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Don’t crow too loudly

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by Peter Switzer

It’s significant that on the day that my old UNSW colleague, Steve Keen, starts his walk from Canberra to Mt Kosciuszko, wearing a T-shirt which reads — “I was hopelessly wrong on house prices. Ask me how.” — Wall Street finished up over 103 points at 11,123.11.

That’s five days in a row for the major US market indexes.

The bet was made between Steve and Macquarie’s Rory Robertson after they made conflicting submissions to a parliamentary economics enquiry.

The two economists disagreed on whether house prices would plummet like they did in the US during the GFC and like Japan before that.

A short-term date was established and property prices did not fall, they actually rose. Steve has argued his scenario was on a longer timeframe but he gambled and lost with this bet, so he’s set to lose a bit of weight over the next week or so.

The lessons

So, what’s the lesson?

First, don’t bet on specific aspects of the economy — it can make a monkey out of you. Today Tonight asked me recently to make a bold call on the Aussie dollar and I declined. When I am asked at business conferences about the dollar, I always reply that the Oz dollar will rise or fall or stay where it is!

Right now the CBA has it falling to 85 US cents by New Year while NAB sees parity or 100 US cents by that time. My gut feeling, based on China and that the Yanks won’t raise interest rates for some time, is that we go higher but I don’t say this with strong confidence.

Back to big calls, the economy and what we learn from the Keen gamble.

The second lesson is that economies have a tendency to muddle along out of potentially serious problems. We did that after Lehman Brothers failed and the governments of the world stood behind their banks.

And we’re doing it now with the Greek debt challenge.

Right now the market loved Intel’s result, JPMorgan’s too, and then the Beige Book also helped optimism as it surveyed the economics of various regions around the States.

More jobs

But the big news is something that Intel referred to and which JPMorgan also spoke of — that’s jobs.

The company said it plans to create 9,000 new jobs in the USA!

And this came as US retail sales jumped 1.6 per cent in March, which was the biggest increase since November. Also business inventories went to the highest level in seven months in February and this was seen as a sign that business is expanding production to meet rising demand.

This is confirmation of the reality of the US economic recovery and a great sign for bulls who are into buying shares.

Economy with bite

The final lesson has to be to remember the Steve Keen incident and don’t crow too loudly as the economy can always come back a bite you. I think the bull market has some time to go but I do think there will be a pay back time for governments cheating the fate and spending big to avoid the Great Depression MkII.

Mind you, I don’t know what the price will be. It could be higher inflation, higher taxes, much slower growth for the global economy and even a property price slump one day!

However, I still think it’s safe to be an optimist for the time being as stock markets, for most periods, put a whole lot of positive years together before the inevitable negative ones come along.

One day Steve might be right but it will be when China goes into recession and we have an over-supply of housing. And that won’t happen for a long, long time.

For advice you can trust, contact Switzer Financial Services.

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Published on: Thursday, April 15, 2010