Roberts Nash Advisory Group

This Time It's Different...

Whenever I hear the phrase “this time it’s different”, I cringe as I have often heard or read it just as markets were in the process of topping.  Back in 2000 there were many arguments put forth to justify the inflated valuation of high tech companies.  In the 60’s, the ‘Nifty Fifty’ were characterized as perennial growth companies that deserved very high valuations.  I look at the market as the ultimate trickster, trying to confuse and create noise, so that our opinions are influenced by the emotions of fear and greed.  We must always step back from this and understand that we don’t have perfect knowledge of the next market event.  There are probabilities but no certainties. Sometimes when forecasters say, ‘this time it’s different’, maybe we should take note.

The bearish case for equities is so easy today: the US twin deficits, the falling US dollar, the slowing economy, the real estate meltdown, higher interest rates, a volatile Chinese economy, and an explosion in the use of derivatives.   On the technical side we have an overbought market, investor enthusiasm that is historic, a volatility index that is normally only seen at market tops, and dividend yields that are still at historic lows.  All these things even in the bullish case can cause short term shakeouts so be careful not to get overextended and make sure you leave some cash available for buying opportunities.

I was recently given an interesting book by bullish fund manager Gerry Broklesby of Marquest Investment Management called “Our Brave New World”, written by Charles Gave, Anatole Kaletsky and Louis-Vincent Gave.  GaveKal Research looks at the world a little differently than I have and they make a number of interesting points.  The writers believe it is necessary to characterize investment environments according to changes in both prices and economic activity.  They say that there are four Economic environments as noted in the chart below.

For years I have read about deflation and one of my greatest concerns is that we could be heading into a Deflationary Bust.  North America experienced it in the 30’s and Japan experienced it in the 90’s.  However, the authors believe that the world has been in a positive deflationary period, a Deflationary Boom, since the mid 1990’s.  Prices of everything that can be manufactured offshore or services where technology can reduce costs are deflating.  Meanwhile, prices of high end North American grown services like education, property taxes and healthcare are inflating.  The combination creates low inflation for the masses and higher inflation for the wealthy. In a Sunday Times book review of The Rise of a Hungry Nation by James Kynge titled, “An ascent that cannot be ignored” , Michael Sheridan writes, “Kynge compares China to 19th-century America, Chongqing to young Chicago, Chinese migration to the opening of the west: both generated “deflationary booms” worldwide.”

When we say “this time it’s different”, today, we may be mistaken for another reason.  We may in fact be repeating history, but it is history from so long ago that no one alive today has any recollection of the event.  The Industrial Revolution of the 19th century was a huge event to create more wealth in the world.  The Asian Outsourcing Revolution is equally colossal.  In my opinion, we should not underestimate the extent of this deflationary boom but we must also be aware that as manufacturing gets outsourced to emerging economies, those emerging economies will have more economic, and therefore investment, volatility.  Buy the dips with proper asset allocation rebalancing.



** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **