@Gibbon86I probably need a refresher on Howard Mark's musings on cycles, but if I remember correctly he is somewhat vague. No doubt his instincts have been honed over many years as a practitioner and so they are of great use to him. For me however, they are too vague to apply. But certainly, these cycles are not rooted in physics, and no natural law dictates their longevity.
Ken Fisher (son of Phillip Fisher) has studied feedback and feed-forward dynamics in markets, over a lifetime. I find his thinking on the subject more compelling. I think Fisher would say that any sentiment that makes people nervous about stocks, but is not rooted in any sound causative principles, is a 'false fear', and so if anything, is a buy signal. Fears about the length of a bull market would have to fit this category. If the market is nervous or fearful, it means that it is acting to dampen demand for stocks, and so is acting to put downward pressure on prices. Widely held sentiments must act on demand, and absent changes in supply, must act on prices.
Fears about trade tariffs also likely fit into this category. If the global magnitude of tariffs (which are effectively a tax on imports) are small compared to current global GDP growth, then there is no sound reason to believe that they will be sufficient to derail economic expansion. Sure, they will
reduce it somewhat. But while there is a widely held fear that tariffs will bring the global economy to a halt, then the fear has to far exceed the reality, and so must be a false fear.
So what Fisher would suggest is that if a fear is false, then economic expansion will continue, and eventually the fear will be lost, and so demand will catch up to supply, and prices will rise. If this continues for a long time, which it can, then eventually market participants might think markets are a free ticket to riches, which means they will buy more, which means prices will rise further, which will increase the optimism. At this point we could say that the demand for stocks has exceeded the sustainable supply, and we are in the era of 'false optimism'. This is why Fisher generally subscribes to John Templeton's view that the next bear markets is born on euphoria.
Back to where we stand in "the cycle", I suspect that Mark's or Fisher's recent musings have not been particularly relevant to Australia. I think Australia is in a fairly unique position in the developed world, with respect to household debt, property prices and the credit cycle. This no doubt largely due to the fact we didn't feel the brunt of the GFC and subsequently had a China free ride. I think it's very wise to assume that markets are reasonably efficient
most of the time. I think it was in a Michael Mauboussin book that I read something about the wisdom of crowds. The truth is that for all the irrationality of market participants, large crowds tend to get things about right. The trick seems to be that there be a wide dispersion of views. It seems to be that when diversity of views is diminished, for instance in times of panic, when almost everyone has a similar panicked views, or in times of euphoria, when almost everyone has a similar euphoric view, that markets become very inefficient.
@allperformersWhen it comes to forecasting, I definitely know I don't know. I think there is a difference between predicting an actual future (which economists are well incentivised to do, for various reasons), and contemplating what you believe are reasonably well grounded
possibilities. We don't know what
will happen, but we can have a reasonable stab at a range of rational likelihoods. Those that refuse to contemplate "the macro" are often putting ideology ahead of reason (let's call it the Buffett Worship Effect).
I fully expect that a buyer at today's prices stands a better than even chance of being well compensated. If the retail downturn turns out to be relatively mild, which it might, then my prognostications here will look silly, and I will look like a ditherer that can't invest to save himself. That's fine. I'm willing to take that chance.
However, my best guesstimate is that there is a reasonable risk (say about 20%) that the downturn will be severe, and that SSG even going under, is far from an extreme proposition. There are a number of things that appeal about SSG. It has strong insider ownership. It has low capital needs. It has low occupancy costs (for a B&M retailer). It has low net debt (1). However, I would need a lot of convincing that this is a business with even a moderately substantial moat (it may have, but I would need convincing). When the chips are down, I really don't know what kind of hold SSG will have on its customers - but I have my reservations.
But again, I know that I don't know (don't blame me, blame my crystal ball), and my odds may be substantially wrong, on the up side and/or on the down side. So my feelings are that if I'm going to invest in something where there is so much uncertainty (in my mind), then I am just not willing to bear the risk just to be probably "well compensated" (picking up pennies in front of a steamroller?). No, I want to be probably
very well compensated. And for that, I just don't think we are quite there yet.
My sense is that property prices are likely to be substantially lower 2 or 3 years from now, and perhaps even not bottoming for another 5 years (perhaps). But I don't expect prices to fall in a straight line. There will probably be periods when the
rate of decline accelerates. I suspect that the intensity of fear will be proportional to this rate. If so, I expect that at that time (if that's how it pans out) market participants will unreasonably extrapolate those rates of decline (thanks to recency bias), and that markets will then price in a retail outlook that is close to, or even worse, than my low-side projections (market opinion will lose diversity). If so, I suspect there will be a compelling opportunity.
But I may be wrong.
Cheers, Mars
(1) I previously commented about this being higher than the latest accounts indicated, once seasonal working capital variations were accounted for. This was an error on my part, as I inadvertently divided WC at HY periods by HY revenues (not 12 month revenues) - my apologies. It seems to me that SSG runs WC at < 6% of annual revenues - which is really good.
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