Please let me start this Blog topic by declaring that by no means am I a qualified economist. But I feel compelled to add my two cents worth on a recent email doing the rounds that originated from Ross Greenwood. The numbers and statistics quoted in the email below are staggering and you have to question the level of federal government borrowing, especially when put into context with historical levels. Whilst I am concerned with the effect excessive government borrowing will have on each of us as tax payers for years to come, I am less concerned with the effect it could have on the market. Personally I class this type of information, in general, as ‘noise’. The market will do what it will do. Government borrowing is merely one variable amongst millions of other variables that will affect the market. None of us have the wherewithal to determine what weighting of negative or positive affect any one variable, or group of variables, will have on the market.
By Ross Greenwood of Money News:
“What Chairman Rudd has been saying about, what he calls, these temporary borrowings.
Remember those words … temporary deficit. But the total Government debt could end up around $200 billion.
So here’s a very basic calculation … I used a home loan calculator to work it out … it’s that simple.
$200 billion is $200,000 million. The current 10 year Government bond rate is 4.67 per cent.
I worked the loan out over a period of 20 years.
Now here’s where it gets scary … really scary.
The repayments on $200 billion come to more than one and a quarter billion dollars – every month – for 20 years.
It works out we – as taxpayers – will be repaying $15.4 billion in interest and principal every year.
That’s … $733 for every man woman and child – every year.
The total interest bill over the 20 years is – get this – $108 billion.
And remember, this is a Government that just 18 months ago had NO debt.
NO debt. In fact it had enough money to create the Future Fund to pay the future liabilities of public servants’ superannuation.”
If we were to concern ourselves with these types of opinions, theories and conjecture we would find it difficult to take positive action to buy shares when it appears as though, from an economic perspective, that we are on the brink of ruin! Despite these observations and postulations, the share market has had a rather significant rally starting from early March 2009. There were some wonderful opportunities to participate in this rally and generate profits, especially from March to October 2009.
And it looks like we are about to have another positive run with the recent breakout above 5000 by the ALL-ORDS. The point is that if we based our trading and investing decisions on the views of economists and other market commentators with various opinions on the existing or future state of the economy we would struggle to take decisive action. Think back to March 2009 and all the negative news that abounded our news screens. Noise limits our ability to generate profits from our share market activities because we have a natural tendency to magnify bad news and discount good news.
We need to be able to react to market price action when the need arises and be prepared to have an “anything can happen”, good or bad, approach to the market.
For those buy and hold type investors I encourage you to develop or obtain a strategy that works on market timing. By having a system that allows you to time the market it will allow you to increase your portfolio exposure in a rising market and decrease your exposure in a falling market. These principles are fundamental for any strategy and will allow you to sleep well at night.
The numbers and statistics quoted in the above document highlights the need to use a system or strategy that removes all market ‘noise’ and concentrates instead on engaging the market with rules and processes. Whilst the numbers being quoted in this article are quite profound and may be of great interest to economists and analysts, they should have little or no impact on the decisions made by traders and active investors who listen solely to the market for direction.
The current economic climate may be summarised well in the quote below. Whether it be fictional Cicero or truly one of his pearlers, it highlights the fact that perhaps not much, if anything, has changed or been learned over a 2000 year period?
“The budget should be balanced, the Treasury should be refilled, public
debt should be reduced, the arrogance of officialdom should be tempered
and controlled, and the assistance to foreign lands should be curtailed
lest Rome become bankrupt. People must again learn to work, instead of
living on public assistance.”
Cicero , 55 BC
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