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US Economy – World’s Greatest Investor Speaks his Mind
There has been financial markets action that suggests that people are indeed concerned with the direction of the US economy. These concerns were reinforced last week with economic data showing the unemployment rate had grown to 9.2% as the US economy only added 18,000 jobs last month. Any continued weakness in the job market will adversely impact upon the levels of consumer spending.
Billionaire Warren Buffett said he is wagering on continued US economic expansion and he doesn’t expect a second recession. Buffet told Bloomberg Television’s Betty Liu on the “In the Loop” program, “How fast the recovery will come, I don’t know. I see nothing that indicates any kind of a double dip.”
Concerns for not only US economic growth but also world growth have resulted in share markets all over the world falling.
As long term investors what should we be doing?
The Google Index
I have been saying that the direction of the Australian economy is very dependent on the events that unwind in Asia predominantly China. These countries are fuelling our resources sector as they demand more and more.
Well guess what we are in the age of new technology so maybe we need to start looking at new economic indicators. The most famous economic indicator drawn from everyday life is the “Big Mac Index” which compares the price of the very famous burger in different currencies. This measures, however crudely, the difference in purchasing power of different currencies.
However, maybe we need to be considering the “Google Index”.
According to a recent article by The Economist, It appears that many Chinese are now concerned with the implications of their economic position if the frequency of the Chinese equivalent to “Hard landing” and the amount of times it has been searched in Google is any indication.
Has Australia utilised these good times in regards to establishing ourselves for post resources boom? Or will we look back and think what a wasted opportunity?
Need to Remain Patient
From an investment returns perspective it seems the GFC is still here. People are asking when asset values will recover.
As with everything the longer things go the more people question will it ever change? The answer to that is only if it is different this time and never is.
The graphs Missing the Best Trading Days and Rolling Returns Since 1980 demonstrate that we need to stay the course and commit to our longer term strategy. The fact that so much has gone against us in the last few years is reason for the attitude that it change sooner or later. In a drought every dry day is said to be a day closer to rain.
In short we cannot afford to be out of the market for the days that it does go up. For example last week the S&P 500 increased 5.6% its largest weekly gain in 2 years.
Also, importantly when we look at rolling returns over longer periods of time the returns become more palatable. Obviously 3-5 years during the period such as the GFC will not look spectacular but the question is what does the next 5 years have install?
Will the Bubble Burst?
An article from David James in the BRW discusses the bursting of the Australian residential property bubble. I have been discussing the “expensive” valuations of our property for sometime however the market is holding up, so far.
In the article Tim Lawless, research Director of RP Data, says that in the year to the end of April, the top one-fifth most expensive capital city suburbs recorded a decline of 5.4%.
Naturally, the parallel is then drawing to the US residential property market which is roughly 1/3 below the peak in 2006.
It should be noted that the mortgage debt to GDP ratio in Australia is around 87% according to The Reserve Bank of Australia. James cites the US peaked at about 75% saying that our bubble is bigger than the US.
I guess we still have strong employment in our economy and the question is what would happen should the “lucky” country become subject to a global slowdown lead by China thus decreasing the global demand for our resources?
Markets Unsteady – Again
More than US$2 Trillion has been wiped out of global stock markets values from the high reached in May. The US stock market has declined for the last 5 weeks as a result of economic news that manufacturing weakened and that unemployment rose.
What does all this mean?
Well according to Bloomberg the S&P 500 is trading at 12.2 times earnings. So what does this mean?
This means that for every dollar of profit you need to pay 12.2 times that amount to buy the business on the stock exchange based on current prices. The long term average is anywhere between 16 and 17 times for this index which means that we are acquiring the assets on historically cheap terms. That means that there is already consideration for some “bad” events in regards to the current prices. Naturally shares can always get cheaper but if you are a long term investor there is an opportunity to take a longer term position and reap the rewards.
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