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Doomsday merchant time

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by Peter Switzer

Halloween may be over but the aftermath is still with us with the doomsday merchants trying their hand at spooking the market. And while one bear hasn’t changed his pelt, another is being realistic enough to see the value of prop up actions such as QE2.

So let’s take stock of the down day on Wall Street and then consider what our two bears are up to.

Basically, disappointing profit results from Cisco got mixed up with new concerns about European debt problems, with a special emphasis on Ireland’s woes.

The Dow dropped 73.94 points, or 0.65 per cent, to 11,283.1. The Nasdaq lost 0.9 per cent to 2555.52 while the S&P 500 gave up 0.42 per cent to end at 1213.54.

Up or down?

Lance Lai, the charts champ on my Sky New Business Channel program, warned we were in for a pullback, profit-taking period or consolidation within a general uptrend.

Other analysts based in the USA also run the same argument but, of course, there are dissenters.

One such bear is Jeremy Grantham, who has argued that the Aussie housing sector is a bubble.

Local economic whiz, Christopher Joye from Rismark International, says he’s wrong and has challenged him to a potential $100 million bet. You should see the interview I had with Joye this week and read his articles (here and here) on our website.

Grantham has told US investors that they should be long cash for when stock prices fall.

Long-term, he likes copper and oil, which shows he’s not against everything and he, of course, likes defensive stocks.

Roubini’s view

At the core of Grantham’s criticism is his unhappiness with measures such as QE2. However, the famous US bear, Nouriel Roubini of Roubini Global Economics, has a surprisingly different take on increasing the money surplus.

In fact, he criticizes the European Central Bank for not increasing the money supply at a time when Eurozone economies are going hard with fiscal restraint!

Showing his old-fashioned economist skills, he knows falling inflation and economic growth can be treated by the extension of the money supply. These measures can be toxic if the economy is starting to pick up pace and prices are on the rise but that’s not now in the USA and Europe.

“To me QE2 was a necessary evil because with growth so below potential and with inflation following a risk of deflation, if we had not done QE2, the risk of a double-dip recession and of deflation would become more significant,” Roubini told CNBC.

He suggests we could see QE3, QE4 and even QE5! But I hope he’s wrong — this guy does have a tendency to be overdramatic.

However, I like his central argument that you can’t let important economies fall off a cliff as it would rock economies and global stock markets. This is the time for measured assistance to maintain confidence, which is the key in these challenging economic times.

Muddle through

You know the only good aspect of our Reserve Bank’s ridiculous interest rate strategy is that it must believe, like I do, that troubled US and European economies can muddle through their difficulties because if they can’t, these rate rises are somewhere between stupid and reckless!

And if they’re wrong, rates will be slashed again here in Australia.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, November 12, 2010