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PROPLAN > The Updated Mothership Chart Sep 3 2015

Another wave of selling on the worlds Sharemarkets and the question on the medias lips is “Another GFC?”

The economic drivers are similar, moral hazard being ramped up by thoughtless governments this time, rather than reckless Investment Banks. I am unsure of where we will be in the next 12 months, but I continually refer back to the “Mothership” chart of Industrial Shares and growth of dividends over the last 35 years. And highlight that we continually face these cycles of share price and economic growth followed by periods of contraction.

Below is the familiar pattern of stock movements and dividends paid superimposed on a term deposit and the subsequent interest payments. This time chart has been updated to the end of 2014.


The GFC saw a drop of 50% in prices, similar in percentage terms to the sharemarket correction of 1987 and also the reaction to the first Gulf war in 1990. Although the GFC decline looks more substantial it is only because the same drop of 50% was applied to an index that had grown steadily over the intervening 21 years.

At the time of the GFC and during the six years since, I have reminded clients that we would recover from the GFC as we have from all previous falls throughout history. This would then be followed by another correction as greed, speculative activity and misguided government intervention drove the prices up again.

My rationale for this view is that the stock markets of the world ultimately reflect the profitable endeavours of the human race (the unprofitable endeavours inevitably fail). For markets to collapse totally requires that all human endeavour comes to an end and I find this rather hard to imagine.

Sadly, my rational view of the stockmarket is, I suspect, shared by a minority. Everyone else, including many institutions, regard it as a casino

I will admit to one aspect of current conditions that we haven’t experienced for some time, so one could be forgiven for not remembering, and that is low interest rates; it has been roughly 5000 years since we have had rates at the present levels!

Here in Australia company balance sheets are generally in much better shape than they were prior to the GFC and it is clear that fear is driving the present gyrations, not fundamentals. If I may quote a miniscule number of headlines from recent media:

Market bounces back but FEARS China will drag down the world

FEAR indexes surge to highest since GFC as China slide spooks markets

The day began with investors FEARING the worst as the market fell to a fresh two-year low.

Global economies are experiencing something unique these days, and the FEAR gripping Chinese shareholders right now is just one element.

FEARS remain that the sharemarket fallout could bleed into China’s already slowing economy.

FEAR driving sideshow but no need to panic here

This latest sharemarket rout has everything to do with FEARS that China and a bunch of developing economies are running out of puff.

$A drops to six-year low as ‘FEAR takes over’ in global markets

Chinese FEARS spark region-wide rout

The scene was set by Wall Street as steep falls on Friday showed FEARS over China had invaded the thoughts of investors in the world’s biggest economy.

And so it goes on, ad nauseam!

You will no doubt be aware of the preponderance of comments relating to China amongst the above. I guess it makes a change from the ‘European crisis’ or ‘Middle Eastern crisis’. However, it did focus my attention and sure enough, the usual tripe appeared.

An article titled “Stock shock leaves a trail of victims” in the Australian newspaper caught my eye. The example given was a white collar worker in Beijing who sold his house in March this year to INVEST (my emphasis) in the Chinese equities market.

Predictably, he has seen his ‘fortune’ abolished in a few months. He told the journalist that he knew the risks when he joined with friends to invest nearly 2 million yuan in the volatile market but was still angry with the consequences. He is now worried that his decision to invest in equities could have long-lasting consequences. “I am old enough to get married and you know here that girls prefer guys who own their own houses,” he said.

“I didn’t tell my Mum that I sold the house; she would be too mad.”

What right did this lunatic have to feel angry I ask myself? I feel angry with the journalist who included the word ‘invest’ in the article to describe the stupid speculation that this young man indulged in.

To try and put a positive spin on all this can I just say that none of this has anything to do with investors or investing. I would venture to suggest that the only likely action taken by investors would be to top up or add holdings to their portfolio.

As an investor personally and anecdotally from conversations with others I can confirm this. I personally would like to buy some more CBA at $26.00 and Wesfarmers at $13.50′!  Albeit, silently I hope they do not fall to these levels again……..

As the human race appears incapable of recalling the past, consider again the chart above and merely be prepared to take advantage of the ‘fear factor’ and add to your quality investments should the opportunity present……

Credit: some of this content is credited to Peter Thornhill.


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