Issue No. 16. January 1999
17.I.1999
Given the recent performance of American stock markets - up until last
week
anyway - I had been having some doubts about my overall analysis. Was
there something crucial that I had missed? Might perhaps we really have
seen the worst of the global
economic crisis that began in 1997 (as stock prices in the USA suggest is
believed by many investors there)? If the markets had indeed already
bottomed out, then The Skeptical Investor
But, after a few weeks of reflection and detachment, my core view
has not changed. Indeed, my belief that the global economy has changed,
fundamentally, and that we have already entered a major secular
deflationary trend, has been strengthened.
The fact is that interest rates are falling at the same time that
commodity prices and corporate profits growth are also declining. Adjusted
for inflation, oil prices recently fell to such low levels that they rival
those during the Great Depression. Canadian resource stocks -
historically often used by investors to generate income during
periods of low interest rates because they move in opposite
directions - are doing poorly. Trends like this cry out "deflation
ahead!"
The performance of the US dollar is possibly the single most significant
sign that something very fundamental has changed. I have several times
noted and emphasised the importance of the strong dollar:weak Yen
relationship in
understanding global trends. This previously well-entrenched relationship
appears to have changed: last year the dollar fell significantly against
the Yen and it stayed down. It has also, more recently, dropped against
other currencies. At the end of 1998, the trade weighted average of the
dollar was off approximately 10% from its highs. I have not yet had an
opportunity to assess what this trend is going to mean, but it is
certainly very important: likely it will eventually turn out to have been
the single most important financial event of 1998.
The interesting thing about the TSE300 is that, unlike its American
counterparts, it has recovered from its lows in the second half of 1998,
but has NOT rebounded to its peak. A glance at a chart of this Index will
immediately show that its current recovery may easily be viewed as a
"dead cat bounce" rather than a continuing bull run. Thus those
who now believe that the new highs established in American stocks in the
past few weeks reflect anything other than a, admittedly highly-aberrant,
"dead cat bounce" perhaps should take pause. A serious decline
in the TSE300 now may well indicate serious difficulties ahead on Wall
Street.
To close, a Happy New Year and successful investing to all readers.
Is a global recovery underway?
Being without my eyes and ears on the world (in addition to a computer
crash I am also on the road) was unintended, but the break may have been
fortuitously advantageous. When dealing with matters as complex as the
global economy it is very, very difficult to maintain one's perspective.
It can be hard to "see the forest for the trees" and easy to end
up with tunnel vision. Sometimes stepping out of the forest for a while
clears the mind.Where are we?
In order to gauge where we are now, I suggest looking at the Canadian
stock market instead of the American. At present it may be a better
indicator of the fundamentals of the North American economy than the US
stock markets because the latter have become so totally irrational that
their behaviour is no longer indicative of anything much. The Canadian
economy is very closely linked to that of the USA, which accounts for 80%
of our
exports and, I believe, about 60% of our total imports. The widely-watched
TSE (Toronto Stock Exchange)300 Index may thus be viewed as a damped (due
to socialism and confiscatory taxation) analogue of the broader North
American markets. It almost always moves in the same direction as the DJIA
and the SP500.