Things To Come

This is not related to the famous science fiction book "The Shape of Things to Come" by H.G. Wells but rather my take on the stock market. Regular readers of my blog would know about my stance on the market today. Take advantage of the market exhuberance but beware of what is coming ahead in 2014. I have said in the past, history tends to repeat itself, even if the Feds keep printing money and delay the inevitable, the outcome will still be the same. Personally i have a bearish outlook for stocks in 2014, i let the chart below do most of the talking. 

   
Eventhough we have not reached market tops, we are quite close. I think DowJones Industrial average is a better indicator of global market cycles than S&P500, Nasdaq or other indices. Of course our very own STI can tell a different story but there is a high correlation between the two.

On first look, you might say the DJIA is moving perfectly between two parallel lines but the bottom in Sep'2002 does not touch uptrending line. Another fact is that the bottom in Feb 2009 was actually lower than Sep 2002, which lets some people believe that we have been in a bear market since 2000. I however, do not think technical analysis takes into account all the things that have changed. We have not taken into account how the index NOW has more components than it did 20 years ago, the revolution of the internet and increase in accessability to trade the market. All these things add to the volatility equation. 

What has happened since 1992? We have seen internet bubble and housing bubble. What has allowed for these bubbles to form? Ever since 2000, the central bank's policy has only delayed an eventual bottoming of the stock market. But i am not going to complain about that because it has made many, including myself, to get a decent return from investments. 
Recent activities in the stock market and other asset classes is sending a clear signal that bubbles are forming everywhere mainly due to loose printing of money and low interest rates. Many people are quick to forget how often central bank policies have backfired throughout history, as they try to artificially quell inflation. Central bank policies have only three achievements throughout history: 
1. Making a few successful traders, filthy rich over a short period of time >>> suddenly they become guru's and start conducting seminars and writing books.
2. Ensure Banks make more money, and also making the wealthy eventually wealthier
3. Eventually failing and sending the world into turmoil

What is happening recently? You must have seen Twitter jumping almost 73% on its IPO debut appearance. Everybody is probably thinking, hey i want a slice of that pie also. But did you stop and think about the business of twitter? How are they able to generate income through advertisements alone? I guess there will always be followers who will buy into the hype but i do not think its a sustainable business model, same goes for Facebook. Another internet bubble in the making perhaps.

In Asia, we see bigger bubbles forming across all asset classes. Look at the Indian stock market which has reached record highs over the past week despite all the problems and massive devaluation of its currency. Its definitely speculator's market, with no fundamentals. Look at the chart below for SENSEX, where is the supporting line for their post 2004 rally?

   
Housing markets in Singapore, Hong Kong, China and Australia are all in a bubble.
Australian housing market has been on an uptrend since the 1950s and is one of the world biggest housing bubble. Now Aussies are being allowed to use their "superannuation funds" as collateral to buy residential properties, reflating their bubble again.  Look at the charts below:

So just beware of things to come. It is not going to get easier. Central banks around the world are clouded by their hubris, endlessly printing money and stretching without contraints. Bear in mind, our financial system as it stands today has a very short history compared to the thousands of years of written history. No body is sure how the future will play out. But i do know for sure, increasing asset price volatility is here to stay. 

The best defense would be to: 
1. Diversify your assets (Stocks, Commodities, Property etc.)
2. Don't take on "bad" debt. (read Robert Kiyosaki's Rich Dad Poor Dad, in case you are not sure what is good debt and bad debt.)
3. Avoid hyped up IPOs (which gets undue media attention)
4. Hold some cash reserve (SGD is still one of the best in the world)


Since last week you will hear and read in every type of media that the economy is going to get better ahead. Yes it will, I am counting on it. Just be prepared to take profit and close positions.

I leave you with a statement in an article by BoeckhInvestmentLetter which i like very much:

"The fragile state of the economy and financial system will continue to require inflation of money and credit, heavy government intrusion into the private sector, and frequent resorting to subsidies and support programs. This will continue to distort relative prices of labor, goods, services, and assets. It will sustain the economy in an artificial state and will compound instability and make it impossible to understand what is real and what is not."