Even founder member bears like me are startled by the way events are unfolding. I think that one of the big drivers for what is going on is that the US has decided to turn away from the outside world and concentrate on themselves and their own problems. The biggest of these is of course is debt – and lots of it. Despite everything that the so-called authorities can do, there is extreme reluctance and lack of capacity for any more lending to take place. There is now a desperate need for truck loads of dollars to pay off that debt. Americans are apparently selling off everything they own in order to raise dollars. And when they sell foreign assets – including here on the JSE of course – they then need to sell that foreign currency and buy dollars. Hence the present amazing strength of that currency.
Naturally, selling shares on Wall Street is also a source of dollars and so that helps explain the weakness of that market as well. Anyone idly flicking through the TV channels will invariable chance across a remarkably attractive wide-eyed young lady relaying the latest plunge in the Dow while in the background are scenes of dejected dealers watching screens filled with red numbers. Thanks to these instant communications, the alarm and despondency becomes global in the blink of an eye, and investors everywhere become bearish about even their own local markets. It is an entirely unvirtuous and very vicious circle.
My guess is that the weak dollar gold price is evidence that the US government is selling some of their bullion reserves because they too also need dollars to pay debts. The rate at which the US economy is sliding into an ever deepening pit of economic seizure is quite terrifying. No investor anywhere is immune and there is pretty well nowhere to hide. Even the world’s greatest investor has felt moved to announce loudly that he thinks that on a five year view shares are worth buying now. The problem is that much of the audience are battling with a 5 week horizon of meeting the bills. Mr Buffet’s mortgage is probably paid off.
Mr Buffet is, however, probably correct and even I believe that local investors will probably find that most share prices five years from now will be higher than they are now. Those with the happy but thorny problem of a large amount of cash might think about the following two points. Firstly that the outlook of a positive 5 year return certainly was not true in May (some 40% ago) and secondly it is very likely that share prices will continue to go down even from here. This is a big and persistent bear.
But now consider the following propositions: that no one knows where the bottom will be nor how long it will last; that in the current environment, cash is a very poor asset class; that a buying program should be spaced out over a period of months or perhaps even years and that importantly, buying must be restricted to the highest-quality strong dividend-paying securities that are at multi-year valuation highs. Buyers should also promise to themselves and their advisers that they will not look at the shares prices and portfolio valuations more than once every month after each buying spree.
I have been in Johannesburg for a few days refreshing myself on what a proper traffic jam feels like and on just how beautiful this place is when the Jacarandas and roses are blooming. This evening I shall be home trying to find a place for a quiet beer which is not festooned in black and white bunting and posters portraying a toothy piscatorial predator.
James Greener
24th October 2008.
