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My favourite information sources – Part 1
I remember first hearing about the US subprime crisis around July 2007, three years ago. At that time we had no idea of its implications – was it a small problem that would be quickly resolved or the beginning of something much bigger? As new SMSF trustees, I remember feeling very fearful about what the future held and worrying about whether we would make the right investment decisions. It is hard to make the right decisions if you do not understand what is happening. Today, three years later we are going through another period of volatility but this time we feel very different. We no longer feel fearful and uncertain because we have a much better understanding of the unfolding debt crisis, and even though we believe the next few years will be tough for investors, we are a now lot more prepared.
In the last three years, I have spent a lot of time researching the causes of the Global Financial Crisis. Thanks to the internet, I have found a great wealth of information and most of it is free (the preferred cost for a small SMSF with a limited budget for investment research). I plan to write a series of blog posts to share some of my favourite information sources and to give proper credit to the right people who have helped us on our investment journey by sharing their knowledge so generously.
I like to use both fundamental and technical analysis to help me with my investment decisions so my information sources consist of two broad groups:
- Fundamental – This group comprises mainly of economists and analysts who look at what is happening in the global economy, and
- Technical – This group are mainly technicians who look at charts and various technical indicators like price pattern, volume and sentiment.
I believe that both groups are equally important and have a part to play. Fundamental information help me understand why certain things happen and the Technical information help with the timing of when they are likely to happen.
In Part 1 of this series, I will talk about some of the key sources of fundamental information that has helped us with our investment decisions.
My favourite fundamental analyst would have to be John Mauldin, a best-selling author and recognized financial expert himself, who is also the editor of the free “Thoughts From the Frontline” newsletter that goes to over 1 million readers each week. John is a great information funnel as he gets access to a lot of good information from sources that are not readily available to retail investors, like myself, and he either passes good information resources directly on to his readers or writes his own analysis for his readers. His writing style is easy to understand for an average investor who does not have a background in economics. I get two free newsletters a week from him and get a lot of great insights from these emails. You can sign up for his newsletters on the Thoughts from the Frontline and Investor Insights website. Each year he also organises a strategic investment conference and this year the focus was on the “The End Game” i.e. how this ongoing global financial crisis is going to end. Some of my other favourite analysts/economists such as Dr Gary Shilling, David Rosenberg, and Dr Niall Ferguson, were the speakers at this year’s conference. Of course I could not afford to attend this conference but John Mauldin is currently writing a book called “The End Game” which I am sure will be a great summary of all the insights he gained from this conference.
My second favourite fundamental resource this year would probably be the book “This Time is Different – Eight Centuries of Financial Folly” by Carmen Reinhart and Ken Rogoff. John Mauldin and a number of other economists frequently quote from this book so I had to buy a copy for myself as well from Amazon. Niall Ferguson, author of The Ascent of Money says “this book is quite simply the best empirical investigation of financial crises ever published”. The book looks at all sorts of financial crises that have happened in the last 800 years and guess what – they are not that different even though with each crisis, the people involved always thought it would be different for them. The authors call it the “This-Time-Is-Different Syndrome” and this is described in the book as:
“The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our own country) is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.”
Sounds familiar? Over-leveraged subprime borrowers triggered off the housing crisis in the US. Despite having the highest level of household debt in the world (yes, even higher than the debt levels in the US before their crisis), most Australians do not believe that the housing crisis that happened in the US and so many other developed countries can happen here. The reasons given are high immigration, a housing shortage etc. will keep property prices going up forever in Australia but the reality is that things are not that different here compared to the US before their crisis. Highly leveraged households are always economically fragile. If, for any reason, there is not enough income to service the debt, some assets will have to quickly liquidated. One housing foreclosure can bring down the prices of all properties in the neighbourhood. When that the average house price is now 7-8 times the average salary, many home buyers have to borrow more than what they can comfortably service. I have heard that after six interest rate rises in the past year, 50 percent of new home buyers who bought last year are already under mortgage stress.
The book also tells us that banking crises are always followed by sovereign debt crises. When there is a banking crisis, governments have to bail their banks out by buying their non-performing assets so the problem gets transferred from the banks to the governments. Governments also have to provide stimulus measures to prevent their economies from falling into recession. If they do not have reserves to do this, they will have to borrow to get the funds for the bailouts and stimulus measures. As we have seen with countries like Greece, governments who borrow too much will soon run into the same problems as the overleveraged subprime borrowers except their problem is on a much bigger scale. Hence, sovereign debt crises take a lot longer to resolve and it is not uncommon to take ten years or more to get back to pre-crisis levels.
Well I have crossed the 1000 word limit, which according to blogging experts is the recommended maximum for a blog post. I will stop here today and continue with more fundamental information sources, including those that have more focus on Australia in Part 2. Stay tuned.
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