Reflection on 2012 and the worsening macro road ahead

I am having a hard time being positive about the next couple of years unless some serious changes occur to monetary policy in the US and Eurozone.  Politicians continue to kick the can down the road, while the “Takers”, those who consume more than they produce (via government benefits, cushy jobs etc), are currently far more vocal than the “Makers” (Those who actually contribute to society), whose incentives to produce are currently being curtailed by taxation policies designed to bleed the wealthy of resources and redistribute it to those who did not earn it.

 

I have been gradually unwinding my book, paying down my mortgage, and sidelining cash to move into distressed assets in the future.  BHP is a forever stock to me, but I think there is better buying down the road so I have sold down my shares for now.  The gas industry is going to reduce the western world’s reliance on OPEC, which is one of the few positives I have for our economic outlook. (Hate big oil?  I’d much rather buy my fuel from BP than a cartel that controls 1/3 of the world’s oil supply and makes a mockery of human rights).

 

I think Australia is pretty well positioned, we are a stable environment in the growing APAC region, and we are well resourced, but I don’t see the ASX200 going to 7000 next year.  More likely it will bumble along at 4500 with the possibility of a major financial lockup caused by US, Eurozone, and Japan treasury debt and putting us into the 2000 range.  Quality assets will be going at century-low prices, and at that point it’s going to be “risk on” for me in a big way.

 

I’m not positive on the RBA’s ability to influence housing demand by lowering interest rates – people are losing their jobs, housing prices are falling, and apartments are going up everywhere.  I always thought the optimal number of properties to own was one, but if I can get a 10 year fixed mortgage at 4%, and a 7% rental yield, I’ll have a significantly de-risked investment which is positively geared (I’ve done the numbers, you need about 200 basis points yield above your borrow rate to break even).  The plus side of any overbuilding is that if they are built properly, the buildings are going to be there for 100 years.  People can bag the Brisbane tunnels all they want, fact is we’ve got the tunnels there now, and we can use them for centuries.

 

My car has nearly 250,000 km on the clock, and apart from a regular service (keeps it running well) costs me nothing.  But when I see the current offers car manufacturers are putting out, I’m tempted to look at buying new!  A brand new Nissan with 5 years finance at 0% comparison rate?  I feel sorry for anyone looking to offload their used car.  Nobody’s going to be interested.  In fact, it might be a good time for me to trade up to something nicer and send my old beater to the scrapyard.

 

Bottom line is that now is not a good time to be in debt.  Economics is all about allocating resources efficiently, and the reality is that everyone is going to have to allocate their resources more efficiently – that’s not just at a personal level.  Businesses and even Governments, will start getting rid of the “passengers” who aren’t pulling their weight.  Don’t take it personally if you’re axed, and don’t be bitter.  You might be a good worker (unlikely, you probably suck) but you aren’t required.  Why should anyone keep you on?

 

The best sector for “takers” is going to still be the Non-Profits, where the benefactors money is frequently misspent, and those in charge believe their good intentions place them above criticism.  I’m just going to focus on enjoying life and keeping my expenses low, that way I could be flipping burgers and still keep my head above water.  The vagaries of economic life only matter if you’re over-committed.

2 thoughts on “Reflection on 2012 and the worsening macro road ahead

  1. Hi Leon,

    Really enjoy reading your blog particularly your views on various small cap value businesses. In the above article I see you express a dour view of the larger macroeconomic picture. When you publish your reviews of companies you typically list a number of solid reasons why you believe they are good investments or whether the case for investment has changed. I am curious for why you think the ASX can drop to 2000 – you speak about ‘treasury debt’ and ‘kicking the can’ down the road – why and how will this lead to ASX 2000 ? If you have time would like to see you elaborate more on this.

    Thanks

    Mike

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    1. Hi Mike

      My macro outlook is not positive, and so I am avoiding most mainstream ASX stocks. The ASX was sub 3000 a decade ago in 2003 and a major Government default or breakup of the Eurozone is going to spook everyone and could easily send it back down there. I’ve still got BGL, SNL, CKL and a couple of others I haven’t written about on here, because I believe they will not be affected as dramatically. I have thought of selling down BGL/SNL. CKL is in the middle of a re-organisation process.

      2013 could easily bump along with ASX finishing between 4000 and 5000 but a major disaster will put virtually everything on sale, which is when I plan to load up on BHP, CCL, CSL, etc.

      Thanks for reading.

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