The best is yet to come

Wednesday, 30 August 2017
Melbourne, Australia
By Bernd Struben

  • Advantage who?
  • Why you need to keep an eye on credit creation
  • My greatest passion is trading

‘The Best Is Yet to Come. Advantage Europe, Rebound in Spring’.

This is the headline from the lead article of the 2008 Europe Real Estate Yearbook, released in December 2007.

The yearbook focused on commercial real estate opportunities across Europe. And the lead article offered investors an economic forecast for the year ahead.

As you undoubtedly know, that forecast proved to be a tad, erm, optimistic.

Yet almost all of the top analysts — and financial publishers — remained optimistic as 2007 drew to a close. I was living in the Netherlands at the time, working in The Hague. And over in Europe, there was a sense that we were isolated from the credit issues unfolding in the US.

The EU was expanding, after all. Our debt structures were different from the US. And, as the article in the 2008 yearbook noted, ‘the Eurozone has created 15.5 million new jobs since the end of 1988. Far more than the 11 million jobs created in the US.’

Now full disclosure, I was the senior editor at the company who published the Europe Real Estate Yearbook. In fact, I penned the opening headline.

Why am I sharing this blunder with you today?

I’ll get back to that, right after the markets.

Markets

 Overnight, the Dow Jones Industrial Average climbed 56.97 points, or 0.26%.

The S&P 500 gained 2.06 points, or 0.08%.

In Europe, the Euro Stoxx 50 index closed down 32.81 points, or 0.96%. Meanwhile, the FTSE 100 fell 0.87%, and Germany’s DAX index dropped 1.46%.

In Asian markets, Japan’s Nikkei 225 index is up 134.56 points, or 0.69%. China’s CSI 300 is up 0.08%.

In Australia, the S&P/ASX 200 is up 0.79 points, or 0.01%.

On the commodities markets, West Texas Intermediate crude oil is US$46.26 per barrel. Brent crude is US$51.85 per barrel.

Gold is trading for US$1,309.21 (AU$1,644.74) per troy ounce. Silver is US$17.44 (AU$21.91) per troy ounce.

One bitcoin is worth US$4,647.96.

The Aussie dollar is worth 79.60 US cents.

Advantage who?

Despite the writing on the wall — clearly visible in hindsight — remarkably few analysts or economists saw the GFC coming. You’ll still widely hear it referred to as a ‘black swan event’ today. Meaning one that was impossible to forecast.

And the market experts I worked with to put together the 2008 Europe Real Estate Yearbook would likely agree.

The analysis for the lead article came from Dr Holger Schmieding. He was the Managing Director and Head of European Economics at the Bank of America in London at the time. Today he’s the Chief Economist at Berenberg Bank.

Here’s what he wrote in December 2007,

Europe has not completed its cyclical upswing yet. Upswings usually do not come to an end before consumer spending has been strong. This consumer boom is still missing in Europe. We have almost all of the ingredients we need for a consumer boom. That is fairly strong gains in employment, a modest acceleration in labor income gains, and a structurally more sound economy than we had five years ago…

Once the US recovers from its current semi-stagnation — probably by mid-2008 — and once consumers adjust to the new level of oil and food prices, we should return to our normal cyclical path, with stronger consumer spending powering the economies ahead…

The EU will likely see a very soft start to 2008, with a much better outlook later in the year and for 2009.’

In case you need a reminder of how 2008–2009 panned out in Europe, below is a snapshot of the FTSE 100. It fell from 6304 points on 16 May 2008 to 3530 points by 6 March 2009. A staggering 44% loss.



chart image

Source: Google Finance
Click to enlarge

Well at least we got the ‘very soft start to 2008’ right!

Now I’m not writing this with any intent to besmirch Holger’s reputation. I met with him on several occasions. And as far as I’m aware he’s a very intelligent and well-informed economist. Not to mention a nice bloke.

So how did he — and almost everyone else, including myself — get it so wrong?

Largely because we were ignorant of the Grand Cycle. If you subscribe to Phil Anderson’s Cycles Trends and Forecasts, you’ll know what that is.

I won’t go into the details here. Phil covers the basics of the Grand Cycle in the Anderson Series, which you can read for free on the Port Phillip Insider website.

The point is that he uses his unique, deeply researched knowledge of cycles (yes, there are more than one) to great effect.

If you’re a sceptic like me, you’ll be wanting some evidence to back this up. So here you go.

In April 2007, this is what Phil told a small group of his private trading students:

If the Dow keeps going up and makes a significant new high around July-August, that’s it; that’s the peak, that’s the top. I’ll be going into cash.

Indeed, the Dow did make a significant new high on 13 July. Then on Tuesday, 6 November 2007, Phil emailed his clients:

The market is beginning to tell us what it is going to do in 2009. At this early stage, a low in early March would not surprise me.’

The Dow plummeted through 2008 and — like the FTSE 100 — hit its low on 6 March, 2009. Phil called both the high and the low, almost to the day.

Granted, there were perma-bears in the market who were calling for a crash in 2007. But most of these same voices had been repeating the same warning for years. And even after the market rebounded in 2009, they remained bearish.

Not so Phil Anderson.

In 2008, the UK’s largest financial magazine, MoneyWeek, led with an article on Phil’s thoughts about the collapse that year. He wrote that things would most certainly recover by 2011, with the US stock market leading the way in 2010.

He also wrote that we’d likely see US stock markets back to new all-time highs by 2013.

Once more, he called it all spot on.

I don’t know about you, but evidence like that goes a long way towards taming my inner sceptic.

Why you need to keep an eye on credit creation

One of the things Phil tells me we should be seeing at this point in the cycle is easily available finance or bank credit.

And here’s what he wrote to his subscribers,

The eventual depth of the real estate bust is determined by the prior level of bank credit creation that was permitted in the boom. This has never been any different since at least 1792 in the US, and even earlier in the UK.

From 1998–2007, the world saw unprecedented levels of credit creation, using real estate as collateral.

Speaking of using real estate as collateral for credit creation, the following caught my eye in The Wall Street Journal, ‘Tapping Your Home Equity for Cash Is Big Again’:

Rising home prices are getting borrowers comfortable again with the idea of tapping their homes for cash.

Home-equity lines of credit and cash-out mortgage refinances, two products that let consumers spend the windfall of home ownership, are back in vogue with consumers. That reflects growing confidence and is a potential benefit to the U.S. economy as homeowners have more money to spend.’

And over he in Oz, easy credit looks like it’s here to stay for some time yet as well. I shared the following excerpt from Business Day with you on Monday. But it’s worth repeating today with Phil’s message in mind.

Mortgage Choice chief executive John Flavell on Thursday predicted banks’ recent tightening of credit policies and moves to charge interest-only customers a higher premium on their loans were coming to an end.

That is because the changes announced so far should allow banks to comply with the 30 per cent cap, and banks might even start to ease up on the tighter conditions in the interest-only market.’

And so the cycle turns.

My greatest passion is trading

I mentioned Phil’s newsletter, Cycles, Trends and Forecasts above. It’s a great introductory service that gives you a tonne of insight into the real estate cycle, specific Aussie property markets, and much more.

But Phil doesn’t share any stock recommendations there. He restricts his trading tips and advice to the select group of subscribers at Time Trader.

And Phil’s passionate about his trading. As he writes,

My great passion…it’s not real estate, actually. My greatest passion is trading the stock market. Specifically, how to know — with sometimes great precision — what’s going to happen next, and how to make money from it.

But even better…

What to do if you don’t know what’s coming next — and to profit from this, too.’

Phil and his team over at Time Trader are as good as his word. I’ve seen the results for myself.

If you’d like to see the results of his existing (and former) recommendations yourself, and be in the loop for every new trade Phil recommends, the door has just reopened today.

Publisher Kris Sayce has gotten Phil to agree to take on new members. But that offer ends on 15 September. And Kris tells me he won’t open the service to new subscribers again this year. Perhaps not again until this time next year.

Time, in other words, is running short.

For all the details on Time Trader, go here.

Cheers,
Bernd