investing on the waves: Overpessimism is back: reconnection of Nasdaq/Topix analogy

Tuesday 5 June 2012

Overpessimism is back: reconnection of Nasdaq/Topix analogy

For a long time the collapse of the Nasdaq after March 2000 followed the collapse of the Japanese Topix since December 1989.

Since November 2011 there was a disconnect between Nasdaq and Topix lagged with a bit more than ten year. The Nasdaq went up, while it should have gone down according to the believers in the Japan scenario. They had to wait a bit, but now they are screaming victory: the Nasdaq will reconnect to the Topix movements ten year ago and so it will fall about 60% from now on before you can dream again of a big bull market.

The number of doom and gloom stories is exploding. They are emphasing now that the Japan scenario is now insanely overoptimistic for what we will see in the coming years. Sovereign bond yields are saying loud and clearly that there will be no growth in the world for the next 30 years, for decades you will not get positive real interest rates (as is priced in now). Never will the equity market go up structurally unless deleveraging has been finished enough and that will not happen in the next thousand years because governments have to pay for care and healthcare and trillions a quarter to keep the banking system a life. They don’t see a way out. The ICT-revolution is not leading to progress but decay. Governments were out of their mind when they privatised so much because governments are so much more efficient, not making profits.

Seriously, people proposed to buy put on bonds priced at zero % interest rates for short dated maturities, because interest rates have to fall deeply below zero and option models don’t take this into account and calculate too low prices for puts. It est prices for put at interest rates of zero are too low.

Soros with his speech how badly Europe is doing went viral. Everybody is saying this is the wisest thing they have ever heart about Europe (maybe with the exception of Reinhart/Rogoff). Patiently he explains the euro is a bubble that is going to implode. Italy and other PIGS voluntarily agreed to be downgraded to an Emerging Market that cannot lend in its own currency they can’t manipulate.

http://www.businessinsider.com/george-soros-speech-goes-viral-2012-6#ixzz1woFygyv5

Hedge funds finally know it fors ure: the good old times are gone forever. http://www.businessinsider.com/raoul-pal-the-end-game-2012-6#

The retiring boss of the worldbank agrees totally now he is allowed to say what he really thinks.

http://www.businessinsider.com/world-bank-boss-impending-catastrophe-a-rerun-of-great-panic-of-2008-2012-6

Lombard Street Research was talking about:

The looming cliff for asset prices

It is abundantly clear, let us migrate to Mars.

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Cycles

This blog will discuss from time to time the most important cycles, as we (ter Veer and Vermeulen) decribed in our book.

We illustrate the long wave, the Kondratiev wave, with the chart above the blog. So we see inaverage good times for investors until 2018 (maybe longer).

The four year cycle have we illustrated stylistic above the way ter Veer (and I) always did it. Other people describe the four year cycle difeerently.

From time to time I will try to indicate where we are on the four year cycle. You can't know for sure, so the indication will always be subjective and can be wrong.

At the moment I think we probably are in the phase FG (and we have seen the first correction in this phase).

Summary investing on the waves (beleggen op de golven)

This blog started because of the Dutch book Investing on the Waves (Beleggen op de golven in Dutch).

The summary of the book:

For being a good investor you must have views. You have to explain things well to judge what the future will bring.

We (Ter Veer and Vermeulen) think the next eight to ten years will bring prosperity as the world (dominated by the 85% of the world population that lives in Emerging Markets) has never seen.

We base that view on the study of several shorter and longer cycles in the economy. We use our investment chart (heading this blog) already for several decades: you can see the Kondratiev wave with its regular sequence of the scenarios recovery, creative transformation, prosperity, recession, chaotic downturn and depression.

To determine in which scenario we are you study the important powers in the society: business, employees, government and individuals. The shift of these powers goes in a regular cycle and causes the long wave (Kondratiev) in the economy with its long periods that things go well on average and its long periods that things don't go well.

In the current phase of the cycle business and indivuals are strong (and government plus employees weak). The strong powers cause a high growth of productivity and implementation of many innovations.

High productivity growth is much more important for economic growth than debts deleveraging.

That is why we -especially Emerging Markets- will get strong growth in the world. That will especially be the case when governments invest a lot in infrastructure (including what is necessary for the Green Revolution).

The growth in the world in the past years had three pillars: the ICT-Revolution, the Emerging Markets and the Financial Revolution with its Asset Economy.

All three pillars had its severe setbacks (The ICT-Revolution in 2000-2003, the Emerging Markets in the Asia crisis of 1997-1998 and the Financial Revolution in 2008-2009 because of the Credit crisis). The first two pillars saw very strong recoveries and we expect the same for the third pillar, especially when the Green Revolution will take off..

Gerhard ter Veer was CIO of PVF asset management that later merged with Achmea Asset Management and F&C. After his retirement he wanted together with Peter Vermeulen, then his head of strategy and now strategist at F&C extensively our theories about investing and our views that we had told to the boards of pension funds during decades.

To make things not too heavy and complicated we explain a lot with dreamings, the simple stories that aboriginals use to teach. On this blog you will see more new dreamings.

Explanation for the existence of a long wave (Kondratiev wave)

* Debt mechanism: over and under investment creates long cycles (Marxist explanation)

*Innovation mechanism: inventions, implementations follow long cycles (capitalist explanation). It explains productivity growth and so employment growth.

*Sociological mechanism: you have long periods where the society gets softer and harder.

All three mechanisms explain for a part the phenomenon of long waves. When you take them together, you can get a better picture.

The power shift between Business, Employees, Government and Individuals ( a social mechanism) is according to us the best explanation for long waves.. It explains why in some periods the incentives are right to have succesful innovations,inflation and high investment growth versus other periods in which inflation goes up,unemployment goes up and profit margins go down.

The current debt crisis is definitely a reason why growth is so low in high debt countries.

The possibilities for high growth are underestimated because productivity growth is high, many innovations have to be implemented and important new (emerging) markets grow fast.

In Emerging Markets and some developed markets like Germany you have the old classic situation of the powers for a prosperity scenario: strong Business (strong profit growth, high margins), strong position of employees (unemplyment rate is low or falling to low levels) and a weak position of government (has to downsize). Individualism is not yet strong.
In many dveloped markets like the US and the UK the situation of the important powers is differenT: employees are in a weak position and individuals (like knowledge workers with (international) networks) are in a strong position.

Because of the weak position of employees this is not the classic prosperity scenario, but you still can get high economic growth when the income of business and individuals grows strongly: a Goldilocks economy with a strong asset Economy. When this growth is strong enough this will lead to a more normal prosperity scenario with fast declining unemployment rates.

This situation will occur much sooner than most people realise: productivity growth is high, the housing market in the US will grow strongly from rock bottom levels, investment growth will be very high because of high profit margins and low real interest rates.

Because 85% of the world population lives in Emerging Markets and only 15% in Developed Markets and economic growth in the world is more than 4% (even while it is now only 2% in Developed Markets) for the world in total you can speak of a prosperity scenario.

investing on the waves

Investment Chart Kondratiev Wave

Tuesday 5 June 2012

Overpessimism is back: reconnection of Nasdaq/Topix analogy

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