Why I don’t like talking

Fridday, 8 February 2019
Melbourne, Australia
By Greg Canavan

  • Fed drives a change in sentiment
  • Your advantage…
  • Credit growth continues to slow

Here’s something you may not know about me: I’m not a very sociable person. I’m not a fan of crowds and I don’t enjoy mingling or small talk. Some people probably think I’m just rude. I don’t mean to be. It’s just that I’m an introvert.

I’d prefer one-on-one situations where you can actually have a useful conversation.

It’s probably why I find myself writing for a living. I spend all my time reading or writing. And thinking about stuff. When I’m not doing that, I’m with my family. It’s a pretty simple existence, but one that suits my personality.

Reading is akin to listening. Except you don’t have to interact and you can, by putting the book down, stop listening whenever you want. It’s probably why I enjoy reading so much.

If you want to improve at anything, the art of listening will help. The doing bit is, of course, important. But learning from your mistakes by taking on feedback and listening is where the real improvement comes from.

This is especially true for investing. The problem is that most of us listen to opinions. It’s the worst thing you can do to become a better investor. That’s because we tend to seek out opinions that confirm our pre-existing beliefs.

As such, we are really just listening to a different version of our own thoughts. That’s not going to promote learning.

What’s my solution?

Listen to the market, not peoples’ opinions. That’s why, as much as I can, I try to give you the opinion of the market, or at least my interpretation of it, rather than my personal view.

My personal view is useless to you. It might make you feel good if you happen to agree with it, but my job is to help you make money, not give you biased opinions that make you feel good.

In recent weeks, my view, guided by ‘listening’ to the market, has been that we are in a bearish phase. Actually, that was my view for much of 2018. And the market confirmed that view in the latter half of the year.

More on this after a look at the markets.


Overnight the Dow Jones Industrial Average closed down 220.77 points, or 0.87%.

The S&P 500 lost 25.56 points, or 0.94%.

In Europe, the Euro Stoxx 50 index finished down 61.99 points, or 1.93%.

Meanwhile, the FTSE 100 fell 1.11%, and Germany’s DAX lost 302.70 points, or 2.67%.

In Asian markets, Japan’s Nikkei 225 is down 427.47 points, or 2.06%. China’s CSI 300 is up 1.43%.

In Australia, the S&P/ASX 200 is down 20.0 points, or 0.33%.

On the commodities markets, West Texas Intermediate crude oil is US$52.23 per barrel. Brent crude is US$61.22 per barrel.

Turning to gold, the yellow metal is trading for US$1,310.44 (AU$1,847.26) per troy ounce. Silver is US$15.75 (AU$22.20) per troy ounce.

One bitcoin is worth US$3,361.02.

The Aussie dollar is worth 70.77 US cents.

Fed drives a change in sentiment

Now you’re seeing a strong rally. The bearish sentiment is giving way to growing bullishness. The biggest impact on this change is the US Federal Reserve. It recently succumbed to market pressure and pulled back on its intent to keep raising rates.

It’s decision to raise or not is now ‘data dependent’. The impact of this statement has been huge. Does that mean the bear market is over?

Well, let’s see what the market is saying now…

Remember, I’m not trying to tell you what I think. I’m trying to show you the apparent verdict of the market so we can work out whether to be cautious or more aggressive with our investment decisions.

I’ll keep it simple. For more detail (as well as some analysis on the banks) you can watch my latest Rum Rebellion update here.

Let’s take a look at the ASX 200. It’s rallied very strongly since bottoming in December. Yesterday’s bank-induced rally saw it close at the highest level since October last year. That’s an impressive move of just over 10%.

chart image

Source: Optuma
Click to enlarge

The chart looks like it could be turning bullish. Prices have had every chance to correct lower, yet haven’t done so.

The market is telling you, then, that things may not be as bad as they seem. Perhaps the worst is over?

Your advantage…

That’s certainly a possibility. In my publication, Crisis & Opportunity, our process relies on assessing the charts as well as fundamental data. This is what gives us an advantage over those that just look at one side or the other.

When I say ‘fundamental data’, I’m referring to data that gives us an idea of how the real economy is tracking. Is it speeding up, or slowing down…

Data points are subjective. You can usually find one to suit your view. Which is of course what I’m going to do now. But I’m using this data point because it is so important, not just because it suits me.

I’m talking about credit growth in the Aussie economy. Credit growth is what drives the economy. Newly created credit flows through the economy and drives aggregate growth in wages, profits and tax revenue.

Profit growth is what ultimately drives share prices, so this is a very important metric to look at when trying to cut through the noise (and the effect of sentiment on share prices).

Credit growth continues to slow

Based on the latest data released by the Reserve Bank last week, total credit growth in the economy continues to slow. At 4.3% in the year to December, credit growth is at a five-year low. Annual housing credit growth is at 4.7%, the lowest level since mid 2013.

Monthly readings for housing credit growth are now regularly coming in at just 0.3%. If this continues (due to the housing downturn and banks tightening loan criteria), the annual rate will continue to fall as the 0.5% monthly growth rates from earlier in the year drop out of the calculation.

Reflecting this slowdown in credit growth, broad money growth is also very weak. In the year to December, broad money grew by just 2.4%. In the past four months, it has only grown 0.3%.

That tells you that in recent months Australians have been paying down their debt (and thus extinguishing money) nearly faster than new credit growth has been creating it.

With this in mind, I struggle to see how share prices can fundamentally continue to recover. That doesn’t mean sentiment can’t continue to push prices higher.

I just don’t have confidence in the bullish narrative when the fundamental data remains so obviously weak.

And it’s not just in Australia. Global indicators are weak too. From The Wall Street Journal:

Data released late last Friday showed that the J.P. Morgan Global Manufacturing Purchasing Managers’ Index dropped to 50.7 in January. A reading above 50 indicates growth, but the index is signaling its weakest expansion in 2½ years.

The new exports portion of the index was even weaker, dropping from 49.6 in December to 49.4 last month, the lowest since May 2016.

The index, which is compiled from surveys of thousands of purchasing executives around the world, has been a reliable predictor of real global trade volumes which are published weeks or months after the fact.

It isn’t just trade data that appears to be slowing. The Caixin China Composite PMI, released over the weekend, fell to 50.9 in January from 52.2 in December. The index covers the manufacturing and service sectors.

Having said that, keep in mind that all data points are lagging indicators. They tell you what has already happened. The market looks ahead and tries to guess what will happen. More often than not the market is right, which is why you should listen to what it’s trying to say.

But often it gets it wrong. And it usually gets it wrong during times when the business cycle is turning, which is now.

Bear market rallies are notorious for being big and deceptive. From March to May 2008, the ASX 200 rallied 18%. In the US, the S&P 500 rallied 12% over the same time frame, and a massive 19% during April and May of 2001. These were all bear market rallies. Prices fell to new lows afterwards.

As you can see in the chart below, the S&P500 has had a big run since December. So far, the gain from the lows is nearly 16%. If it is a bear market rally, it is a big one.

chart image

Source: Optuma
Click to enlarge

For now, I’m sticking with the view that it is indeed a bear market rally. As such, I expect to see the market sell off in the weeks ahead.

Greg Canavan

Editor’s note: The above article is an edited extract from a recent Crisis & Opportunity update. To find out more about Crisis & Opportunity and Greg’s unique combination of chart and fundamental analysis, go here.