An anxious October

It’s been an exciting week in the market. September and October are always exciting in the market and these two months have a special place in the history of the markets.
Investments and money are continuously circulating to find a new home. This week that home was in gold. Prices hit a new high and Jim Rodgers is predicting that gold will hit $2000 within 10 years.
Central bankers are beginning to change their language with regards to monetary tightening and Australia has already started the process.
What does all this mean for the global economy?
Are consumers going to be faced with rising interest rates soon which could depress house prices further?
Will interest rate rises kill off high street spending for big ticket items such as cars, holidays etc? How will interest rate sensitive industries adjust, the global automobile manufacturers who have received billions in bailouts don’t want to see credit become more expensive for consumers.
Is inflation lurking around the corner due to the trillions of dollars pumped into the global economy in the past two years and will the collapsing dollar add fuel to this fire?

Preparing and managing expectations will be key to how we play this game. Central bankers are telling us that historically low interest rates cannot stay low forever. They are also warning us that external factors could be building up and that inflation in the future could kill off any global recovery.
The markets are telling us that the plan so far has been successful. Human emotions are played out in the market on a daily basis. With the markets at 2009 highs, the markets are telling us a lot of success has been achieved by the fiscal stimulus policies put in place by the governments.

Where to now?

Revised earnings for companies were so low that it was easier for them to meet consensus earnings after implementing a year long restructuring and cost cutting exercise. Meeting those earnings going forward will be difficult unless managing expectations are improved. In a slow growth environment is it better to focus on the positives and how they are affecting the organisational structure and how these will factors will improve future earnings.
There is a danger the baby will be thrown out with the bath water if all the market does is focus on profitability numbers if earnings growth doesn’t take off as quickly as expected.
I believe growth will be slow, and I’ve always believed this and this is due to the continuously high unemployment levels and personal indebtedness of the populations.
These factors should not mean growth will be zero but they also don’t mean that growth will be high enough to cause major inflation worries.
Capital expenditure projects will be more difficult to bring to complete as risk factors will continue to be high. An appropriate discount rate should include estimating cost of capital in excess of accepted averages and applying difficult success factors should determine the ability of these projects to contribute significant cashflows in a low growth environment.

Companies that once heralded prominent positions in society, which ranked as top organisations for employment with strong leadership such as Enron, Worldcom, and Lehman brothers have collapsed. Millions of people have lost homes and pensions so it cannot be expected that we will all return to our previous spending habits. The moral compass has shifted. Everyone is re learning how to assess risk in their lives and this cannot be done over night.

The goal is to create long term wealth!