Stockmarkets Sail Through Quarter Of Trauma

By The Noble Contrarian on April 28, 2011 in Other

The first three months of 2011 will be a period many people will remember for the rest of their lives. The CBD streets of one of Australia’s largest cities were submerged under water after the Brisbane River broke its banks. Cyclone Yasi hit North Queensland, leaving behind a damage bill of $5bn. An earthquake struck Christchurch in New Zealand’s south and flattened much of that city before Japan’s largest recorded earthquake shifted the island of Honshu 2.4 metres east and unleashed a tsunami on the island’s east coast. The earthquake and tsunami crippled the Fukushima nuclear power plant and a full-blown nuclear disaster is still a possibility as engineers struggle to contain the fallout.

In the Middle East, autocratic governments were overthrown in Tunisia and Egypt by so-called democratic revolutions. It remains to be seen whether the new governments will be any more democratic than their predecessors. The trouble spread to Algeria, Syria, Jordan and even Saudi Arabia, home to one-fifth of the world’s conventional oil reserves.

Western military forces were drawn into a conflict in Libya, where rebel forces are attempting to overthrow the incumbent leader, Muammar Gaddafi. Oil hit two and a half year highs as the crises unfolded.

In the financial world, Europe’s fiscal troubles came roaring back to life. Ratings agencies again downgraded Portugal’s sovereign debt. Two of the three agencies (S&P and Fitch) no longer rate the country’s debt investment grade. The cost of Ireland’s bank bailout is now estimated to top $100bn – $16,000 for every man woman and child in the country and a sum that is going to take a generation of frugality to pay for.

After a few years of Ben Bernanke flood irrigation, inflation’s green shoots started to poke their heads up in the US and have developed into a crop of weeds in China. Authorities in the US have been very clear that they don’t intend to do anything about it and authorities in China are trying their best but clearly failing to rein in the cheap-money-induced lending boom.

And how did equity markets react to the world’s troubles? The ASX All Ordinaries Accumulation Index rose 2.9%. The Aussie market underperformed its US counterpart, the S&P 500, which rose 5.9%. The Australian dollar, known as a barometer of risk, recently hit an all time high, buying US$1.05.

So much for the quarter of trauma.

Times such as this can be very difficult for an investor. Many, like me, have taken a conservative position with their portfolios, preparing for difficult times. As I wrote in the February edition of The Beast, I’ve also been shifting the focus of my portfolio away from Aussie dollars and the Australian economy in general.

At the moment, that is costing a lot of money. A trader friend of mine recently told me he has also been betting against the Aussie dollar, but feels like he’s standing in front of a steam train. I share his pain, but it worries me not.

What’s happening in the world at the moment is not normal. Nor is it sustainable. Markets are not being driven by fundamentals or by optimism. They are being driven by cheap (almost free in the case of the US) money.

I have no idea what the consequences of all this cheap money will be. But underperformance now is a small price to pay for some insurance.