feeling’ over the last 15 years, have generally seen their overall share of output drop, and in the US, they have sustained a real wage cut.
The real question is, where did all that ‘lost value’ come from, who really owns it, and who is going to pay for it? Does it have to be ‘paid for’ if it indeed is ‘imaginary’ as the man from Access economics seemed to be implying (the ‘market’ is not the real economy’)?
I think these rather old fashioned questions that the media insist belong on their ‘finance’ segments, (to the extent they ponder them at all) will soon be appearing on the ‘politics’ page, and could well have a real world effect on the composition of the US Congress next year, as opposed to the largely ceremonial dance known as the Presidential elections. Watch out as the political Right there trots out the usual poison, this time directed against ‘immigrants’, and watch as the largely ineffectual social democratic forces in the US start to permit themselves to be used as a battering ram for that section of US capital that will demand a reconfiguration of China’s currency arrangements. It will be very depressing to watch and to listen to.
BBB,
Hawke and Keating foolishly prepared the groundwork for many of Howard’s excesses, I agree, and a pox on them for doing so. But it was Howard who said he wanted to turn us into a nation of shareholders. J. J. Desdman, one of Curtin’s Ministers in WW2 famously remarked that he hads no intention of turning Australians into ‘little capitalists.’ But as one historian of the home front during that war remarked (I forget who) that’s exactly what Australians wanted to be. My comment on that is, lamentably.
BBB: anybody that invests in the stock market to make a quick killing is playing with fire.
Katz: yes, I didn’t get data going back to 1987, which is unfortunate.
But you’ll also note that it’s a graph of the All Ordinaries, rather than the All Ordinaries accumulation index, which assumes that dividends are reinvested, and thus reveals the actual return to somebody holding shares over time.
As to your points about the USA, yes, they have some issues. So do we, most notably our grossly overvalued property market.
The subprime story is facinating, unfortunately I lost the link I had to a very good explanation so I will try to get through it in my own words.
The normal lending system awards and assesses the risks in lending money to a borrower by a credit point system. Over 500 points (based on income, debt, equity etc) and you may get a loan at a higher than normal market interest rate. Over 1200 (Im may be off in exact points) and you are getting a loan at market rates. The less points the greater the risk to the borrower, and the greater the returns to the lender to compensate for that risk. All lenders want a mix of high and low risk borrowings out there, and the points system allowed a fairly accurate “guess” at the quality of the debt they were owed.
The major falldown that triggered the crisis is as follows.
A perfectly legal scam (but still a scam) started whereby people with bad credit ratings could be piggybacked onto the credit cards of AAA credit rated people for a fee of about $100.00 per month. After a few months their credit rating would be up over the “subprime” rate and they would be able to borrow as “no or low” risk lenders. The person piggybacking these people had no risk and could have as many as a dozen piggybackers at a time. Nice money for bugger all.
However what it meant was the lenders (who should have seen this coming) could no longer rely on the points system, and through lack of oversight now held a large chunk of debt which was high risk.
Due to financial institutions trading debt in large packages what should be AAA packages are now containing a high proportion of high risk money at interest margins that dont reflect the risk.
So debt traded from the US to overseas banks is effectively “junk” rated, leading to massive writedowns, even if the losses have been negligable so far.
I dont know how well ive explained it, but very financial institution that trades debt or borrows money is exposed.
This is an actual lenders expalnation and is good for the basics.
[link]
One can only hope this means my rent will fall.
Quiggin on the causes and implications of the current mess:
[link]
Here ya go Gilmae!
Prepare to remove rose-coloured glases.
[link]
According to these figures, in September 2007 alone over 1,000,000 houses went into foreclosure.
Between Sept 2006 and Sept 2007 over 7m houses went into foreclosure.
It has got worse since.
The ’sub prime’ issue is a symptom, not the cause of the current jitters. The real question is, why was prudential supervision so lax, who benefited from the creation of a ponzi scheme touted as the economy ‘we have to have’, and what will be the political implications?
amused, if you think the global economy is a ponzi scheme because Wall St banks mispriced risk in the US domestic housing market, you’ve got a long way to go.
BBB
And the words of the prophet are written on the L.A. malls.
“Yesterday was the US equivalent of a bank holiday, a day off in memory of Martin Luther King. MLK Day isn’t national retail therapy on a par with Thanksgiving. But yesterday, walking around the shopping cathedrals of Friendship Heights and Chevy Chase - one of the wealthiest parts of the country - in northwest Washington DC, you could see and feel why so many now think a recession is on the cards. It wasn’t just that there was no one buying inside the brand-new Bloomingdales and the vast Neiman Marcus department stores there, despite all the “sale” signs. It’s that there was no one there at all.
If anything the malls felt like a zombie movie, where a small band of heroes are trapped by the undead - shop assistants, in this case - who slowly close in one them. Walking towards the menswear section of Neiman Marcus, I watched eight salespeople twitch and begin to shuffle in my direction. Naturally I fled.
As with most horror flicks, we know things won’t end happily. Perhaps the best thing to do is to shut your eyes and wait for it all to be over.”
[link]
No need to worry though, experts are at the helm. President Bush’s people have injected another economic stimulus package. It’ll all be fixed in a jiffy.
It is of minor consequence that our rates are about to rise, while the US Fed just dropped theirs 75 BPs. Just a minor aberration really. Happens all the time.
where did you find that groovy graph Robert?
I yanked it from my online broker, ETrade Australia.
You should be able to get similar graphs from Yahoo Finance and the like.
amused,
Looks like you are agreeing with the analysis of Catallaxy’s favourite commenter on the causes of the current crisis. Are you going to start blaming “fractional reserve” next?
.
Robert,
Thanks for the pool of common sense amongst the miasma of misinformation. As your graph clearly shows the “Mums and Dads” have made a packet out of the exchange over a long period - small temporary glitches notwithstanding.
To be honest, the returns to the “Mums and Dads” are typically better than those to the market professionals for a simple reason - the professional are constantly trading, incurring fees and spreads each time. The strategy of your typical non-sophisticated investor, buy and hold, will beat the constant traders 9 times out of 10 over the long term.
Andrew, I neither know nor care about the arcana touted as the ‘answer to everything’, by people whose grasp of the real world is limited to blogs devoted to explaining nothing, in very loud and abusive terms, to no one in particular.
In the real world, deflation for the last twenty years has been obscured by giant speculative bubbles, one after another, as a veritable ocean of liquidity has chased the next best thing. The reality is that the capacity of the middling sort in the OECD to absorb more debt, as a means of ‘consuming’ the huge and growing surpluses generated by the efforts of the chinese and indian working class, and partly underpinned in the case of China, by a world record beating expropriation of the means of subsistence of over 300 million chinese peasants, is now drawing to a close, for the time being.
This one won’t be over until ‘markets’ (that greatest of political abstractions) are satisfied that someone somewhere, will be required to ‘pay’ some kind of return for all that stuff out there that has ‘disappeared’ as if by magic. In the end, the great milch cow of last resort, at least within the reach of those who are responsible for this laughable (because it was both predictable and avoidable) mess, will be the great mass of tax paying and voting publics, that were persuaded that asset bubbles beat being paid properly, every time.
The only imponderable in all this, is the precise nature and strength of the resistance to being required to shoulder this burden, and the form that the exhortations to undertake this noble task, will take.
amused opined:
then a very large swathe indeed of the increasingly hard working and decreasingly well remunerated working class, have just watched their retirment nest eggs permanently reduce in value.
Not necessarily, if they stay in (are able to stay in) for the longer haul, the “paper losses” of yesterday - or of the last month - are quite likely to disappear. See third paragraph from BBB @ 6 above.
If there’s one thing Robert’s graph shows, it demonstrates that nothing is permanent in the share market. No “permanent rises” no “permanent falls”. A mum or dad only makes a change permanent if they SELL their shares.
If my nest egg N drops to 0.80N, then in subsequent years grows by 50% from 0.80N to 1.20N, was the dramatic fall of 20% “permanent”? I think not. In analysing movements you should try to take the long-term view.
I read a Govt report circa 1992, which calculated the average rise in super investments at about 2% to 3% [in real value] in Australia during 1960-1990 approx. Some years there were falls, in other years rises. It averaged out as a modest rise.
It’s a sharemarket, not Tattslotto.
amused,
The only “magic” out there has been that most non-market of abstractions, the Chinese Government, which has persistently been able to hold the line against common sense by the labour of its
slavespeople. To blame any markets for this seems not merely questionable, but downright wrong.Compare the position of today’s people, at any strata of society to that of any period in the past and the contrast is such that, for me at least, it is difficult not to reach the conclusion that something right is happening.
Actually Robert, it’s graphs like the one you show that is keeping my money in the bank rather than on the stockmarket. A rise of over 100% in five years strikes me as ridiculous. Granted it came after four years of minimal growth, but it still seems like the stockmarket grew way too fast recently. It will need a substantial correction before it will strike my uninformed eye as good value, and I’m not sure its had that yet. I think I’ll wait a little longer.
Your point is correct as far as it goes ambigulous, but over the longer haul, equities can’t perform much ‘better’ than the real economy forever, and certainly not at the level represented by the last five years. An interesting graph would be one that tracked the rise in the value of equities against real wage growth in the UK, the US and in good old, dear little OZ.
That would tell us more about the last twenty years than any bleating from the self interested spruikers posing as ‘financial correspondents’ for this or that media outlet. That is why there has been relatively little squealing about the privatisation of retirment schemes that occurred post Thatcher/Reagan across the english speaking world. Providing for a secure, worry free retirement for millions of working stiffs, on the basis of what is in effect a giant casino, overseen by the very people that benefit from the unending stream of liquidity this bonanza provides, and supervised by nobody that really represents said punters, is a recipe for political and economic turmoil.
Amused: you do have a point - stock prices, and corporate profit growth, have outpaced GDP growth for some time.
Clearly, that can’t continue forever.
“In the real world, deflation for the last twenty years has been obscured by giant speculative bubbles, one after another, as a veritable ocean of liquidity has chased the next best thing.”
I wouldn’t have picked amused as a committed Austrian, but there you go. I reckon you’re onto something when you invoke GMB, Andrew.
BBB
This is true by definition.
The dividend flow to investors might have gone to employees or reinvestment in the company. This is a zero-sum game.
It is possible to conceive of a situation where all property in the economy is corporatised. In other words, all property is owned by shareholders whose holdings are traded on the stock exchange. This would be the end of the “forever” mentioned by Amused because the stock market would be the economy — they would be co-terminous.
It is equally clear that this is not the case. In fact, hedge funds have privatised recently much previously corporatised wealth. Qantas was an example where this process failed. The question is, do corporations produce a better rate of return than private firms (or vice versa)? If it is the former then corporations would tend over time to outcompete their private competitors, whether driving them to the wall or taking them over. If it is the latter then it is impossible for corporations owned by shareholders to increase its rate of return on invested capital “better than the economy” because private firms are doing it better.
Any fluctuations in share prices that take place outside these parameters are simply zero-sum games that take place between speculators, some of whom are bulls, some of whom are bears. These games add nothing to the size of the economy.
Some analysis from Dick Bryan of Sydney Uni at New Matilda:
[link]
Robert, the graph uses a linear scale rather than log on the vertical axis. That’s really annoying, and leads to incorrect inferences, like Katz’s:
I’m not criticizing Katz here, I’m just pointing out a fundamental flaw in the graph.
“Amused: you do have a point - stock prices, and corporate profit growth, have outpaced GDP growth for some time.”
So Robert are you conceding it is more than just “Random noise” that we are talking about? Good luck with your optimism and just hope the ETrade website does not crash for your graph information like CommSec did yesterday.
[link]
Feral spparowhawk - it’s graphs like the one you show that is keeping my money in the bank rather than on the stockmarket. A rise of over 100% in five years strikes me as ridiculous.
>
So you don’t like the stockmarket ’cause you make to much money????
>
Nice handle.
“It’s a sharemarket, not Tattslotto.”
……said Ambigulous.
Indeedy it is. Less risk, for sure, for many who already have a packet and do not give a stuff about how the money was made. Cheers, Tattslotto winners who are even further removed from understanding what their so called investment has done.
SJ: I know, but I figured that a log-scale graph might have confused matters further.
joe2: share prices have been rising pretty much in line with corporate earnings. The disproportionate increase in earnings can’t continue forever, sure. But that doesn’t mean that the stock market is going to fall into a screaming heap for years on end. It’ll just start increasing roughly in line with overall economic growth.
Robert Merkel Says:
No, it wouldn’t have. The proper graph can be found here. Note that this one goes back to 1985, and so includes the 1987 incident.
Linear scales are absolutely useless on this sort time scale. A 1000 point fall from last year’s high represents a loss of about 15%. Back in 1987, it was a 50% loss. In 1986, it would have been a 100% loss. The proper comparison is percentage falls, and that’s what a log scale shows automatically.
Thanks SJ
Yep it’s the % differences that count.
And real increases (real in purchasing power)…, so always adjust for price inflation.
cheerio
I was up at Tewantin yesterday until late and working all day today.
Robert, I found the downturn as of Tuesday scary. The pull-back from November 07 was about 23%, which is more than random noise or range trading. It’s fallen out of the up-channel and is definitely ‘bear’ rather than ‘bull’, but the downturn is so precipitous that it’s more than a normal bear. We had one of similar dimensions starting in March 2002, but it took a whole year. 7% in one day scared me.
The problem seemed to be driven at that stage by margin calls which caused more selling, which caused more margin calls…
The US rate cut and the steadying of the US market may have provided the circuit breaker, but almost certainly buyers were finding value in the market.
The market is now cheap, but only if the current profit forecasts are maintained in the forthcoming reporting season. In other words, it remains to be seen whether whatever happens in the US affects Australian companies or whether, as some say, the strength of internal buying in China and India will keep them and us rolling.
For the record, I didn’t sell anything, but I’m holding off buying until things are clearer and a support platform is built which breaks the downtrend. But you should consult your own advisor. I download prices every night when I feel like it and use charting software. In this case I’d be using the MACD at the very least and probably the 30-day moving average (weighted). What it means is that I’d be waiting for a definitive turnaround.
BTW there was no asset bubble in our share market. Certainly it was probably fully valued but the run up from 2003 to 2007 was driven by company profitability in the main.
In general terms leaving money in the bank is a sure way of destroying value. If you’d bought 1000 CBA shares in ‘91 at the list price of $5.40 you would have received a dividend of $400. Today those shares are worth $50,750 and the dividend for 2007 was $2560 fully franked (essentially tax free).
By contrast money in the bank in 1991 may have given you double the dividend of that time in interest, but your much depreciated $5400 would have remained exactly that and now you would get less than $400 in interest. And you’d pay tax on every cent of interest earned.
Thanks for your informed comments Brian.
The point I was trying to make (and perhaps the title was too inflammatory) is the people get overly het up about one-day movements in the share market - even big ones, and, furthermore, pay much more attention to falls than rises.
That’s very true, Robert, and it’s not helped by the colourful language used to describe such movements even by our ABC!
Barry Ritholz over at The Big Picture reckons that the sudden drop on Tuesday morning was actually due to Soc Gen unwinding the fraudulent multi-billion dollar futures position on Monday, something we only found out about today.