"So how was it down there? Was it insane," a friend asked your editor on the phone this morning.
"You mean here in Australia? Are you talking about the election?"
"No you moron. I'm talking about the Deep End."
"Huh?"
"Your Daily Reckoning yesterday. You went off the deep end. Did someone slap you upside the head and get your mind right? What was that all about?"
We probably could have saved a lot of trouble by just writing: people tend to overestimate what they think they know and underestimate what they don't know. It's best to be modest, work hard, and recognise that sometimes what you get in life is neither what you expect nor what you deserve.
But let's talk about markets and cycles first today before we get on the crazy train. And since yesterday was all about words (even though words can change worlds), let's look at some pictures. First up is the proof that no matter how much you hate reading about it, what happens in the American market is usually what determines what happens in the Aussie market.
The chart above shows that despite different economies, different key industries, and different names, the Dow and the All Ordinaries have pretty much moved in lock step with one another. So what does it mean that on Thursday the Dow closed below 10,000?
Well, according to Dawes (a sample of whose work we're sending out this weekend) it means the Aussie indexes have entered the "sell zone." You can see from the chart that the July lows have yet to be taken out. But that's the level our friend Phil Anderson said to watch for earlier this week. If the markets don't take out the July lows, Phil reckons it would be "exceedingly bullish."
We realise we pretty much butchered the explanation for what a Kondratieff cycle (or wave) is. So today we resort to a simpler explanation: a picture. In Phil's presentation the other night he concluded that rather than being in the middle of the Kondratieff "long winter" we're still on the upswing in the cycle. If true, this would be bullish for commodities. But let's look at the wave before we get to the metals and grains.
Full disclosure: your editor knows very little about this very exclusive domain of cycle theory. And this particular chart illustrating the waves a bit prejudiced in that it suggests we are closer to the top of the cycle than the bottom. But when you're talking long cycles, being "near" the top means that a powerful trend could have several years to run.
That, in fact, is what Phil suggested the other night about commodity prices. It would mean that gold, oil, and some of the grains - all for their own reasons - would make higher highs in the coming years. But do other charts bear that prediction out?
Doing a little research of our own this morning, you can see that commodities have yet to make a new high in U.S. dollar terms. But in terms of the British Pound and the Euro, commodities have in fact eclipsed their 2008 levels. Should you be bullish, or terrified?
The alluring way to look the charts above is that the huge sovereign debt problems in Europe, the UK, and America are again making tangible assets popular. In 2008, we recall a lot of people saying - ourselves included - that real assets would be a better hedge against inflation and/or a market crash than stock and bonds.
The trouble is, there turned out to be just as much leverage in the commodities markets in 2008 as there was in stocks. When the credit crunch hit, commodities crashed hard. And commodity stocks crashed even harder. So now, are commodities again making a high as equity markets turn down?
That's the $64 trillion question.
The big deleveraging and asset deflation of 2008 was sparked by the failure of Lehman Brothers. That terrified plenty of people. Since then, the debt problem has migrated to the balance sheets of sovereign governments. That suggests the next failure - if one is required to kick off a big deflation - would have to be a sovereign one and not a corporate one.
But we reckon that this time the trigger to a big move in the markets will by psychological and not mechanical. That is, investors in the Western world are already adapting to a world with lower corporate earnings and less private and household debt. It's the people running monetary and fiscal policy - central bankers and elected officials - that haven't adapted yet. And you know what happens to species incapable of adapting to new circumstances.
In the meantime, it's wise to remember, as the great Blue Oyster Cult tells us, that the seasons don't fear the reaper. Cycles aren't anything to fear. It's just something we have to learn to live (and die) with.
And economically speaking, we may just be in the middle of a cycle where wealth and power are migrating from the West to the East. It's an argument we began making in 2003. If you're in the West, the bad news is that it's probably winter time for asset markets. But the good news is that there's a place where honest-to-goodness green shoots may come again. We'll visit that place next week. Until then!
Dan Denning
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by john on 27 August 2010:
If the power is really moving from west to east how come it still looks like flat screen tv's and motor cars? when the power finally comes to rest it probably won't look like todays consumer led paradigm. How well off is china for oil? The USA took over from the british empire because it had more of the stuff. Germany lost ww2 when it failed to secure reserves. I recommend you follow the oil....energy begets wealth and power.
Comment by Ned S on 27 August 2010:
I wouldn't panic over China going short for oil John. There's wasn't the economy that went belly up when the stuff went to 140 bucks a barrel.
Comment by Ned S on 27 August 2010:
'Their's' - I've been reading too many blogs!
Comment by Biker on 27 August 2010:
"And economically speaking, we may just be in the middle of a cycle where wealth and power are migrating from the West to the East."
Yep. Unless you're in Oz, of course.
If you're in the West, the bad news is that it's probably winter time for asset markets.
Nope. Just checked. WA winter ends in four days.
Asset markets are about to s-p-r-i-n-g into life. (y)
Comment by Ned S on 27 August 2010:
Mustn't be gunna be one of those 'Klondike' winters or whatever they are that DD is writing about then Biker?
Comment by john on 27 August 2010:
Ned S, I'm not convinced that china is decoupled from the US economy, aren't they still pumping out the stimulus? Lets see what happens when that game comes to an end.
Comment by Ned S on 27 August 2010:
"when that game comes to an end" - The game might come to an end in about 10 years for the US and 500 for China though John?
Comment by Biker on 27 August 2010:
Hey, c'mon Ned. They only have a 100-year-plan, mate. Not forward thinking at all. World leader in EVs. Probably building more nuclear reactors than the rest of the world... and still in $urplu$.
Slightly reassuring that the US is able to create and operate shuttles that can 'disappear', radically changing trajectory and orbit.
Comment by Biker on 27 August 2010:
"...one of those 'Klondike' winters..."
Definitely a northern phenemonon, Ned.
Comment by Biker on 27 August 2010:
Maybe even a phenomenon!~
Comment by Ned S on 27 August 2010:
I think that reading books as a kid probably helped my spelling a bit more than reading blogs as an adult mate!
Damned if I can see any signs of deflation anywhere much in the world though - Do you think it's just possible that Big Bad Ben could be telling fibs. And that poor little BB might be beginning to suss him?
Comment by Biker on 27 August 2010:
The blogosphere is no help, Ned!~
Well, the data shows deflation of close to 1%, in Japan, I think.
Inflation everywhere else.
I was starting to wonder if _rents_ would deflate here, mate... but they're rising steadily once again.
Now we're waiting to see what our builder might offer, as construction slows. Not holding my breath, but as we're his best customer, you'd think we'd have had another call by now! Last time we talked, he wanted 6% more. Something about rising wages... . Ah well, that's good news for some, I guess...
Comment by Ned S on 27 August 2010:
"Not forward thinking at all" - Lots of foreign students in places like Oz and the US I gather Biker. So someone is doing a bit of forward thinking.
When they go home we'll get a bit dumber and they'll get a bit smarter I guess. Plus there is NO absolute shortage in any resource yet that I know of? And won't be for many years even on the gloomy forecasts.
In the meantime, the challenge might be to live within one's means so one can afford to pay for resorces as they get dearer perhaps? Wonder who is gunna win that game?
Comment by Ned S on 27 August 2010:
"wonder if _rents_ would deflate here" - I'm thinking declining house prices in Brissy for a bit as you know. Which means FHBs buyers will become extremely shy. So a bit more pressure comes back on rents again maybe? Until something else changes anyway!
Comment by Biker on 27 August 2010:
Well, fewer building, fewer buying must mean rents will rise, Ned. We see no decrease in population here, either.
You're probably going to experience the same dip in Brissy as we have here: 2.5% in the capital, 6% in the regions. In other words, the ASX on a really bad _day_.
The kids just sent me a beautiful diver's watch for Fathers Day! The UPS lady wandered around until she found me (sitting on the can, gazing out at the forest across our valley! Big glass windows do have a downside!
)
What's this(?) I thought, opening the heavy package to discover I should have waited another week... . Nicest chunk of PM anyone has ever given me!
I feel like a Rich Dad!~
Comment by Ned S on 27 August 2010:
"Big glass windows do have a downside" - Ain't touching THAT with a barge pole. But enjoyed the laugh regardless ... Ta!
Comment by Biker on 27 August 2010:
"But enjoyed the laugh regardless ... "
So did the missus, mate!~
Comment by Ned S on 27 August 2010:
Wonder if DD is ever gunna write an article about whether rents might go up or down? Some of this Wow can WE ever show you the way to cream umungous profits off the captital growth we make you type stuff, could be starting to sound a bit 'Yester Year'?
Biker - I've written it into my diary. We must visit one way or another within the next 5 or 10 years mate!!!
Comment by Ned S on 27 August 2010:
And No, I've got NO interest in EVER seeing what's behind your bloody big glass windows!
Comment by Ben on 28 August 2010:
Biker you better start thinking of the shtf scenario.
With that nice watch and all, you may have to go Pulp Fiction with it.
Start wearing away the rough edges while you spend time on the can. Practice, practice, practice. Its going to hurt, but at least you'll have something of value retained.
Comment by Biker on 28 August 2010:
Jeez, nice to have you blokes concerned about my welfare!
Comment by Biker on 28 August 2010:
"And No, I've got NO interest in EVER seeing what's behind your bloody big glass windows!
"
Trust me, you'll never see another home like it, Ned. Think Bali/California.
The Oregon beams were flown to Oz in a Jumbo.
Mine dew, you'll be condemned to pass your sentence in the chalet.
No forest view from the ablutions, son!~
Comment by Ned S on 28 August 2010:
"nice to have you blokes concerned about my welfare" - Re my comment about not feeling especially inclined to play Peek a Poo should I visit; Last I heard the Salvos were still selling off semi-transparent washed out sheets for $2 a set - Cummon Biker - Lash out!; Worst case scenario is that we're only in the Greatest Ever Depression of all time mate - No excuse for cutting back on such essentials ...
Comment by Biker on 28 August 2010:
"Last I heard the Salvos were still selling off semi-transparent washed out sheets for $2 a set - Cummon Biker - Lash out!; "
The deal is that the UPS lady never realised our road ends in a circular drive, Ned. She saw the chainsaw sitting where I'd left it down on our causeway... heard another saw buzzing across the valley... and went off in search of me...!
Coming back up the hill, she suddenly sees me, perched on my throne, wondering WTF she is, marching around on our property!
Truth to tell, I enjoy the view, Ned! First time this has happened in twenty years. We have four external doors... and she never bothered to knock on any of them... . Just sees the saw, hears another saw and decides to trek off across the valley! Don't think the sight of my jeans around my ankles was particularly troublesome to her, mate!!~
I'm sure she's seen worse in the last fifty years... .
Comment by emmbee on 29 August 2010:
Hi Biker,
I've been reading the responses on DR for a while and, considering we reside in the same city, was wondering what you thought about real estate in Perth at the moment? I've just arrived back from a long jaunt in Melbourne and Perth real estate is not looking too bad (Melbourne is overpriced for what you get)... but I am unsure what the future holds. What do you guys at DR think? Is it a good time for the first homebuyer to jump into the market, or should I wait until everything crashes and burns like the other subscribers predict/hope?
Comment by Biker on 29 August 2010:
G'day emmbee, Perth is a such mixture of great value and utter daylight robbery! That last description aligns me a little with the clan of cave bears here, but it's true... .
In regard to Perth, I advised our eldest to buy an apartment when many of the very best were selling under $450K. That's also true of our second son, in Melbourne. Both markets have risen steadily.
In terms of houses, we think the situation may get 'worse', as our population rises. For example, property near water is going to go utterly ballistic, _if_ the population jumps dramatically. That doesn't mean you should pay too much for it now... .
The best advice I can give is to research your preferred areas extensively.
And you need to ask yourself _why_ you're buying, rather than renting.
If it's solely for rapid capital appreciation, you're gambling. You have an edge, but you're still gambling. If it's to acquire a nice home you'll live in for a decade or more, it's rational to pick up a well-located bargain, after you've researched extensively.
If it's to rent to someone else, you need to research ALL the ongoing tax claims and write-offs... then _test_ this information throughly. There's so much that we _think_ we know, but, which tested, proves incorrect. We've tested the information with the ATO, FAs and our accountant(s). Internet sources are sometimes useful.
Ultimately, in our experience, our 'best' buys have been made when _no-one_ else was buying. Critics may contend that in this scenario you're "catching the falling knife." In over thirty years, that's never proved the case for us, _in property._
Now, having said ALL that, we ourselves have done _nothing_ for the last seven months*. We may later regret that inaction. Our worst mistakes in the past have been to research, find a great buy... then not proceed.
* We've consolidated... and 'upspec-ed'... but we've bought no new property; built nothing. We haven't stopped researching... .
Comment by emmbee on 30 August 2010:
Thanks biker, much appreciated