My Say
'ONE SWALLOW DOES NOT A SUMMER MAKE' - My Say No 37
19-07-2008 18:24:56
"There is a tide in the affairs of men, which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and miseries" (Julius Caesar Act 4).
Please forgive the rather pretentious beginning to this edition; allow me to explain. Shortly after we married, my wife and I left on the ubiquitous Australian 'working holiday'. Whilst the plan had been to spend 18 months abroad, this 'foreign holiday' eventually turned into almost 18 years abroad! Following 6 months in the US we arrived in London in 1971 and thus, unintentionally, began my serious introduction to the world of investment and financial planning.
In 1973 the first oil shock occurred and the UK market fell by almost 30%. This sharp drop combined with rising inflation, similar to what is happening now, had a severe effect on sentiment. Pessimism deepened but, even worse, in 1974 the market declined by another 50%! I cannot begin to describe peoples state of mind as a result of what was considered to be a catastrophic market collapse.
Bear in mind that unlike the events of the last 3 decades, this wasn't the typical 'sell off' followed almost immediately by a 'recovery': This was two years of pain which simply wore even the most optimistic person down. With all the 'corrections' that have occurred since the 70's, central banks have fallen over themselves to ensure soft landings. As a result, these were merely setting the scene for the current denouement.
"If I'd known then what I know now"1; brings me obliquely back to the introduction. Being young and impressionable I became caught up in the doom and gloom; followed the herd and became as pessimistic as the next person. Then paralysed by this negative sentiment I, like many others, was incapable of taking any advantage of the 'tide'.
From its low point the UK market swiftly rose over 150% but sadly, few enjoyed this result as most had baled out of the share market in the preceding 2 years.
"Those who cannot remember the past are condemned to repeat it": (George Santayana 1863-1952).
Not wishing to repeat the mistakes of the past I have remembered the events surrounding this period and thus was born my cock-eyed optimism regarding the share market: Which brings me to the current events. If history is to repeat itself then we may not yet be out of the woods.
As most would be aware, much of the current commentary is again related to the dangers of share market volatility. Funny that I did not hear anyone complain about the volatility over the last 5 years. Starting from 2003 onwards we have had 5 consecutive annual rises of: +15%, +27%, +22%, +24%, and in 2007, +17%. Where were all those who are now concerned about the volatility? Oh, I forgot, it is only negative volatility that is a problem. Talk about perception being reality!
If you think that is cock-eyed then consider all the faux agonising by politicians over the housing affordability crisis. Now that we have property showing early signs of becoming affordable everyone is concerned. How did people believe that property was going to become affordable without prices falling? Were salaries going to rise meteorically, was the government going to increase the first time home buyers grant to $100,000?
With the US dragging the globe backwards (in more ways than one), the impact of past policy decisions are now coming home to roost. Cutting interest rates each time we were faced with a minor market correction has allowed speculators world wide to 'push the envelope'. The excess liquidity looking for a home has slowly created the global property bubble which is now unwinding at break neck speed.
America, Spain and the UK are, notably, in the throes of this house price realignment; typically however, many consider that Australia will be immune to this; it will be interesting to see. When simply buying property, with unprecedented indebtedness, became the overarching method of creating perceived wealth overnight, western economies began their dance with the devil.
There is no denying that property speculation has always been the favourite distraction for most lazy punters. This has taken the focus away from the main game of wealth creation; productive enterprise! Now, we are all going to pay the price for this stupidity.
The book "The Worst Poverty" was first published in 1991 and I have pulled it off the shelf as a 'refresher'. In the introduction to the book there is a reminder of an old proverb: "Debt is the worst poverty". A quote by John Cunningham, Chief Executive of the research firm Mintel summarised the changing attitudes well.
"There is a clear dichotomy in the (British) attitude to credit/debt. At its most basic assumption, credit is when you can afford the loan and debt is when you cannot. Certainly approximately 70 per cent of the population disapprove of debt, and 70 per cent of the (British) population are in debt. There is disapproval in principle and approval in practice, or is it hating the sin and loving the sinner"?
Well said, and considering that this was written in 1991 it amounts to an understatement as indebtedness has reached new heights on a global scale. The thing that makes me unhappy is the extraordinary complacency that has gripped the western world. We have begun to believe our own b******t.
Whilst western markets and economies unwind, I watch as ever greater amounts of our capital now flow outwards; only to be used by the developing and oil rich nations to rescue/purchase our businesses as they lie on the brink of failure. It could be amusing were it not so sad. Still, on the bright side, maybe this will be seen as the wake up call we 'had to have'.
Enough she cried: I promised in the last "My Say" to provide the updated data for Industrials versus Listed Property Trusts (LPT's). The chart is only up to December 2007 so only displays the beginnings of the carnage that has afflicted the sector since.
The days of LPT's having been perceived as safe havens are over, for the time being at least. They, like many of the public, had fallen into the debt trap.
As I mentioned earlier, we remain optimistic despite watching the portfolio values unwind before our eyes. Five figure losses have become six then seven figures and so on. We acknowledge the emotional hit one takes at these times however, we have chosen to live within our income and the only debt (modest) remains for investment purposes, not consumption.
As the bulk of our income is provided by dividends, our future, financial and emotional, lies firmly with the ability of good companies to continue their dividend payments.
It is too early to make a definitive call but the early scorecard looks thus; seven companies have already paid dividends in the first few weeks of the new financial year. Of these, six have increased their dividends over the same period last year and one has maintained its payout. Increases range from 5% up to 20% with an unweighted average of just over 10%. Seven swallows do not a summer make but watch this space.
My next public session is the full day on Saturday, 2nd August for Sydney University Centre for Continuing Education.
