It would be churlish and cowardly of your humble essayist, having lampooned the market’s soothsayers last week for their droll predictions, to shy away from a forthright stab at the impossible himself.
Besides, readers should also be aware that it is well nigh the end of the year and there is little more to say – except for tomorrow’s column, which shall be, as the French say, “une balltearer”.
Bearing in mind also that it is a desperate and vain indulgence for any media pundit to talk about oneself – even to deploy the personal pronoun at all – we
should concede, in the interests of transparency that, as far as last year’s prediction went, we remain on track.
A brief history of forecasts then: we predicted the bear market two years too soon, calling shares overvalued since 2005. Prices have since come back to 2005 levels.
When the crisis did hit, in mid-2008, we said it would entail a deep recession and a four-year bear market. Intrepid at the time, that forecast now looks timid.
The bear market soon enters its fourth year and it is evident the world is engulfed by a far bigger event: the great deleveraging. This is no ordinary cycle. In America this week, US debt finally, and for the first time, surpassed the country’s gross domestic product – at $US15.18 trillion.
In fact, those “doomsayers” so ridiculed by the mainstream a few years ago are now looking a good deal more perspicacious than their cuff-linked counterparts who are paid large sums to predict things and pontificate over aged claret and rare fillet. We may be just as close to tinned food, bomb shelters and vegetable patches as we are to the utopian “stronger for longer” visions of the bull market.
Having called for a four-year bear market in 2008, we also missed the bear market bounce from the nadir of March 2009. And of course, there was deep recession, but not in Australia. Thanks to China, we have managed to stay out of recession for 20 years. It is London to a brick that when China slows, we, as a country, are in for a torrid ride.
In any case, this time last year, the equity market prediction in this very space was – and this is the exact text of our penetrating analysis: “Here is our not one-year, but two-year, view: it ain’t going anywhere.”
In fact it went down, although we remain only at the mid-point of the forecast period. As the forecasts of your bashful scribe have proved more prescient than most we can only warn that we are probably overdue for abject humiliation. Such are the pitfalls of prophecy.
Still, the most likely outcome now would appear to be global recession next year as the world sinks into a Japanese-style long deflationary funk. Bailouts, the debauching of risk, corporate money in politics and corporate welfare in general will stave off recovery. But the culprit is debt.
One could spend a lifetime poring over data and countless metrics but it is simple logic that leverage cannot mount forever. Growth rates since the early 1990s were fuelled, undeniably, by rising borrowing. Excessive borrowing has brought the world to the brink of collapse via the sovereign debt crisis. And so it is that economic growth, and therefore sharemarket returns, will be slower while the world unwinds its debt.
In the 1980s in Australia, private sector debt was roughly 50 per cent of GDP. It peaked at 150 per cent of GDP in 2009 and has barely retreated since then.
There is a long way to go.
And so it is that we are deeply concerned for our old friends at Macquarie Group, the masters of leverage. Please do not die!
You are the wind in our sails, the yin to our yang.
It was with great sorrow that we read speculation this week that the mighty Macquarie might be selling the bit of itself which is actually worth something.
“Macquarie Group, Australia’s biggest investment bank, may be considering the sale of its retail lending business to concentrate on investment banking,” said the report, which was met with the requisite “we don’t comment on speculation”.
“The banking unit, also known as BFS, is one of six key divisions at Macquarie, and accounted for the equivalent of 45 per cent of total profit in the six months ended September 30 and generated about one-third of the group’s total funding,” the report said.
It was their banking licence that saved them. Under the sovereign guarantees scheme – the detail of which you won’t find any more as it has been purged from public data-bases – Macquarie raised nearly $17 billion in wholesale funding.
That cool $17 billion bought breathing space. Macquarie went for long duration funds – five-year paper that is. The three-year paper starts to roll soon. That means the bank has to refinance, likely at a higher rate. It’s tough enough on global bond markets for the Big Four.
But how, pray tell, did they splash that $17 billion?
A recent leak to a friendly source gives us a hint: “Macquarie Group has moved to take advantage of deleveraging by competitors in Europe, snapping up a parcel of loans offloaded by the beleaguered Societe Generale.”
The story labelled this brazen taxpayer-supported punt as a “classic counter-cyclical play”.
Did they buy some Greek debt too? Terrific 55 per cent yields, they say!