Wall Street is aware that the second round of Quantitative easing (QE2) is ending in June. This is despite the fact that both quantitative easing programmes have had little effect on unemployment in the United States. The real outcome was the effect on lowering bond yields (to the extent that we worry about another crash), driving down the US dollar and fuelling the rise in equity and commodity prices. As soon as it concludes, we will start to see sloppy data in manufacturing, unemployment and home prices. It is almost like a drug, where they continue to require an injection of “financial morphine” to the financial system. Once people are accustomed to it, they don’t know what to do without it.
At present, the markets may be holding the Federal Reserve to ransom. If there are continuing signs that the US economy remains sluggish and asset values continue to decline, could this be a trigger for the Federal Reserve to consider and implement a third round of quantitative easing?
Our view is that the Federal Reserve is just delaying the inevitable. It seems to continue to believe it can smooth out large falls and rises in markets only to see that what it has created will eventually lead to much larger swings. Did the Federal Reserve not learn from the Global Financial Crisis? Perhaps those currently in office do not want to look like the bad guys, however, if they take the pain now, they may become heroes in the future.
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Wednesday, 29 June 2011
Monday, 6 June 2011
Inflation data
Most central banks closely monitor the core inflation as one of the key figures in determining monetary policy. However, with large increases in base and agricultural commodities over the past decade, we think stripping out food and energy prices from the inflationary figures makes “core” inflation no longer useful.
It's not difficult to figure out that our daily cost of living has risen sharply over the past few years. While larger items such as cars, TV and some luxury imported goods have stayed flat due to our strong currency, the typical family does not often get the benefits of these luxuries. Instead, they are slapped with almost a daily “tax” every time they go out to buy groceries, fill up their car and take public transport. It is these issues that make us brush past some inflationary data as being unrealistic.
Further, governments are able to manipulate the goods and services making up these inflation figures by replacing goods that have increased more in price compared to those that have had a more neutral price effect. This enables them to somewhat control the inflation numbers so that it appears lower than the actutal figure.
It's not difficult to figure out that our daily cost of living has risen sharply over the past few years. While larger items such as cars, TV and some luxury imported goods have stayed flat due to our strong currency, the typical family does not often get the benefits of these luxuries. Instead, they are slapped with almost a daily “tax” every time they go out to buy groceries, fill up their car and take public transport. It is these issues that make us brush past some inflationary data as being unrealistic.
Further, governments are able to manipulate the goods and services making up these inflation figures by replacing goods that have increased more in price compared to those that have had a more neutral price effect. This enables them to somewhat control the inflation numbers so that it appears lower than the actutal figure.
Sector bias and asset allocation
If you follow share markets on a regular basis, you might have noticed that the Australian share market has outperformed international markets over the past decade. With large developed markets providing low returns over this period, our mantle of being called the “lucky country” certainly seems justified.
The natural question investors would ask is "why should we invest anywhere else?" There’s certainly some validity in this, but if we go further into the asset allocation, we are able to better determine the risks and reasoning for this outperformance.
Asset managers and financial advisers preach that good asset allocation is the biggest key to long-term investment success. However, looking at the ASX200, we realise immediately that our banking and mining and resources sector account for 70% of our index. In comparison, the widely followed S&P500 only has 30% in these two sectors, while globally it only makes up 40%.
This large bias is the key reason for the outperformance over the past decade as both of these sectors had strong returns. This bias also provides greater risks and when the commodities boom ends and/or our housing sector slows down, investors will truly need to think twice about having their money so heavily invested in these two sectors.
This is one of the big reasons why it is still important to allocate a certain percentage to international markets. No one knows when our “lucky” run will end, but to be certain, by the time you find out, you will have missed the boat.
The natural question investors would ask is "why should we invest anywhere else?" There’s certainly some validity in this, but if we go further into the asset allocation, we are able to better determine the risks and reasoning for this outperformance.
Asset managers and financial advisers preach that good asset allocation is the biggest key to long-term investment success. However, looking at the ASX200, we realise immediately that our banking and mining and resources sector account for 70% of our index. In comparison, the widely followed S&P500 only has 30% in these two sectors, while globally it only makes up 40%.
This large bias is the key reason for the outperformance over the past decade as both of these sectors had strong returns. This bias also provides greater risks and when the commodities boom ends and/or our housing sector slows down, investors will truly need to think twice about having their money so heavily invested in these two sectors.
This is one of the big reasons why it is still important to allocate a certain percentage to international markets. No one knows when our “lucky” run will end, but to be certain, by the time you find out, you will have missed the boat.
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