A Mid-Pacific View of Markets

Robin Griffiths, one of the longest serving technical analysts in the City of London, now at Cazenove Capital, has a plan for surviving the next phase of the market cycles. Later this week he sets off to fulfil a lifetime ambition, sailing round the world in his 54ft ketch. Thanks to the wonder of modern communications, he will continue to have access to data while he is bobbing around on the oceans; and being a committed market junkie, like the rest of us, he will of course be at his laptop updating his views at periodic intervals on where he thinks the world is going.

Having crossed the Atlantic five times already, he is as experienced a sailor as he is a market-watcher.  It may not be pure chance that, if Mr Griffiths’ expectations for the future trajectory of the markets are right, he will be leaving our shores at a prudent time and, assuming he is not swamped by a Krondatieff wave in the meantime, returning only in 18 months time when the markets have become much calmer than they are today.

In his work he tracks a variety of different cycles, with most weight given to a four-year cycle (more popularly known as the US Presidential cycle) and a longer ten-year one which encompasses the modern phenomenon of start-of-decade recessions. His view is that the equity markets, while still in a decade-long phase of multiple compression, are heading in the short time for a new peak early next year, followed by a sharp decline, possibly well towards their 2009 lows, in the middle of the year. They will then surge to a new peak at the end of 2012, around the time of the US Presidential election, when markets are traditionally strong.

These views are not, I suspect, those of all investors, and while I often disagree with Mr Griffiths, on this occasion his trajectory is close to my own expectation of what, despite the well-aired risk of much more extreme outcomes, is most likely (but not, alas, certain) to play out over the next 15 months. The hardest thing to do when the world faces a critical event with severe binary outcomes is to maintain perspective. That is where technical analysis, which in its simplest form is nothing more than a visual reading of market history, can help – provided you jettison all the weird theorising and mumbo-jumbo that so often goes with it.

Being a technical analyst does of course conveniently absolve you from the need to work through in detail complex issues like the endgame of the Eurozone crisis. The Greek experience is an unfolding horror movie, but great political theatre as well, with tension and drama, just what markets hate, all the way to the final curtain. At the time of writing, the fate of Greece hangs in the balance. History has not been kind to monetary unions, and the Eurozone is a badly flawed example. It is likely to be, at best, a much reduced force by the time Mr Griffiths returns from his travels.

Now that Eurozone leaders are finally addressing the real issues, rather than falling over backwards to avoid even mentioning such toxic words as default, it does at least bring the prospect of a final resolution to the crisis nearer.  One way or another, the current impasse will be resolved and the markets will sooner or later, probably not without a sharp setback next year, move on to new concerns and new highs, as they invariably do.

Historical perspective has been notably lacking in much recent discussion. Fear and a fixation on sovereign debt and the Eurozone crisis have been driving up volatility and distorting market perceptions and behaviour.  In his latest book, Ken Fisher, the money manager, enumerates some of the historical misconceptions that are addling investors’ brains. The lost decade? True enough for US and European equities, but not for emerging markets, which are up handsomely, as are bonds. Since the year 2000 the world’s economic output has doubled, to an all-time high of $63 trillion, and is still growing at around 3%-4% a year. This is not the stuff of which global Great Depressions are made, although a failure of global diplomacy could still allow it to happen.

Double dip recessions?  They are rare beasts, and in any event, given that the last US recession officially ended over two and a quarter years ago, according to the National Bureau for Economic Research, it is hard to say whether a second slowdown now, so long after the initial event, would still qualify. US and European economic data have been disappointing this year, but are still more consistent with a mid-cycle slowdown than full-blown recession.  Many European stocks look cheap on a three-year view. So too does the Indian market. History tells us that crisis and fear beget opportunities. This crisis, severe though it is, will be no different. First however, you have to be ready to countenance the possibility that there will be life beyond the crisis – and mid-Pacific, as far away from Europe as possible, could be as good a vantage point as any for dispassionate analysis. Provided of course that the markets can avoid their equivalent of Cape Horn.