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Is this time different?

8 Apr 2022 2 month(s) ago

Thinking what is happening is very new can be dangerous. But what if it is true?

Wise investment sages warn against believing anyone who says ‘this time it’s different.’ The investment guru Sir John Templeton described the phrase as "the four most dangerous words in the English language".

It is true that in the past these claims often turned out to be false and that long standing investment principles remain viable. One need only think of the debacle at the beginning of the century.

But there are also things happening in the markets that really are different, and that make judgements extremely hard to make. For example:

  1. There has never been $6.5 trillion transacted in the foreign exchange markets every day, only about 1% of which is actual trade of goods and services (the rest is mostly high tech financial activity).
  2. There has never been cryptocurrency, essentially made up digital assets (that aren’t currencies).
  3. There has never been efforts to establish central bank digital currencies. These have sinister implications for personal freedoms and, because it is interest free money, it poses a big threat to private banks.
  4. There has never been the kind of intense digital surveillance that the Chinese are using to increase their despotism to extraordinary levels.
  5. There has never been a ‘pandemic’ like covid: a panic largely based on testing (using now discredited kits) rather than looking at symptoms. The global shutdowns were unique in human history, as were the forced vaccinations, which effectively put hundreds of millions into a drug trial.

These and other developments suggest that investors should at least be open to the idea that ‘this time it’s different’ because financial markets are evolving in new ways, even if the human behaviour that informs them is much the same as always.

Firstlinks addressses some of the unusual characteristics in the markets:

“The cash rate in Australia has never been lower, but it will start to rise after the May election. Globally, negative bond rates made up 30% of global bond indexes in 2021 but it's now down to 5% as decades of falling rates are over. The US Treasury 2-year versus 10-year yields spread is at its most deeply-inverted for 15 years. Governments around the world have never bought so many securities but that is also ending. Commodity prices such as for coal are at 20-year highs, while lithium is at record levels. The war in Ukraine threatens global peace and nuclear attacks more than any time since World War 2.

“Where once we saw a future of smaller governments, now we face a more intrusive and bigger public sector. Most people in the world now live in an autocracy, while Donald Trump is the bookies' favourite to win back the Presidency in 2024 and who knows how divided and aggressive the US will become. Putin in one corner, Trump in another ... oh, dear!

Not much deja vu in that lot.”

Global stock markets remain near their all time highs and the S&P200 has been solid. The splitting of the world that is occurring because of Russia’s invasion of Ukraine is perhaps more a return to the Cold War divisions. It has certainly divided fund managers, as Firstlinks observes:

“While some fund managers are on the right side of these disruptions, such as those backing resources and energy, others have misjudged the changes. For example, between the start of November 2021 and end of March 2022 (five months), the ASX200 Total Return index was up 4.5%, but the ASX200 Resources Index rising 34% was offset by the ASX All Technology Index down 19%. That's a 53% difference in two sectors of the ASX Index. Never deja vued before.”

Australia’s old industries should be beneficiaries:

“One big hope for our economy and Federal Budgets, as well as many companies and fund managers, is that the resources boom continues. The global gas crisis is a boon for local producers such as Woodside. Mark Taylor, Senior Equity Analyst at Morningstar, expects Woodside’s near-term earnings to soar due to higher prices for hydrocarbons but in particular to uncontracted LNG.

“The massive upside has already fed into the Budget deficit improvement announced by Josh Frydenberg last week. Exports of resources including energy are expected to reach $425 billion in FY22, or 50% more than forecast, feeding a $100 billion improvement into the Budget coffers.

Australia is a major beneficiary of the growth of EVs, and lithium carbonate prices in China have risen from US$10,000 a tonne in July 2021 to US$75,000 now. The share prices of companies such as Pilbara Metals have increased 10-fold in two years. While carmakers are scrambling, Australian miners are developing new mines and raising fresh capital to fund future growth. In a sign of the times, GM and Honda have just announced a technology-sharing partnership aimed at producing millions of EVs priced at around US$30,000 by 2027.”


Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.


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