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

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“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…

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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

For editorial enquiries and feedback, email moneymorning@moneymorning.com.au

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has more than fifteen years’ experience in analysing small-cap stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia — but eventually, took over Money Morning. It’s now read by over 50,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money!

Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Official websites and financial e-letters Kris writes for:

Kris is also the Investment Director for the following services:

(You can find a list of recent investment articles written by Kris at the bottom of this page.)

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25 Responses to “Neither a Buyer nor a Seller Be… You’ve Got to be Both”

  1. andy dufresne

    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!

  2. Peter Fraser

    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…

  3. andy dufresne

    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.

  4. Peter Fraser

    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.

  5. mel

    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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