Gerard Minack is one of the world’s most respected and insightful market and economic analysts. Over many decades he built a reputation and following amongst investment professionals which placed him in the Pantheon of analysts and made his daily missive, Downunder Daily, a must-read across the globe.
Minack famously highlighted the risk to markets and the economy before the GFC hit and while he has tended to see the risks rather than the rewards in the post-GFC world, dominated by super low-interest rates and quantitative easing, his latest thoughts are sobering indeed.
In an interview with the AFR Minack poo-poohs the return on the S&P 500 in 2014 in US dollar terms. He says Australian shares “are in a full-blown bear market, in US dollar terms. Credit markets are starting to wobble, commodities have been smoked. After two years of broad-based gains in risky assets, we’re down to the last man standing.”
That’s a pretty bearish outlook implied in that statement. (He also describes the S&P 500 as the “Steve Bradbury of financial markets”, in that it’s the only one still going as all the others have fallen over.)
Minack said that the Fed’s tightening this year would “bring the curtain down on P/E expansion” which means that, “it’s going to be a poor year for US equities because earnings growth is not that strong; but at least the US has earnings growth. Outside the US you don’t, which is a very problematic outlook for this year.”
If Minack is bullish anywhere it bonds where, contrary to calls that bonds are in a bubble, he says “I can’t see a day of reckoning any time soon. The forces of disinflation still have the upper hand.”
But buying and holding bonds sounds like a safe haven strategy with Minack noting, “You can’t look for bonds to give you the same returns as the past couple of years, or the past 30 years, but as we saw in Japan for over a decade, there’s a time to own bonds not because of what they were but because of what they weren’t: they weren’t things that were going down.”
Minack is also worried about global leverage, especially in China which has “ironically” increased in the post GFC period – no doubt as a result of free money and low rates.
He sees the Aussie dollar heading to 75 cents, iron ore to halve in US dollar terms and thinks there is nothing “exceptional about our housing market” which will fall when unemployment rises.
On monetary policy Minack notes that the leading indicators of employment look okay, well at least “half good”, but overall he sees Australian growth weakening and the outlook for the RBA is:
… either get nothing or more than two [cuts]. If the leading indicators of employment roll over, then for me recession is the most likely outcome. We have national domestic demand growth of 1 per cent. Here in NSW it’s 4.5 per cent while in the rest of the country it’s falling.
It’s too early in the day for an adult beverage but perhaps a lie down will help.
You can read the full interview at the AFR.