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Beware bears

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by Peter Switzer

My old mate and Australia’s scariest bear, Associate Professor Steve Keen from the University of Western Sydney, is back out of hibernation warning that the debt out there will come back to bite us in 2011. But the question is how long can Keen growl out his prophecies of doom before he admits he’s wrong on the implied economic and market devastation that lies out there waiting for investors?

I think he’s got until this year but after that he has to give up the prediction caper.

Market comeback

What got me thinking is the fact that the S&P 500 in the US has now come back something like 82 per cent since the market rebound of early March. So that means if you were in an ETF of that index, you would be down around 18 per cent after sitting through the crash of 2008 and the comeback years of 2009 and 2010.

If you listened to Keen and his US counterpart Nouriel Roubini and they spooked you, as was their intention, you might have taken your portfolio which was halved and plonked it into say six per cent or seven per cent fixed deposits for safety, while our S&P/ASX 200 has comeback by around 50 per cent.

And if you sold your home expecting a collapse in house prices, you would have missed out on a lot of capital gain, especially if you lived in Melbourne where house prices rose by more than 20 per cent since Keen made his scary calls.

Debt talk

His latest article on what lies ahead says we can’t beat the debt trap and I think debt will slow up the global recovery as well as the eventual retracing of stock prices, but the co-ordinated approach of world governments plus the growth potential of the likes of China and India keeps me in the tentatively-positive camp.

Market-wise, sector movements, valuations, the economy, market reaction to news, the movement of commodities and bonds all say stocks can go higher next year.

Sure, most economists, excluding Keen and Roubini, missed the crash. I did too but I was wary and was one of the few commentators who quoted Keen before the crash and before he became fashionable.

Big challenge

I just know that being right one time does not mean you will always be right. And just because all of the big banking economists, the Federal Treasury’s economists, the Reserve Bank and most market commentators missed the market meltdown and financial system flaws, it doesn’t mean that they will get it wrong this time.

My economics training tells me the challenge is enormous, but I believe strategic intervention can stimulate economic growth and eventually the debt to GDP ratio, which Keen rightly worries about, can be pulled back to acceptable levels.

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Published on: Wednesday, December 15, 2010