Will These ‘False Signs’ Lead You to Invest Badly?


It’s been a whirlwind start for the markets in 2013.

In the first week of trading major indexes notched up their biggest weekly gains in more than a year.

Greg Canavan predicted this bullish start to the New Year in his latest research presentation.

In fact everything from the property market to commodity prices to the terms of trade is tracking the predictions Greg’s made in ‘The Fuse Is Lit‘.

But it’s still very early days in 2013. So I sat down with Greg before he rushed off to celebrate the birth of his new-born daughter to get his take on where the markets are poised right now…and what kind of actions you should be taking to safeguard your capital this year…

Simon Munton: Greg, how should our readers feel about this rally in stocks? This week we’ve seen a bit of a cool-down. Is that a chance to jump in and join the bulls? Or are we just being sucked into a major sell-off in the coming months?

Greg Canavan: I believe the latter. The Fed, the Bank of Japan and other major central banks are trying to push you into risky assets. This is a game for nimble traders. It’s not a game for people wanting to make sound investments. Just like the rallies that happened after QE1 and QE2, this one will end. And probably quicker.

SM: Why do you say that?

GC: This sort of action always ends badly. By that I mean forced speculation during times of economic weakness. It ends when there is no one else left willing to risk their capital for a few extra percentage points of yield. The bottom line is we’re being pushed out on the risk spectrum, right when the risk is greatest. Resist this urge. I just don’t think you’re being compensated for putting capital into the market at this point.

SM: You mention in your predictions video for 2013 several ‘false signs’ that will trick investors into thinking things are getting better in the markets and the Australian economy. Is this rally a false sign?

GC: Yes. Another false sign is renewed optimism about China. That’s also firing up our market, especially the iron ore majors BHP and Rio. Probably the biggest mistake you can make with your money in 2013 is believing the hype about China’s ‘comeback’.

SM: That’s a big call. There’s been a 70% rebound in the iron ore price. Companies like Fortescue Metals are now reviving projects that have lain dormant for months. Surely that constitutes a genuine comeback.

GC: Nothing has fundamentally changed in China in six months. China has simply found new ways to keep its credit boom going. As I explained in last year’s ‘China’s Bust’ report, China may be on the other side of its historic credit boom (which expanded most famously from 2009 to 2011) but due to the state-controlled nature of the banking system, credit growth is still running at dangerous levels. China has a banking system that is ready to blow. The same thing happened in the US in 2007, and it’s going to happen to China in 2013.

SM: What do you mean?

GC: I read a Bloomberg article recently that explains it well. An analyst for TCW Group Inc., which oversees about $135 billion wrote, ‘The U.S. got into trouble because institutions like Fannie Mae (FNMA) and Freddie Mac were too big to fail and had a toxic mix of private shareholders and implicit government guarantees. China’s financial system is full of Freddies and Fannies.’ What you’re seeing now is not a brave new recovery in China. You’re seeing a bust being delayed by piling on more debt. As I’ve said for the last six weeks, the fuse is lit for a catastrophic bust in 2013.

SM: What timescale are we talking about here? And what practical steps can Aussie investors take to prepare?

GC: I lay out the three phased impact of a China bust on Australia’s economy here. That’s not to say the Chinese ‘recovery’ won’t have legs from here. But if history is any guide China is going to face some very hard choices later this year (harder than it already faces). Australian investors face a hard choice now too. Do you go with the crowd and hope for the best? Or do you swim against the stream and prepare for the worst?

SM: Clearly you’re taking option two. You’ve called your investing strategy for 2013 ‘The Survival Circle‘.

GC: Yes. These are portfolio adjustments I believe you need to make now if you believe, as I do, that a fuse has been lit from China’s bust to the heart of the Aussie economy – specifically, the Aussie banking sector. What you need to know about this strategy is it’s designed to take into account rallies that might occur BEFORE the fuse reaches ground zero. We just sold out of Treasury Group for a 36.5% gain. And the latest investment added just before Christmas is already up 4%. So this is a bearish portfolio set-up that can yield results even when markets rally hard. Predicting and capitalising on what I call ‘false signs’ is a big part of the ‘Survival Circle‘ strategy.

SM: Final thought for readers?

GC: Look, it can be annoying watching markets rally if you’re bearishly invested. But if you look back through recent history, credit expansion, stimulus measures and falling interest rates have ALWAYS pushed up share prices even as the risks of investing increased.

This is what’s happening now. But I don’t think this situation will last long. In fact, I think the market is on the brink of another down leg. If you agree with me, and you’d like a strategy for protecting yourself – and even profiting – from this down leg, you’ll find it in my report.

SM: Thanks Greg.

From the Archives…

The Trade Deficit Dilemma That’s Alive and Well
14-12-12 Greg Canavan

Downside in the Yen: Shinzo Abe and the Three Bears
9-1-13 Murray Dawes

Zombie Nation
8-1-13 | Bill Bonner

A Fed Divided
5-1-13 | Dan Denning

Light at the End of the Tunnel for Gold and Gold Stocks
3-1-13 | Frank Holmes

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.

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