Saturday, July 10, 2010

Wall Street Journal : 1937 vs 2010

This chart appeared in the Wall Street Journal on 2 Jul 2010[Link]:

It shows the stock market movement in 1937 (light red line) being closely correlated with 2010 (deeper red line). It may all be just coincidence but I remember this story about the 1987 crash very well - George Soros when asked how he managed to escape unscathe during the crash said that lengendary investor John Templeton shared with him a chart that showed the 1987 market was closely correlated with the 1929 one before the big crash.

All this may turn out to be a something like Paul the Octopus (or Singapore's parrot Mani) whose picks have correlated actual World Cup match results. All luck and coincidence? However, my take on the market[posted here] is we are indeed in for one last rally (shown also in WSJ's chart) fuelled by good company results, coincident economic indicators which will show good growth and plenty of liquidity. This last rally catches the short sellers off-guard and sucks back in the money that left the market in May. The govt stimulus will run out and austerity measures will kick in later part of the year and Paul Krugman will be proven right(?)[Krugman on the coming 3rd depression] and this debt ridden global economy goes into a painful restructuring....


18 comments:

Anonymous said...

So are we going to have World War III 4 years from now?

Anonymous said...

I watch CNBC and Bloomberg and believe Krugman is spot on. However, the local economy may not feel the full impact of the next big downturn. Too much is at stake. With the upcoming local election and hugh reserves, I believe we will be made to perceive that we are ok. The MSM will ensure that. On a personal level, I minimise all asset classes except RMB inder my pillow. dt

Anonymous said...

Whether recession or depression again, life goes on.

Everything will be peaceful and prosperous on the surface.

Of course some will suffer, but the majority will not, thanks to the PAP.

Anonymous said...

When everyone else around is worse off, you are still better off. So depression is relative, likewise during a boom too.

Anonymous said...

Lucky, 2010 is a vastly different world compared to 1929. In 1929 they still don't know how the economy worked. Now they know the solution to any global financial n economic problems is to throw bucket loads of $ at the problem. After the double dips of 1930's, I don't think the political and financial leaderships of the world will make the same mistake again. They may make new kind of mistakes but repeating an old disastrous mistake is pretty unlikely from my perspective.

Anonymous said...

What is there to worry?
The saviours of stock market will come in different form to pop up the prices of stocks.
For example,
During asian financial crisis, HK central bank intervened the market by buying up the blue chips.
In Sept 2008, the SEC prohibited short selling of numerous finanical stocks for a while and
Federal Reserve pumped large amount of liquidity to the banking system.
Recently, IMF with ECB put together $1 trillion to rescue the europe from default and thereby
crushed the short sellers.
... so on so for
Next time market is down, they will come to the rescue again. Therefore the market will be down for a short period before it moves up again.
That's why don't worry, the market will rise and rise because in the mind of these central banks,
there is one and only one direction the market can go and that is market must go up and up.

Anonymous said...

Dear Mr Lucky

We already know that you know nuts about investing.
But I would be quite happy to follow your tips .. just like i would Paul the octopus. But pls spare us your doubt inducing analysis.

Btw, your chart shows the great depression during the Obama presidency. Surely not! POTUS Obama farts smell of rose and turns water to wine.

Speaking of wine, Mr Krugman was quite critical of Obama until he got an invite for dinner. Maybe he needs another serving of the Obama special afpak magic flower/potion?

e-financialhub said...

Lucky, would Gold still be the way to go with the equities market in such a prospect?

Anonymous said...

depression or not..keep healthy keep honing yr essential skills
keep happy
life goes on..

actualli if a serious depression comes, nature will do e course, for eg, the poor will rob the ultra rich, imbalances in income/wealth will beeven somehow..

Investor A said...

hi Lucky,
Thanks for the post. It's kind of eerie! Anyway, if this plunge really happens, how much do you expect the property prices in Singapore to move?

Anonymous said...

If china needs tightening to cool the market, more so sg which we dun seems to be doing, therefore it may be fair to expect our extremely overheated property mkt to crash any day.. when mortgages are worth more than property prices, that could be the bottom.

Lucky Tan said...

Investor A,

A simple way to look at the property market is that all rise has to be sustained by similar rises in income. If property rises by 50% and income rose only by 10%...ask yourself where did the money come from? Singaporeans borrowed from banks, inflows from foreigners, China?, some Singaporeans had huge savings and are using it ...today's Sunday Times one analysts suggest it is 'liquidity' due to low interest rates....and so on.

Whether you call it a bubble or not so long as the rise is much faster than income, it is
unhealthy because many have to borrow more and expose themselves to higher risks. So for the ordinary Singaporeans who are not owners of multiple homes and property tycoons. This rise is not good.

How long will it continue? There are 2 ways to look at this - how long will the govt allow it to continue. If the govt does nothing, it will contine until the global economy rolls over. Some govt like the Australian are taking harsher measures. My belief there is probably foreign funds play a big role in this bout of rise. This property booms is perhaps an 'extreme' situation - we have severe housing busts in USA, Europe, ...and unprecedented booms in various parts of Asia. Are we going to follow the same pattern of the US boom and bust? Many mistakenly attribute the problems of the US housing boom to fraud (in subprime lending) and the way the boom was finance through the issue of CDO, MBSs, etc. However, if you look at the housing boom-bust in Ireland, Spain, and parts of Europe, they didn't have the fraud yet the bust is equally painful.

When people come to me to tell me they are buying this property and that, I don't dare to tell them not to buy because nobody can really tell the exact timing of the peak and the bust. But for myself, I will never buy anything stocks or property when I see this type of euphoria. It may rise another 5% or we are 30% away from a high peak ...I won't know but I won't buy. There is this spreading belief that prices cannot go down because of limited land and rising population, this is the exact same argument that fuelled the Tokyo property bubble and when it went bust it sunk for more than 20 years.

Many months ago, I wrote about the strategy of investing during recessions and some investors (in property and stocks) only buy during recessions....if pple apply this to property, they don't have to end up in a situation like today wonder whether to buy or not to buy. The risks is definitely higher and it only makes sense to buy for those will tons of excess cash (and don't care about pricing like the $32M Sentosa Cove purchase) or intend to flip quickly for profits.

Anonymous said...

Singapore has overtaken Hong Kong to become the frothiest housing...

http://www.economist.com/node/16542826

Divali said...

"The New Buzz Word – Alternative Yield"

http://www.thereformedbroker.com/2010/07/11/the-new-buzz-word-alternative-yield/

Investor A said...

hi Lucky,
Thanks a lot for your kind reply. Looking at the launch of 368 Thomson recently, it seems like 75% of the buyers were Singaporeans - I am not sure where the money is coming from. Maybe savings?
You made a comparison with the Tokyo asset bubble. I think the extent of the "bubble" in Singapore is much less than Tokyo in the late eighties. During the euphoria in Tokyo, prices in the hottest districts were $1 million per sqm (Crazy!!). It is now slightly more than 1% of the peak at $12,884 per sqm. For comparison, Singapore is doing about $11,324 per sqm and HK at $16,422 now. We are nowhere near $1 million per sqm. So in a way, we can argue that there's more potential for upside, with the demand far outstriping supply (as long as we don't hit the crazy prices seen in Tokyo in the late eighties).
Moreover, it seems like the China property bubble is expected to burst and the cash-rich Mainland Chinese would be desperate to park their cash in bricks and mortar somewhere. I reckon the most familiar places for them to buy property would be Singapore and HK.
What do you think about these observations?

Lucky Tan said...

Investor A,

Every bubble you get confident investors popping out. In 1986, 1996, 2007 many Singaporeans can easily afford the downpayment for a private house, it is only whether they choose to step in to buy or not.

In the 1996 bubble, the economy was so fantastic most people who could see nothing can go wrong. Incomes were actually rising and housing prices triple within less than a decade and was climbing every month of the year. Shortly after, we had the Asian Crisis.

Today's bubble is actually smaller although prices are hitting records. Tat is why some say it can continue. I'm not interested because anything can happen to bring prices down and usually it happens suddenly over 1-2 week period the market suddenly turn over. In 2007, the economy was on the upswing all the way. Within 2 weeks of the US subprime crisis , the property market suddenly froze and later turned down. In he recent Euro 'mini-crisis' volumes shrunk by 50% as buyers wait and see. Had there been misteps in Europe, the market could've turned.

Everything always look rosy before they turn over. There is always the possibility that it keeps rising and rising...but nobody can tell for sure. Every peak of the property market you can list a whole host of reasons why it should go up further and more and why there is little risk. But if you look back at the lessons of history, it is always best to buy during recessions and advisable to stay conservative when it comes to property.

For most Singaporeans who buy to stay they pay for their homes over a 20-30 year period. It is guaranteed that there will be serious recessions within that period...

Watching prices go up, looking at confident buyers, analyst who give 20 reasons why prices won't turn down....does not tell you if the peak is next week or 2 years from now. The property market when it is frothy and risen beyond income gains can just turn on a dime if people get risk averse. Some argue that foreign money from China will keep coming or demand will not fall due to immigration or land is limited. Others know it is a bubble but are in because they expect the bubble to get bigger. There is nothing new here. In 1996, Singapore property was being snapped up by rich Indonesians the argument is there are so many of them they will keep coming because the Indonesian economy was a rising star (due to large population, resources etc). Today people say China is the rising star and chinese millionaires come to Singapore. There are parallels between the Indonesian economy of 1996 & the Chinese economy of 2010 - low wages of workers, corruption, lack of democracy, high corporate debt and overconfidence. Within months, the Indonesian economy crumbled, the Indonesian millionaires became paupers, the poor rioted, the govt fell and the Indonesian economy tanked after decades of non-stop growth. All it takes is for some problem in China to suddenly take hold and bring everything down along with it the skyhigh property prices in Singapore. I'm not saying it will happen for sure but that it can suddenly and unexpectedly...because most peple don't see it coming, it will catch most people off-guard.

I prefer to buy in the next recession even if the prices are potentially higher than today because you're more assured that the prices are good and tested by all sorts of downside pressures....and if opportunities don't come, just give it a miss. Like what Buffett said, always wait for a good ball before you swing the bet so you won't miss. There has always been opportunities because there were always human errors in man-made system that is brought about by greed and fear. Never ever worry that opportunities have slipped by and are gone forever - more mistakes are made chasing after yesterday's opportunities than anything else. Property prices have already risen a lot, while they may (or may not) rise somemore, these are yesterday's best bets and the lesson learnt from the past is 'don't chase' yesterday's opportunities.

Anonymous said...

Thanks Lucky for your detailed analysis.
I am a civil servant and so, my income is quite recession proof. I've been thinking of getting a
2nd property but don't know when is a good time to make an investment.

Your analysis of bubbles and the comparison of rich money from Indonesia and China was very good indeed. Thanks for sharing so generously.

Personally, I see a dangerous bubble forming. Incomes today have not really grown compared to 8 years ago, but property prices are escalating dangerously. Salaries won't rise, given the huge influx of FTs, and I know of graduates whose starting pay was even lower than mine 8 years ago.

Salaries seem destine to shrink, given that our economy is chasing after "CHEAPER, better and faster".
And with property prices still rising with no regard to shrinking salaries, I can only say that it is very likely we will see a bubble bursting very soon.

MM Lee predicts otherwise - no bubble. But he has been consistently wrong in his financial predictions. I use him as my crystal ball. When he says 'yes', I will act on 'no' and vice versa.

Julian Cartman said...

What is there to worry? The saviours of stock market will come in different form to pop up the prices of stocks. For example, During asian financial crisis, HK central bank intervened the market by buying up the blue chips. In Sept 2008, the SEC prohibited short selling of numerous finanical stocks for a while and Federal Reserve pumped large amount of liquidity to the banking system. Recently, IMF with ECB put together $1 trillion to rescue the europe from default and thereby crushed the short sellers. ... so on so for Next time market is down, they will come to the rescue again. Therefore the market will be down for a short period before it moves up again. That's why don't worry, the market will rise and rise because in the mind of these central banks, there is one and only one direction the market can go and that is market must go up and up.