History not a reliable guide to the future.

FT's Neil Hume has some GRIM news

Morgan Stanley’s Graham Secker makes some interesting observations in his 2012 outlook report. Chief among them is that the investment framework of the last 25 years is increasingly irrelevant and that Japan offers the best guide to what might happen in the equity market over the next decade. And that’s important because a lot of people are still living in the past and using heuristics to predict what will happen next.

Morgan Stanley take a different view

For us, the most important development for investors has been confirmation that we have reached the end of the debt supercycle in developed markets.

And that means that the taxpayer will feel more pain

As consumers experience declining living standards for the first time in a decade, we can expect strikes, unrest and political instability.

A tale of two economies

Chris Joye shows us how, despite the much feared resources rent tax, Capex spending is blowing out in Australia (ex NAB)

RBA shows that housing has the lowest growth in 34 years.

RBA maintains that Capex is driving inflation and will use interest rates as a tool to slow down overall spending

Historically it is unlikely that the RBA will come to the aid of the consumer who appears to be carrying the burden of the expansion in the mining industry.

The Kouk crunches the budget

Stephen Koukoulas (worked in Treasury, was Chief Economist (Australia) at Citibank, was advisor to the Prime Minister, wrote for the Australian Financial Review and led the global research team for TD Securities from London) casts his eye over the midterm budget

-Total government receipts (tax, dividends, fees and the like) was 21.6% of GDP in 2010-11, the lowest level since 1973-74 when Frank Crean was Treasurer.

-The tax to GDP ratio fell to 20.0% in 2010-11, the lowest since 1978-79 and is a whopping 4.2% of GDP below the record tax to GDP ratio raked in by the Howard government in 2004-05 and 2005-06. That's a lesser tax take of around $60 billion for one year that was taken from tax payers during the peak period of the Howard government. As mentioned elsewhere, it is easy to register a budget surplus when you tax the living daylights out of the population.

-Real government payments (spending) will rise by an average of less than 0.1% per annum in the 3 years to 2012-13, the weakest 3 yearly spending growth since the mid to late 1980s under the Hawke/Keating Government. Never once did the Howard Government deliver a cut in real government spending - in fact real spending grew by a thumping 3.5% per annum for the last 5 years of the Howard government.

-Payments (spending) will be 23.6% of GDP in 2012-13 - around 1.5% of GDP below the average of the last 30 years. In the 12 Howard Government Budgets, spending to GDP averaged 24.2% of GDP: and only in 3 years out of 12 of the Howard Government was the spending to GDP ratio lower than the Gillard Government is projecting for 2012-13. Which government is addicted to spending?

-The 4.3% of GDP turnaround in the Budget balance in the 3 years to 2012-13 (from a deficit of 4.2% to a surplus of 0.1%) is the most rapid turn in the fiscal position on record.

There are more gems I'm sure, but that is for another day

.

Welcome to my computer generated anxiety attack.

The Economist looks at how IT has turbo charged financial markets

In theory all this activity ought to lead to more accurate pricing of stocks and more efficient allocation of capital. In practice there is a lot of tail-chasing going on. That has led to calls for a tax on financial transactions, the Tobin tax, which advocates argue would be a painless way of boosting government finances

Excessive effluence

Mr Denmore casts a weary over the latest Kyle Sandilands tantrum

If you want further evidence of the desperation of the mainstream media money mandarins for manufactured  controversy, look at the Ten Network's recent hiring for $NZ1 million of "controversial" Kiwi breakfast broadcaster Paul Henry, whose claim to fame was being sacked by NZ network TV3 for wetting himself on air about the name of an Indian government minister.

"Paul is exactly what we've been after for Breakfast," said Ten's chief programming officer David Mott. "He's cheeky, mischievous and unapologetically forthright, just like Ten's viewers. While you can't ever be sure what Paul will do, when he's on air, you know he's going to tackle the elephant in the room."

Yes, elephants. Big and brave elephant hunters,not afraid to tackle the herds of  threatening beasts whose presence most of us are afraid to confront: Elephant men like Paul Henry, who fearlessly snickers on air because someone has a funny sounding name. Elephant men like radio "personality" Sandilands, calling a female critic a "fat slag" and threatening to hunt her down. Or the biggest elephant hunter of them all, Alan Jones, Order of Australia, calling for our female prime minister to be stuffed into a sack and drowned at sea.

D'oh!

I've been saying the following to friends and colleagues for months now: In all my many years as a business and economics reporter, I have never seen a greater cognitive dissonance than in the current coverage of the U.S. bond market. Even Chicken Little and the Boy Who Cried Wolf would have by now taken early retirement had their warnings proved as lame as those of the MSEM (mainstream economic media).

"S&P Downgrades!" "Bond Vigilantes Poised to Strike!" "America is Greece!" One-liners meant to catch the eye, freeze the heart. But flat-out irresponsible.....

....fear-mongering with regard to the bond vigilantes and Greece finds no support in the data.

More here

Private Equity and Venture Capital consistently outperforms ASX

Link

BOSTON, MA and SYDNEY, AUSTRALIA -- (MARKET WIRE) -- Nov 14, 2011 -- The Cambridge Associates LLC Australia Private Equity and Venture Capital Index (CA Australia Index) continues to outperform the S&P/ASX 300 Index over multiple time horizons.

The CA Australia Index, which measures private equity and venture capital returns in Australia, also outperforms other key asset benchmarks over a number of different time periods.

For the quarter ended 30 June 2011, the CA Australia Index had annualised returns of 8.59%, 2.42%, 4.23% and 7.81% over one, three, five and 10 years respectively.

The index's quarterly return of 3.18% also compares favourably against minus 4.26% for the S&P/ASX 300 Index, 2.3% for the S&P/ASX Small Ordinaries Index and minus 9.31% for the UBS Australian Composite Bond Index.

The Australian industry benchmark is even more impressive in US dollar terms, with one-, three- and five-year annualized returns of 37.63%, 8.33% and 12.66% respectively.

GMO Australian Outlook

Link

The market appears cheap, trading on a forward multiple of 10.5x. This has come down recently at the same time as earnings have been downgraded. The two are probably linked. The results season that has just passed was not as bad as some had feared, however it did result in further downgrades to forecast earnings. Sentiment around global growth has also caused downgrades for commodity exposed stocks. Published expectations are still for strong growth (>10% for each of the next two years), and the risk is that this expectation is pushed out further. Despite this risk, there is a good chance of a rebound in sentiment once earnings seem to have established a base and if the current macro concerns can be satisfactorily resolved.

1+1=?

Conservatives in the US have suddenly woken up

Nov. 15 (Bloomberg) -- For Senator John Cornyn, it was the situation in Greece.

The Texas Republican said he is willing to back tax increases as part of a major deficit-reduction deal because he fears the European debt crisis could spread to the U.S.

“We’ve never been in this spot before,” said Cornyn, who also leads his party’s effort to elect more Republicans to the Senate. “We’re looking over at Europe and what’s happening in Greece and Italy -- we risk having another huge financial crisis in this country, and we’ve got to try to solve the problem.”

He is one of a growing number of Republicans, many with otherwise impeccable anti-tax credentials, who say they are willing to raise taxes to reach a big deficit-reduction deal with Democrats...

Funds managed

Peter Martin

Super is a con, perpetrated by people who con themselves

Whatever happens in Europe we can take comfort from the knowledge that our money is being handled by professionals - experts who’ll know what to do.

They do, don’t they? It’s about to become more important.

Wilful blindness by the government and spinelessness by the opposition have ensured the amount of compulsory super we are forced to hand over to money managers will climb from 9 per cent to 12 per cent of our salaries by the end of the decade (unless we run self-managed funds and try to make a go of financial markets ourselves, something that won’t happen on a large scale and would unmanageable if it did).

Many of us will have to take out larger mortgages than we would have and hold them for longer in order to feed the money management machine. We won’t have the income we would have to pay them off.

Henry recommended against it. He didn’t buy the fiction that the extra super contributions would come from employers (who would presumably get them from thin air). Neither does anyone else, when pressed. The money will come out of future wage increases, giving us less control of what should be our own money.

And giving fund managers more. Even if we have to borrow to give it to them. The Coalition opposed the move for the right reasons - it is financially reckless, costing the budget more in tax concessions than it will raise from the mining tax intended to funded it, it eats into the income of hard-pressed Australians at the times when they need it, and it is paternalistic on a scale that makes mandatory precommitment for poker machines look inoffensive.

And then the Coalition backed down. It’ll tear apart the carbon tax but according to Abbott “national savings and retirement incomes are a significant issue particularly with an ageing population and that’s why the Coalition has decided that we won’t rescind the legislation should it go through the parliament”.

Which pushes us into the hands of fund managers, and in many cases the union-dominated boards who appoint them. They might just be worth their fees if they could get us a better return than we could get ourselves paying off our homes.

The latest Superratings table shows they can’t, over a sustained period of time...

For the past five years the median “balanced” fund has returned an average of just 0.92 per cent per year. Over each of the past ten years the return has averaged 5.16 per cent. Since compulsory super began back in 1992 the return has averaged 6 per cent. The first is way below below inflation, the other two don’t match the return from paying down a mortgage.

Rewarded with generous fees and a leglislatively-directed (increasing) flow of our money into their hands regardless of performance it would be reasonable to imagine fund managers had something special.

They do. Nobel Prize winning psychologist Daniel Kahneman calls it the “illusion of skill”.

Kahneman won the 2002 economics Nobel for groundbreaking research into the way we make decisions. He saves a special place in his new book Thinking, Fast and Slow for “stock pickers”, who he says attempt to make much of their money buying and selling from each other.

“Most of the buyers and sellers know that they have the same information; they exchange the stocks primarily because they have different opinions. The buyers think the price is too low and likely to rise, while the sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong. What makes them believe they know more about what the price should be than the market does? For most of them, that belief is an illusion.”

University of California Berkeley professor Terry Odean examined the trading records of 10,000 private investors over a seven-year period, sifting data on more than 160,000 transactions.

On average the shares the private traders sold did better than those they bought by a very wide margin of 3.2 percentage points, an “achievement a dart-throwing chimp could not match”. Private traders feel compelled to lock in gains by selling good stocks and don’t like taking losses by selling bad ones. Men are worse than women because they act “on their useless ideas significantly more often”.

The winners, on the other side of trades, are fund managers who are less likely to make those mistakes because they are less emotionally committed. But that doesn’t mean they are especially skilled.

As Kahneman says: “The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of investors and funds will vary erratically and the year-to-year correlation will be zero. Where there is skill the rankings will be more stable. The persistence of individual differences is the measure by which we confirm the existence of skill among golfers, car salespeople, orthodontists, or speedy toll collectors.”

Study after study over 50 years - including those done by Kahneman himself - has failed to find any significant year-to-year correlation in the perfomance of US fund managers. Some do well for a while, some do badly - but no more so than would be expected by chance. In Kahneman’s words, “for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of every three funds underperform the overall market in any given year. The year-to-year correlation is very small, barely higher than zero. The successful funds in any given year are mostly lucky; they have a good roll of the dice.”

Fund managers don’t see themselves that way. Like most of us, they think we’re better than average. “The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty,” Kahneman writes.

But if the way markets work mean their guesses are no better than blind guesses I don’t feel particularly good about entrusting my financial future to them. I certainly don’t feel good about being forced to entrust them with more.

Published in today's SMH and Age


"There have been many good books on human rationality and irrationality, but only one masterpiece. That masterpiece is Daniel Kahneman’s Thinking, Fast and Slow." - Financial Times

A greasy pole

The announcement of a referendum to decide on Greek austerity measures met with some enthusiasm

“Obviously in times of difficult structural adjustment, major fiscal austerity and tough decisions such as the Greek government is considering, it is important there is widespread support, democratic support, for such measures…"

Bank of Canada Governor Mark Carney

Others were less impressed

Le geste des Grecs est irrationnel et de leur point de vue dangereux (The gesture of the Greeks is irrational and their point of view dangerous)

President of the French Republic, Nicolas Sarkozy

The markets won, democracy was abandoned and a technocrat was installed to lead Greece.

Former European Central Bank vice-president Lucas Papademos has been named as Greece's new prime minister...Mr Papademos, who is not a member of parliament, will head an interim government until elections can take place in February.

Mr Papademos enjoys wide support

"He is a man of quality and ethics; extremely educated. He is designed to save Greece."

The austerity measures have been imposed by the European Commission, the IMF and ECB (aka the Troika). There are many who would argue that the Troika have had a poor record as evidenced by the Euro

an ill-designed single currency interacting with an insupportable burden of private debt created by oversized, undercapitalised banks.

and

the “technocrats” have consistently ignored their own economic models in favor of what amount to political prejudices, calling for fiscal austerity and higher interest rates when their own analyses say that unemployment will be high and inflation subdued.

The IMF and other agents tried to push their agenda in Argentina, with mixed results. As the IMF recalls

With the economy operating above potential in the first half of 1998, the initial downturn occurred as consumer confidence was sapped by external financial shocks and domestic political uncertainties, compounded by tighter monetary conditions and trade related shocks; thereafter, the structural weaknesses came into play...once the depression was under way, there was no easy way out, as the authorities had no policy instruments that could have enabled them to stimulate the economy without compromising debt sustainability.

Once the austerity measures were implemented recession and depression became inevitable

The occurrence and severity of the Argentine crisis has, as mentioned, been particularly disturbing to the Fund given its extensive engagement for many years beforehand

The problem then becomes an academic argument within the IMF

The Argentine experience also highlights the fact that, while ownership of policies is important, it is not sufficient to guarantee their viability. Arguably, in Argentina there was strong ownership for an inconsistent set of policies—with wide popular support in particular for the currency board but not for the fiscal policies needed to support it. Ensuring that policies are both nationally owned and viable is a very complex challenge that the Fund and the country authorities need to face.

and Washington

Given the political orientation that is predominant in key international players, overcoming the conventional views may be one of the main obstacles to a lasting solution for the crisis.

The Crisis That Was Not Prevented: Argentina, the IMF, and Globalisation

In defending the IMF from criticism by ex World Banker Joseph Stiglitz, Thomas C. Dawson admits to an inconsistency

Stiglitz accuses the IMF of being driven by a belief in the perfection of markets and the imperfection of governments. The accusation is simply wrong. IMF staff are well aware that they owe their jobs to the imperfections of markets.

What is probably true is that the staff of the IMF (and the World Bank) have over time become more confident about the ability to use markets to serve the public interest. What caused this shift? Quite simply, the evidence. Through the 1980s, central planning represented an important alternative to markets as a way of organizing economies. The collapse of the Soviet Union and the fall of the Berlin Wall suggested to many that markets, whatever their faults, were a more durable way of organizing a country's economy. This feeling was reinforced by the good economic performance of the United States and the United Kingdom, both of which had moved to more market-oriented systems during the 1980s.

Importantly this speech was made in 2002, well before the collapse of the market orientated systems. Today it is the non democratic authoritarian economies of China and Russia that have prospered leaving the IMF to demand austerity in exchange for cash from established democracies.

Long live inflation!

Nicholas Crafts, from the in the FT says

The lessons of the 1930s are not well understood but are important. Britain enjoyed a strong recovery from the depression, with growth exceeding 3 per cent in each year between 1933 and 1937, despite a double-dip recession in 1932 and continuing turmoil in the international economy. Until 1936, growth owed nothing to rearmament. Indeed, as now, in the early 1930s the government was engaged in fiscal consolidation at a time of very precarious public finances, while from mid-1932 short-term interest rates were close to zero and could not be cut to deliver monetary stimulus. The parallels with today are clear, but today’s policymakers are unaware of the successful economic policy that revived growth. How did they pull this off 80 years ago – and could we do the same?

Economic historians describe the policy as one of “cheap money”. This entailed a commitment to raising prices back to the 1929 level, announced by the chancellor of the exchequer...

John Hempton attributes the failure of QE to hoarders

The Federal Reserve has too much credibility. Each time it increases the money supply it buys some asset (say a government bond or even a foreign security) and issues cash. And people hold the cash because it is a reasonable store of value. 

and blames the Fed

When he (Bernanke) got on 60 Minutes he proved the point. He was asked point-blank whether the Federal Reserve could print all that money and control inflation and he said it could.

Holding or hoarding cash does little for the economy

If people really believed the cash was trash they would all try to get rid of it (ie buy something) but collectively they could not get rid of it (every time they buy something it would have a new owner) and the result would be inflation. Inflation would then reduce the real value of the money stock to a level where people were comfortable holding it.

Frederick Soddy says that money represents unrealised wealth and such is a liability not an asset

Money is not wealth, even to the individual, but the evidence that the owner of the money has not received the wealth to which he is entitled, and that he can demand it at his own convenience. So that in a community, of necessity, the aggregate money, irrespective of its amount, represents the aggregate value of the wealth which the community prefers to be owed on these terms rather than to own.

Soddy advises that virtual wealth ie the quantity of goods that the community abstains from possessing that is definite needs to be considered

“It is the virtual wealth which measures the value of the purchasing power of money, and not money which measures the value of wealth.”

and warns that it is the banks that have created money without wealth

The threatened collapse of our Western civilization has nothing to do with the political issues between capitalism and communism, but is the consequence of its false money system.”

End of the bunga party.

The overly buffed, implanted and botoxed Eurozone appears to be tottering towards a cliff and the markets arent happy

George Papandreou and Antonis Samaras reach agreement to form a grand coalition under a new prime minister; the goal of the interim government is to implement the eurozone agreement before elections, most likely in February; Lucas Papademos is considered as a possible caretaker PM; a majority of Greeks are in favour or remaining inside the eurozone; Silvio Berlusconi’s parliamentary majority is crumbing ahead of a crucial vote tomorrow; Bundesbank vetoes use of pooled SDR’s to co-finance the EFSF; Bundesbank suspects a plot by the ECB; Holger Stelzner writes that the debate about SDRs was an attempt to get at Germany’s gold reserves; Wolfgang Münchau says the G20 is useless, and as incapable of crisis resolution as the European Council; German coalition partners reach agreement on tax cuts; the French government presents an unlikely consolidation plan to impress the rating agencies; measures include higher VAT and an earlier than expected increase in the retirement age; a poll suggests that a majority of the French are hostile to further Greek aid; eurozone finance ministers, meanwhile, have agreed to speed up negotiations to lever the EFSF.

It is easy to blame the crisis on the greeks and their alleged fondness for early retirement and long lunches; David Zervos from global securities trader Jefferies sees it differently

Bravo to Papandreou. He is peeling back the layers of the rotten onion that is EMU and exposing the Italian, French and Belgian situations for what they really are! I stand by the idea that the end game here is a Greek exit - and today's action gets us one step closer. Further, the turmoil in Italy and France gets us one step closer to a Eurobond that has Germany wrapping whatever remains of a tattered EMU. The EMU end game is German fiscal dilution and exit for the weakest links.

It is worth noting that in an attempt to stop escalating rumours hastening their own endgame Jefferies have announced that they have reduced their exposure to the Eurozone to by 49.5% - the collapse of MF Global appears to have stimulated an unusual outburst of transparency.

To others this seems like a long but steady process

Even before the financial crisis, the volatility of economic fundamentals started to rise, caused by real economic shocks and partially by globalization. The eurozone was already diverging well before 2008. We thus argue that real, financial, and debt related fiscal policy integration is necessary and sufficient to save the Euro.

Markets don't appear to have an interest in events beyond the 24-hour news cycle which, for some, presents opportunities

Nov. 7 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. invested $23.9 billion in the third-quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings..

..“He sees something, and it’s big,” said Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner.

..The last time Buffett invested more than $20 billion in a period was 2008 when he did it in both the second and fourth quarters of the year. Buffett deployed more than $70 billion that year, including $10.1 billion on stocks, as the S&P 500 posted its biggest decline since 1937. This year, Berkshire bought $11.4 billion of stocks in the nine months ended in Sept. 30, while selling $885 million of equities.

..“We’re ready to buy lots of things,” Buffett told Bloomberg Television’s Betty Liu on Sept. 30. “If the stock is cheap, we will buy it.”

Interest rates a game changer

So say Mark Bouris who argues that consumers were psyched out with interest rate hikes

Surveys carried out by Westpac and the Melbourne Institute in February, May and August concluded that the average Australian expected two to three rate hikes in the year ahead. In the most recent survey, nearly one-third of all respondents thought that they would get hit with a remarkable four or more rate increases. It was no surprise to us, therefore, that the “future family finances” component of the consumer confidence data was near its 1991 lows.

The change was seen by some as being too small

I can’t see the reason why you would cut interest rates by 25 basis points – I don’t believe in 25 point cuts. I think that’s a silly situation we got into with making such small adjustments…And I don’t think the international situation is as bad as everyone thinks it is, but 25 basis points is not a response to that. If you really thought it was bad, you wouldn’t be doing 25, you’d be doing 50 or 75...

Former RBA board member and eminent global economist Adrian Pagan

Chris Joye agrees with Bouris and argues that the signal has important psychological implications

The average Australian family expected at least two to three rate hikes over 2011-12, and a big chunk of the community – around 25-30 per cent – were budgeting on four hikes or more.
 

The RBA’s about-face is going to have a tremendous impact on these expectations, which will swing from hikes, to stable rates or cuts. That is, the expectational effect of the RBA’s decision is more like two to three rate cuts. This will be especially powerful in interest rate sensitive sectors of the economy, such as housing.

Bouris points to other benefits, such as a less powerful $A helping the export and manufacturing sectors, and notes that a softening in commodities is a good, not bad event for Australia.

..the RBA has finally received formal confirmation that Australia does not have an inflation problem with the third quarter core CPI printing at an incredibly low 0.3 per cent. 

..as a result, increasingly no need for the RBA to run restrictive policy.

Australian banks..

..performance is just "middle of the road"..

Staying with the 98%..

As OWS gathers popular strength its worth applying the same rational to investments ie don't let the actions of the minority determine the path of the majority.

For example, the $1.6T Vanguard Group report that

In the first eight trading days of August, including two of the most volatile days since 2008, just under 2% of 401(k) participants at Vanguard made a change to their portfolios. In other words, over 98% stayed the course. Ninety-eight percent took no action. Ninety-eight percent took the long-term view..

..we know from our research that during a financial crisis, few investors actually cash out their entire portfolios. Yes, there is always a small fraction of investors—3% in the recent financial crisis–—who sell everything, so there’s always someone to interview about getting out of the market. But they aren’t typical investors. Most investors making a change in a falling market shift a small amount away from equities; others actually buy stocks as the market is falling.

It's only just 1%

Everybody hates Obama..

..except Warren Buffett

On Friday evening, Mr. Buffett was the host of a fund-raiser for President Obama at the Four Seasons restaurant in Manhattan, typically a magnet for the who’s who of finance.

Warren Buffett knows that his views are not necessarily mainstream

"I have always had people disagree with me on politics...If I have views I will talk about them.

and Buffett knows why Wall St has turned against Obama

People need to face up to the country’s problems. Once what you start pointing and explaining what your part is in it, you start losing a few people.

Buffett goes further

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

As Michael J. Driscoll, a former senior trader at the Wall Street firm Bear Stearns observed

In the last election, people were tripping over themselves to get on the Obama bandwagon.. Things have changed; Wall Street is not happy being under attack by the administration.