Lets recap a little of the last chat and see where we are in the world of equities.
Well, in the Keynes beauty contest it appears that we have come to something of an impasse in the equity market. The chart below shows how the market has gone sideways for a long time this year. So what are we thinking about what everyone else is thinking, a la Keynes?

Checking in on the Beauty Parade and the fourth Horseman.

The press would have us believe that we are descending into a “double dip” for the economy and that the 4^th Horseman has been wandering around the garden sharpening his axe. Everywhere you look there are articles saying that the economy is going to struggle and that the demand in the economy is going to decline leading to a vicious circle and a new economic malaise? Well, on that basis would it not make sense that the “news” is already in the price. Has the FTSE not discounted the current outlook?

Anyway, if the depressed outlook is in the price then the equity market should be a lot lower. By the look of things we should not be trading at 5300 on the FTSE and a PE ratio of 17 times earnings but near the lows of last year when the outlook was equally bleak.

Now, from time to time I have been known to hold my own as a chartist so the current pattern looks to me like a boring, going nowhere sort of pattern on the weekly charts (despite Wednesdays rally!). Yes, there is a risk that it will morph into something else but usually the stock market is a good predictor of the economy (about 10 of the last 5 recessions!!) and I would find it amazing if things changed and the economy led the stock market.

On this basis we can conclude that there is a huge amount of noise and not a lot of happening. Given the well-known tendency for the equity markets to decline in September and October perhaps we would upset the most people if the market did not go down but stayed exactly the same or RALLIED. Watch this space!

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The “Third Man” would make a good trader.

Would Peter Mandelson have made a great trader?

The recurring theme of PM’s book is his passion for politics and his ability to come back from his mistakes. It is a testament to his self-belief and motivation that he was able to come back from the political wilderness three times to finally secure his much wished for front line political position. He continually overcomes disappointments to bounce back. This is the most important asset of a trader. There is a feeling that trading is easy and when you are making money that is true. But the true test of a trader is when things are going badly and the trader has to have the willpower to hang on despite his methods being questioned and more importantly his capital is vanishing. This is the side of trading that is often not talked about. The ability to come back from adversity. Peter Mandelson has it in spades. He would probably make a good trader.

OMG! This might be the greatest trade.

This time I would like to consider the Oh My God trade. This is the event risk trade, the unforeseen occurrence trade, the “Grab you helmet and run to the shelter” trade. We need to know the thing to do in the face of a world economic downturn. This time of year there is a chance of a financial accident and we have to consider what to do in case it might happen.

What should we look for and where?

Well, how about a demographic time bomb of too many old people and a falling population?
How about a debt to GDP ratio that makes the UK look positively frugal.
What about an economy with a falling savings rate?
What about an economy with no inflation and a Central Bank that seems to be out of options?
Sounds familiar?
THIS IS PRESENT DAY JAPAN. In serious trouble for all of the above and add a real estate market that has fallen to 1980 valuations.
AND YET ITS CURRENCY STILL RISES.

Now here is the interesting thing about the Yen. It is approaching a pretty important price level especially against the Dollar and Sterling. Back in 1995 the Dollar Yen fx rate made a bottom at 79.70 yen to the dollar. After a few years we are now approaching that level once again. We have to wait and see whether the Dollar Yen rate will retest this level and reject it by trading higher or carry on through in which case this will be an important level on the rally back up. Make no mistake this is a level for the currency that is undesirable for both the Japanese and the rest of the G7. Watch this space as we shall be following the action closely.

The Big Kahuna of a trade will be the value of the Yen falling a lot. Japan is a trading nation and cannot have all of the above problems and a rising currency as well. Just NOT POSSIBLE.

The solution to their huge debt is either Default or Devalue through hyperinflation. EITHER WAY THE YEN GETS SOLD.

So on your way to the bunker don’t forget think about what might happen to Dollar Yen and Sterling Yen fx. At least that way your last trade might be your greatest.

The Bear and the Bull

We have spoken before about the rhythm of all markets. They fluctuate from overvaluation to undervaluation with fair value being only an interesting crossing point ( a bit like the 200 day moving average which as far as I can see has no relevance apart from a line on a chart). I think that we need to all become a little more like Peter Mandelson. There has been a Bear market in equities for over 10 years and it might go on for another few years yet. Who can say and if anyone does predict a Bull market then it is only a guess so please don’t take it too seriously. However, a Bull market will come and there will be full employment again and the economy that our children inherit will go on to be a better place. We need to have a little faith and adopt a Peter Mandelson like quality about the future. The economy, like Peter, will come back. Now there is a scary thought!!

Until next time…