It’s time to start being cautious again | The Finn Review
I recently got back from a trip to the U.S.A.
I always enjoy traveling as it gives you a chance to clear your head and focus on the bigger picture rather than just your day-to-day activities.
It is also great getting an outsiders perspective on their views of Australia and probably more importantly, an insider’s view on how the rest of the World is going. So how is America going?
Over the last year the U.S Economy has grown less than most expected despite the constant monetary and fiscal stimulus that has been put into the system.
There are number of reasons that could have caused this sub-par growth but the main reason is that households are still deleveraging which is offsetting the stimulus benefits. There also has not been a material improvement in the unemployment rate and while people don’t have jobs or are fearful of losing their job it is hard to be confident.
Similar to the situation we have in Australia, Americans aren’t confident in their Government and with the upcoming Presidential election coming up in November, it is very hard to know what direction the Government will point the U.S to.
Normally in America when chatting politics with a Republican or a Democrat, they are very biased and one viewed however it was different this time.
They did not have the normal confidence in either of their respective parties and were not sure on what were the “right” answers for how the Country should be led. This gives me the impression that the everyday American is not happy and this Election could prove to be a very close one.
There have been some positive signs though.
There has been some recent housing data out which is showing signs that the property market is starting to find a bottom. This is very important as the housing industry is pivotal to the U.S economy and in my view the economy has no chance of forming a sustainable recovery until housing construction returns to more normalised levels.
The main thing I learn from traveling to America is that we should never underestimate them.
They have something that most of the rest of the World does not. An internal optimism and the firm belief that they are the best.
I believe it is this trait which enables them to be World leaders in so many industries and why they take on the responsibility of trying to lead the World.
This internal optimism and belief can be a double edged sword though and it is extremely evident in Las Vegas.
A lot of people move out to the Desert with the dream of starting a new life and making it rich and many do. But for everyone that achieves there a many more that fail and this has large ramifications on the unemployment rate.
It’s time to start being cautious again.
The market has just had quite a nice rally and I am struggling to see what positive news could come out which could sustain the rally. We are still waiting on a “magical” solution to come out of Europe and the market is just hoping that the U.S. Fed will pump more money into the system.
The first is never going to come, the European Problem is going to be around for a long time and it will be controlled very tightly by the German Government. The latter is already priced into the market and there is a lot more downside risk if it does not happen.
Where to invest
In the Australian Market I am finding it quite difficult to find good companies to purchase at a price that I am happy to pay.
Whenever I find myself saying comments like this it is generally a good indication that I should sit back for a while and avoid the market.
The high yield (income) play has well and truly been maximised as most companies have had their share price pushed up to levels where the reward is not worth the risk.
With the recent negative data coming out of China it is hard to get excited about resource investments and even though I think a lot of the concerns are overrated if we learnt anything from what happened in the retail sector over the last year it is not to stand in front of a moving train.
Mining services stocks have been the market darlings over the last couple of years but things can change quickly.
With the recent announcements of large projects like BHP’s Olympic Dam being cancelled the market is very nervous about the certainty of other projects going ahead. A company’s share price is a representation of the expected future earnings of the company.
If these come into question then the share price will drop significantly. It is important to look through the investments in your portfolio and ask yourself how certain am I of these earnings.
Word on the street
It is the favourite time of the year with footy finals starting.
There is a lot of buzz around Melbourne on who is going to take the flag out this year. I am quietly confident about the form of Geelong and you can never underestimate finals experience but it is going to be an extremely tough task.
I would like to make a special mention of one of the Wealth Enhancers team Andrew Swallow. In his first year as Captain of North Melbourne he has turned their season around and led them to their first finals series since 2008. We know that he is an amazing person, player and leader and wish him and the team all the very best.
Out and about with TheFinnReview
Breakfast with Bill Evans (Westpac Chief Economist)
I have seen Bill present a number of times and he always follows the same format and covers similar topics with updated data. His predictions have been fairly accurate over the last couple of years and he was the first to predict the interest rate cuts.
His main points recently were:
- Australian household debt world leader. Melbourne stressed large correction. Debt to disposable income has stabilised but at 150%!
- The leverage model that has driven Australia is over. We need new business models.
- Housing affordability is getting better though. People are cautious and reducing debt if they can but less people are in a situation to do this.
- Housing market not going to crash though as we don’t have oversupply and lack of credit. You need these two things for a crash. Our banks love lending for property.
- He thinks it will be sideways market for a very long time. Negative real returns.
- Unemployment likely to increase. When people are nervous about job security it normally becomes reality.
Magellan asset management breakfast
I have been very disillusioned after most sessions provided by Investment managers over the last year as most have had average returns but worse they have had no conviction in their views and did not inspire me to think about putting money with them at all.
This was not the case when I attended this breakfast and listened to the portfolio manager, Hamish Douglass. He had very strong well thought out views and his performance coincidently had been strong as well.
What keeps Hamish awake?
He said not too much at the moment. He believes the next 18 months will be much of the same as the last. A lot of volatility which in his eyes is good as it provides good entry point to invest.
His major concerns though are:
- Middle East tension – oil price rise dangerous for fragile state of World economies.
- Food prices. There is a chance that these could rapidly escalate.
- 3 years ahead big bubbles – bond market crash and huge inflation which will really hurt countries like Australia. This will happen when US economy improves and rates increase.
Did you know?
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As a result of client demand Wealth Enhancers has added another service to our business, personal accounting.
Please check out our website or call the team to find out more. Just like we have done with the financial advice profession it is our goal to try to revolutionise this archaic profession so expect a lot of innovations to occur in this area of the business.
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Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.