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Neither a Buyer nor a Seller Be… You’ve Got to be Both


Written on 09 November 2011 by Kris Sayce

“Hooray!”

The market cheered this morning. Italian prime minister, Silvio “bunga-bunga” Berlusconi will resign.

A statement from Italian president, Giorgio Napolitano read, “Once this commitment [to pass a new budget] has been carried out, the prime minister will submit his resignation to the head of state.”

The U.S. market gained more than 1% on the news. And the Aussie market has moved higher this morning too. So, where will it go next? And how can you make a buck from it? We’ll get to that later.

First, you need to know the reason why this market rally is no stronger or longer-lasting than the one before…

The Happy Couple

Things move quickly in Italian politics. Just yesterday Berlusconi had posted the following message on his Facebook page, “Le voci di mie dimissioni sono destituite di fondamento.”

According to Google Translate, in English it reads, “The rumours of my resignation are groundless.”

By the way, it’s good to see the PM has a nice photo of him on his Facebook page holding hands at a 2009 G-8 conference with… the late Muammar Gaddafi!

photo of Berlusconi
Source: Facebook

 

They make a lovely couple.

Quite what difference a change of PM will have on Italy’s public finances is beyond your editor’s understanding. Even so, the markets love it – for now.

But one thing we know: you’ve got to be kidding if you think the Italians will actually cut public spending. They can’t… it’s impossible. Just as it’s impossible for any other welfare dominated state to cut spending.

The reason is simple. Once a nation embarks on the path of becoming a welfare state it’s a slow but certain economic death.

Debts to Keep Piling Up

 

You see, governments are obsessed by economic growth. In their view an economy must never stop or take a breath. It must grow forever. That’s why governments love credit growth and banks. Credit growth means pumping more money into the economy.

The actual investments don’t matter. As long as the new credit pays off the old credit. (That’s why infrastructure projects are so popular with governments. Build a road and people will use it. Build a real business and there’s not the same guarantee. But it’s easier to hide losses in a new road because it’s “for the public good”.)

And as long as the government is prepared to provide a bailout when everything goes wrong… credit can keep growing. Well, for a limited time anyway.

Because as we both know, growth can’t go on forever. At some point it stops.

And because credit provides a leveraged boost as the market expands, it provides a leveraged knock when the economy busts. Firms go bust, banks cop the fallout from bad debts, and governments see a big drop in tax revenue.

That’s why all the talk about budget cuts and austerity is a smokescreen. Politicians the world over are making the right noises about cutting spending. But they’re doing the complete opposite. They’re increasing spending.

Western governments now account for 30-50% of all national spending. So, if governments stop spending then the economy will go into recession. That’s when you get firms going bust, banks copping bad debts… and governments raising less tax money.

Now, in our view that would be great. Governments should get out of the way of market forces. But no politician wants to cut spending because they know the consequences.

So they have to keep the spending party going.

The U.K. is a perfect example…

Spending Cuts Mean More Spending

If you keep tabs on the Old Dart, you’ll know the Conservative-Liberal Democrat coalition made a big song-and-dance about cutting spending. They said it was for the good of the country… they couldn’t go on living beyond their means… etc.

As we wrote at the time:

“We’ve taken a look at the so-called savage cuts made by Tory Chancellor of the Exchequer, George Osborne, and we’ve come to the conclusion that it’s nothing more than a not-so-elaborate smokescreen…

“[When] you look at the actual spending review… [you] see that the supposed £81 billion (AUD$130 billion) of savings over the next few years actually results in an increase in government spending of £43 billion (AUD$69 billion).”

And according to UKpublicspending.co.uk, net public debt over the next three years will be 53% higher than in 2010:

net public debt UK

 

So much for savage cuts and austerity.

The same is happening in the U.S. The same will happen in Greece… and in Italy. Whether or not Bunga-Bunga Berlusconi is PM.

You’ve seen what happens when an indebted economy stops growing. Government bond yields rise as investors worry the debt-riddled governments won’t raise enough tax revenue to repay the debts.

But asking governments to stop spending when they control between one-third and one-half of all spending just isn’t going to happen. So they have to make all the right noises about cutting spending while at the same time making sure spending (and therefore debt) keeps going up.

This is a Buyers… and Sellers’ Market

In short, as we’ve warned for the past three years, the problems that led to the near collapse of the global economy in 2008 haven’t been fixed. The problems are still there… and are getting bigger by the day.

All the current crop of politicians is doing is scrambling to patch things up as best they can. To make sure the final collapse doesn’t happen while they’re still in office.

But one day (exactly when, we can’t say) the postponed depression of 2008 will return. Only it’ll be much bigger. As the market not only tries to purge all the bad investments and debts from before 2008, but purges the many more bad investments and debts made since 2008.

As an investor, that puts you in a tough spot. You know the market is living on borrowed time. But you also know fools could push the market higher… and that’s something you don’t want to miss out on.

That’s why we continue to recommend small-cap stocks for explosive growth (the type of stocks that tend to surge the most when the market rallies), and blue-chip stocks for leveraged gains to the upside… and downside (if you’re comfortable short-selling).

In other words, the only way to play this market right now is if you’re prepared to buy and sell. This is neither a buyers nor a sellers’ market. It’s a timers’ market. Because getting the timing right is the most important factor when investing today.

Cheers.
Kris.

P.S. So, what do you do? The markets love the latest non-event from Italy. But the excitement will soon wear off and the market will fall. Then we’ll get another non-event… which the market will love… until that wears off too.

The trick is figuring out when to buy and sell. That may sound obvious. But trust us, today it’s a lot harder to pick the buy and sell points than it was three years ago.

That’s why each week, for the past few months we’ve religiously tuned into Murray Dawes’ Slipstream Trader YouTube channel. Every Wednesday, Murray lays out his thoughts on the markets. We asked Murray – before he started recording today – where the market is going next. In short, the key level to look for is around 4,400 points on the S&P/ASX 200.

What that means for the markets is revealed in the free weekly video update. Click here to watch later on today.

 

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From the Archives…

Your Retirement Savings – The Day the Government Began to Raid Them
2011-11-04 – Kris Sayce

Fed Up With Inflation…
2011-11-03 – Kris Sayce

All for Gold… But is There Gold For All?
2011-11-02 – Dr. Alex Cowie

Why Australia Needs More Losers
2011-11-01 – Kris Sayce

Qantas – A Grounded Investment?
2011-10-31 – Dan Denning

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25 Comments For This Post

  1. Steve Says:

    Kris what is the solution? We know the problems.

    You say this

    “So, if governments stop spending then the economy will go into recession.”

    So like you say, no matter what “persuasion” a particular government is, they aren’t going to stop spending because that will lead to recession and affect their re-election prospects.

    But because I’m not a complete cynic, I can also see why it isn’t so easy as “just stop spending” because, well because that means recession. That means people become unemployed, homeless, starve.

    It might sound like a good idea in theory to “stop spending”, but it takes a heartless person to actually do this and bring about a deep recession or depression and all the misery that goes with that. Until you are faced with such a decision, one that you will have to live with and be able to sleep on, I suggest you don’t criticise those that do have to make those decisions, and instead propose reasonable solutions – ones that you could make you sleep at night.

    I don’t think this current situation is sustainable, nor this obsession with growth, but don’t kid yourself – as if you don’t aspire to perpetual growth either.

    I believe a solution revolves around tighter regulation to ensure governments can’t spend more than x% of revenues, making sure the wealthy pay sufficient tax and also restrictions on executive salary increases. If you want sustainable growth, you can’t incentivise CEO’s to get 15% p.a. It just won’t last, and quite why a CEO needs to grow his salary from $5 to $10m is beyond me. It’s not going to make anyone homeless, I don’t buy the whole “”trickle down” theory – it’s voodoo economics created by some clever Havard MBA’s to justify why they should not pay their share of tax.

    So there’s my solution, one that I could comfortably make – what’s yours, and can you live with yourself having made it?

  2. SG Says:

    Nice Kris

    I say cold turkey too….take the pain now……giving the drunk more Jack Daniels whiskey or regulating what days you give him the whiskey or what time of day he is allowed to drink it will do nothing to dry out this booze hag. It will only make the job easier for the current management of our modern version of democracy while putting a greater and greater burden on those how cannot yet vote….and if they could you can guess what they would have to say, “forget it, it’s your problem, you deal with it”

  3. mel Says:

    Wouldn’t you love to know what Berlusconi was saying to Gaddafi right at that moment… looks like it might have been ‘sorry amigo, you understand we are both screwed right?’. Nice article Kris.

  4. Peter Fraser Says:

    mel they were probably arranging a “Bunga Bunga party”

    I was amused recently when a reporter asked a finance commentator whether the Italian Government was a problem.

    He said that they weren’t really a problem, they were just irrelevant, and didn’t matter in the overall equation.

    How much would the share market rise if they all resigned?

  5. M&M Says:

    Steve @1

    “I believe a solution revolves around tighter regulation to ensure governments can’t spend more than x% of revenues”

    I think a lot of people would agree with that statement, but you’ll still have to cut something (someones livelihood would decrease) if when x% of a smaller number is had in ensuing years.

    We’d have to cut someones non essential service – what ever that might be.

    For some it may be sport or the arts or community project or what ever – but someones livelihood would be affected.

    Someone wont be employed somewhere….

    That’s why governments need to be flexible in borrowing and spending. And that’s why it’s difficult to definitively say one way is better than another.

    But it would appear that we need growh (modest growth) at the very least.

  6. Roger Says:

    SG…..How right you were in regard to my enjoyment of Hugh Hendry. I am indebted further.
    It gave me a new insight into Hedge Funds and their role in financial markets.
    I confess once I got started I spent way too much time going over older interviews with the man.Which highlighted just how smart he is. Who was talking about a Greek collapse in 2008 other than him ?
    Time to go short on China.
    His statement in one interview, that he doesn`t meet with bankers or analysts but ” watches what is happening in the World and thinks about things ” Well I previously considered that I thought about things but sorry to say I don`t seem to achieve the same insights.
    It is very humbling to realise how little I know and how naive I am about so many things.So much to learn,So little time.
    Thanks again

  7. KP Says:

    Steve the solution lies in voluntarty tax. Any coercion is merely slavery under another name, and if you give your life to someone else to look after you deserve to have it ruined by them.

    Govt’s will NEVER cut back spending, NEVER stop raping your wealth, NEVER stop insane promises to get elected or stop passing endless regulations that grow the parasite class at the expense of the private sector. It is what a Govt is.

    Any tinkering like you suggest is doomed to failure, you are just rearranging the deckchairs on the Titanic.

    Bluntly, if their ideas were any good they wouldn’t have to force you to follow them.

  8. SG Says:

    Roger,

    I must admit, I am but a simple student of Bill Bonner. You may want to check him out too .
    Better yet my favourite book on finance and economy is Mobs, Messiahs, and Markets By Bill Bonner. I recommend you get on Amazon and part with $20.

    But here is a further link to a another smart gentlemen, Jeremy Grantham….you may remember that he upset a number of Australians because he called our housing market a bubble

    http://www.youtube.com/watch?v=MThMfTNxaB8

    The zerohedge site is also really good

  9. Peter Fraser Says:

    Well the market is in for a pasting today, gold fell although the lower AUD will absorb that for investors in Australia.

    So what is going to be the focus now that we can all see that house prices are not tanking, and gold isn’t booming.

  10. SG Says:

    Patience young padawan much future history is happening it is

  11. andy dufresne Says:

    Big call on the tanking there Pete. Perhaps you could explain that to the householders here in Melbourne who have in many instances cut 25% off asking prices and still can’t get a sale? How’s QLD looking?

  12. Frank Says:

    Yeah Pete – I live on the Gold Coast, why don’t you tell the residents here that house prices aren’t tanking! My sister lost 100k on a recent transaction. She was told houses prices double every 7-10 yrs! She lost 100k in 3!

  13. Peter Fraser Says:

    Hey Andy – how are things.

    Melbourne rose by 27% and now it is falling by much less than that using the same index. So compare that with the ASX and see how it looks over an identical period.

    Actually Melbourne is where I expect genuine falls to occur. Check out the SQM stock on market numbers for Melbourne, they are scary.

    As for QLD – some areas are hard hit, but that has to do with the dollars strength and the desire to sell holiday homes to cash up. It’s the same in Byron Bay and similar tourist areas in every state.

    Brisbane itself probably won’t decline much from here – what has it been 6.9% falls or something like that? Andy that is miniscule in terms of market movements, especially in recent years and after strong gains for many years. A consolidation was always on the cards.

    The crash spruikers will fall on their proverbials once again I’m afraid.

    I do have to admit that gold has seen some good gains, but almost no one owns it in Australia, so the gains are generally wasted here. I also think that we have probably hit a gold ceiling for the moment. Well down from the $1900 per ounce highs despite huge problems in Greece and Italy. If that didn’t throw it up above $2000 then almost nothing will.

    Funny thing about the fiat currencies that everyone worries about, the market is still buying them, and even if the traders stopped buying, the populace will continue to use it – they have nothing else.

    Russia used a currency that no one wanted for 90 years. What is so bad about devaluation of a currency – the USA is trying to do that right now. Sure the people have to pay more for imported goods, but the nation is able to compete more favourably in the global markets.

    Australia would be a lot better off if our dollar was trading at about 0.70 USD – but our flat screen TV’s, petrol, and imported cars would be higher – perhaps that would be a good thing because our housing would be cheaper on a global currency scale, our labour would be cheaper, and tourism, mining, primary producers, manufacturing would be more competitive and employment would be stronger.

    Cheers Andy – BTW do you visit Macrobusiness? that site would suit you, they have some very good contributers there.

  14. SV Says:

    PF, I can tell you as a firsthand witness that there is nothing good about using the currency that no one wanted for 90 years. It makes denizen’s life revolve around simple necessities, such as food and dwelling.

    Competitive devaluation of the currency seems good but it is not; it favours some at the expense of the others, but generally as with any unpredictable intervention, it makes business planning very difficult.

    You run an import business and all of a sudden your product is unaffordable. You are building a factory and half-way through you realise you are over budget.

    If the currency is too high, the companies negotiate wage reduction. Yes it is difficult, but once done, it is a fresh start. Now if Qantas ends up increasing wages due to the competitive A$ devalutation, what was that grounding for?

  15. Peter Fraser Says:

    Frank – on the Gold Coast prices have tanked. They probably won’t fall much further, but they sure won’t increase in a hurry.

    I’m not sure why you hold me responsible for that though. Do shareholders who lose everything, not just $100,000 have an expectation that they can’t lose.

    Sorry to hear that your sister lost money, but that is what markets do. they go up and down. My point was simply that nationally house prices have held on better than the share market, and on that point I’m correct.

  16. Peter Fraser Says:

    SV – yes I understand, but often the national good is contrary to the good of every individual.

    Is it better to have a strong dollar and be able to afford imported goods, but have higher unemployment, which risks your own employment.

    What is the use if BMW’s are cheap if you don’t have a job.

    Essentially the market will value a currency, but government policy will move that value quite a bit, ie QE etc.

    I don’t have all of the answers SV – either way there are winners and losers.

  17. Drood Says:

    PF aka property spruiker aka king of tosh. The great depression took 3 years to bottom out, hardly any of the big crashes happened overnight. Tis not very often i agree with the Saycester but property wise he is spot on. They won,t trend upwards for years.

    .http://www.couriermail.com.au/life/homesproperty/brisbane-cheapest-as-home-prices-fall/story-e6frequ6-1226177753008

  18. Peter Fraser Says:

    Drood – the great depression took WW2 to stimulate the economy – whach country had gold after the Nazis looted every central bank and wealthy landowner in Europe. Think about that one.

    I’m not spruiking property, it just happens that I am probably the only honest one here on that subject.

    Have a look at Murrays next post and look at the graphs, it’s like a roller coaster. I used to sit up and watch the NYSE shake in fear during 2008 – it was the best show in town.

    I certainly don’t deny that property is falling, but everyone uses median values to guage increase or decreases, and nationally they have been almost flat. Check out the RPData or the ABS sites for information on that. The fact that the Gold Coast has fallen whilst Sydney has risen is simply what happens in the market at any time.

    If your going to be negative Drood, you have to support your negativity with some genuine facts, not something that Aunt Mary once whispered to you as she tucked you into bed.

    I’m simply not interested in BS – I can get that anywhere. Give me facts.

    These are the facts – http://www.rpdata.com/research/monthly_indices.html

    yes prices are down, but still above pre GFC levels – now look at the share market indices and decide for yourself.

  19. Drood Says:

    PF ,” the great depression took WW2 to stimulate the economy – whach country had gold after the Nazis looted every central bank and wealthy landowner in Europe. Think about that one”
    WTF has that to do with anything. When Hitler was defeated the allies got it back.
    Just checked your “facts ” and as far as i can see Sydney and Gold Coast are both down, where was i bullshitting? As the great man himself once said ” you are entitled to your opinion but you are not entitled to your facts”

    PS , Why is it negative to disagree with HRH the grand poobah? I love the idea of property devaluing, it cheers me up no end to hear your bleating..
    Also whats the guff about Australians not profiting from Gold. I am way up on it at the mo. As with anything ( including bricks ) it all depends on timing.

    Ciao 4 now

  20. Peter Fraser Says:

    Drood – you brought up the depression not me. My point was that the “real” bottom was probably well after those three years that you talk about, and if it wasn’t for WW2 some ten years later the depression would have lasted longer. Some still say that it lasted until about 1952.

    The Nazi’s spent all of that gold – you can’t fight a war without money.

    Look for a house price graph for the last decade and you will find that house prices are still above the level prior to the GFC – but not so shares.

    Gold – I’m glad that you have profited, that’s fine by me. As for house prices, the current level of price correction suits me absolutely – I couldn’t be happier. We all knew that a correction was needed, but a crash would be bad, so I’m quite elated by the current movements. Sure there have been hgreat falls on the Gold Coast, but as I said that is dollar vaue related, and the Gold Coast has always been volatile – it’s just that type of a market. Frankly it’s great buying there at the moment if you want a holiday or retirement property.

    Facts – Drood the facts are all I have – and I’m certainly entitled to quote them even if they don’t suit you. I’m not bleating, I’m trying to educate you and it’s a tough gig sometimes.

  21. andy dufresne Says:

    Thanks Peter. I have been at Macro from early on, under a different name. I limit my time there nowadays as believe it or not I think it’s a little too bearish!

  22. Peter Fraser Says:

    Andy – MB too bearish – that’s really funny. You are right, but the bearishness is expected in my view.

    I think that unconventional economist and delusional economics are both quite realistic with just a tinge of bearish views. We all have our own bias, I don’t expect people to be 100% unbiased – that isn’t possible.

    I like Cameron Murray aka rumplestatskin as well.

    Andy what happens on theRPData index is – at the moment there will be some great buys around, but they will be scattered and only determined buyers will get them. Everyone else is too scared to buy so they miss out, and the index only adjusts a little due to to the low volumes of those discounted sales. Of course if all buyers piled into the market, it would probably rise.

    When the market is rising rapidly, homeowners are often too scared to sell because if they do, it will cost them more to get back in. Of course if they all sold the market would fall due to the higher volume of stock. Agents will often say that the prices are booming, but they have no stock.

    It’s the buyers and sellers who move countercyclical that get the benefit both ways, everyone else is just herding as TRB would say.

    You said you were in Melbourne – watch the market and maybe in late 2012 or early 2013 would be a good time to buy, but it’s a long call, it could easily be later than that. Melbourne is looking pretty brittle.

    Also there really is so much infrastructure building coming online that will force up prices in WA and Qld – I don’t know if there will be much flow on to Melbourne though – I don’t see why it would, but who knows, the way money filters through is very complex.

    Cheers…

  23. andy dufresne Says:

    Thanks for that. I’ve never spent much time analysing indicies to be truthful. I’ve been around long enough in my market to know where the opportunities lie. I’ve never ventured from that comfort zone.

    I see plenty of discounting in Melbourne at present, but don’t feel the value is there for investors or developers. This isn’t deterring some from still taking the leap and I cannot honestly understand how many are holding on to expensive projects that aren’t selling.

    OOs might be able to make a case, but they’d need a good dose of emotion and a solid 5-10 year plan to help.

  24. Peter Fraser Says:

    I agree Andy – I wouldn’t buy in Melbourne at the moment as an investment – but some people will.

    People sometimes just get stuck with investments that they should have unloaded. I also see people who proceed with projects that should be canned, but they do because they think it is their last hope. Desperation leads to greater desperation.

    You seem to have a very good overview of your market.

    Take care.

  25. mel Says:

    The earlier comment about PF being a spruiker is ludicrous.

    More people should have a close look at the numbers before writing false information about them.

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