Where is the Investment Cycle?

Posted On: Wednesday, April 15th, 2015  In: Blog

We currently have low interest rates, a dollar that has fallen from a high against the USD that we have not seen for 40 years, low inflation and this has caused both the share market and the property market to go up rapidly.

There are cycles in investing just like there are cycles in the weather from drought to rain and also human cycles like from overeating to dieting. And just as unpredictable!

So when was the last cycle? In property, the last high was in 2003. If the property cycle is somewhere from 7 to 10 years then this means that in 2015 we have reached a high. In shares, the mining stock bombed in October 2007 and the rest of the market in early 2008. Shares operate somewhere in a 5 to 7 year cycle. Does the recent bust in iron ore prices mirror the bust 7 years ago?

All ords (AUS) as of Apr 13, 2105 S&P Dow Jones Indices

All ords (Aus) as of Apr 13, 2015 S&P Dow Jones Indices

Based on these two different cycles and their lengths the simple prediction is of a bust in both at a similar time. And busts can be ugly in the short term: 25% to 50% declines. That is ugly! A couple of clients invested in a portfolio of shares in early 2007 and only now are they recouping their losses.

And how accurate can these projections be? Completely unreliable in respect of either timing or size. Not one person came out and said that they predicted the collapse of 2007/2008. Even the most dishonest commentators have not even bothered to lie that they foresaw that collapse.

Our advice has always been that there are in the end only 3 types of investments; loans, property or businesses (shares). If shares and property are now overvalued then in the past investors turned to loans usually to banks (term deposits, cash management funds) but also more risky loans to businesses or property developers via intermediaries (Howard Mortgage Trust has now repaid all its depositors after many years of frozen money).

So what do you do? The honest answer is probably nothing. Put your money in a cash management account and be satisfied that you can get 2%. In some countries overseas you have to pay to keep your money in a bank. You then have the resources to buy when prices are low. Remember you need to add the word “if” to the last sentence.

Can you ask someone for some wisdom? We knew one stock broker who if you rang and asked what he thought of XYZ share he would say yes it is a good company, how many would you like? But if you rang and asked what does he recommend, then you got a completely different answer. If you go to a person from whom you want advice about what to invest in, then you will get that advice. However you are unlikely to be told that we do not want to earn any money from you because there is nothing safe to invest in. You need to be extra careful in seeking advice at this time. If you get carried along by the market it is more likely to be down and heavily down.

money

And how mad is the boom? A client recently informed us that they and their fellow owners were offered $27 million in cash in a suit case if they signed the contract for sale of a development site on that day.

The client and their associates had just signed a contract of sale for $25 million and so could not take up this offer. There is nothing illegal by the owners accepting cash. One presumes that they would have had an Armaguard van outside waiting to take the cash away.

armaguard

The purchaser may have had some explaining on how they got the cash into Australia. As for the Chinese origin of the money, forget about fines or even gaol sentences; the authorities there believe that the best penalty is the firing squad. (To the 50,000 hackers employed by the Chinese government, we have no idea of the identity of the buyer so please do not bother hacking our server).

Sorry that we cannot give clients some easy investment tips. The major advice is be very, very careful!

 

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