1 December 2020
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Houston, we have a problem

Houston, we have a problem

Lance Lai
18 August 2009

Let me start by saying that I am aware of Peter Switzer’s views, and because I respect his opinions greatly, often I wished that my views accorded more with his. Currently we finally agree, but contextually not from the same perspective. I hope we line up one day.

In my last two articles, I wrote of an Inverse Head and Shoulders forming both here and in the US, which would confirm that a bottom was in place. I also wrote of an ideal scenario where a market pullback to 961 in the US or loosely translated, 4,180 (ASX 200) in our markets would confirm a benign pull back to the ‘neckline’.

As I write, 3am Sydney time, the markets are tumbling.
  1. The Australian market closed 4,388 last night off 2.8 per cent from a peak of 4,509 only the day before.
  2. The Ozzie Futures is down another 1.4 per cent to 4,328
  3. The US market is at 983, down 3.4 per cent from an interim top of 1,017, 6 trading days ago.
  4. Shanghai is off a massive 17.5 per cent from their interim top formed nine days ago.

In Paul Keating talk, we are experiencing the pullback we had to have … I say, "finally!”

The world is your casino

As we sit and wait to see if this is a benign pullback or not, I am drawn to a quote by one of our fathers of economics, John Maynard Keynes.

 In 1935, he wrote in The General Theory of Employment, Interest and Money:

“The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct.”

Keynes was a master investor, and referred to the world of investment as a “game”. I loved how, in his very serious economic paper, he likened it to a game of snap or musical chairs, where you try to anticipate the actions of the crowd.

In those games, if you call “snap!” first or secure yourself a chair before the music stops, you win. Calling markets, he thought, was similar, where you anticipate what others are thinking. He called this “the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

He likened this devotion to anticipating what the average opinion would be to gambling.

 In my opinion, the way the world markets have powered up over the past five months from the market bottom of the 6 March, they have resembled a casino. The anticipation of a recovery has been so great, the markets already resemble another bubble.

Given that real world growth cannot exceed about three per cent annually, when we see:

  1. China’s Shanghai Index up 108.8 per cent since 28 October 2008 lows
  2. The US Index up 52.7 per cent in 5 months to 7 August 2009.

Another famous saying comes to mind: “Houston, we have a problem.”

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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