Should we Zig or Zag this week?

Should we Zig or Zag this week?

The world’s financial markets are awash with change, the experts are only guessing and data, when released today, triggers a completely different and unpredictable response to the one triggered by the same data released previously. You are left in the position that John Maynard Keynes described in 1936: “We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be”.

Finding a place of permanence is necessary and that place, for us, is based on a simple principle; that we cannot predict shifting sentiment with any degree of accuracy or consistency.

This week we are confronted with many conflicting messages. Reading Macquarie’s research reveals their economist believes interest rates will be cut four more times to 2% by September. Over at Nab and Deutsche Bank, their prediction is for 2.25% by December. Consensus opinion however suggests only one more rate cut by June and our Bloomberg terminal shows that almost half of all the analysts surveyed believe rates will be unchanged by March next year.

In the US many traders (rather than investors) thought the ‘sequester’ – the automatic triggering of $85 billion in budget cuts if the White House and Republicans couldn’t reach agreement – would trigger financial market Armageddon because the fiscal tightening will be another drag on growth. At the same time, housing is actually recovering finally, as is consumer confidence, suggesting that QE3 is mobilising credit for mortgages and commercial investment.

Meanwhile, the US Fed’s Chairman Ben Bernanke says quantitative easing is here to stay but several Federal Reserve Governors have indicated publicly that the period of maximum liquidity is nearing an end.

It is believed that if The Fed (and the same applies to the European Central Bank) ceases the indefinite buyback of bonds (or actually ever tries to sell them) prices will crash, rates will soar and the world will be plunged into a depression. Asset bubbles are one reason some suggest the Fed will need to step back from QE, while others believe that QE is just a way to reduce rates when they are already at zero.

Over in China, the latest PMI data points to a slow down and the impact on commodity prices is a negative for Australia. Last week we also heard hints from BHP’s Marius Kloppers and calls from China watchers that the Iron Ore price is more likely to be lower than higher. Forecasts of $50t have been proffered.

European economies are still contracting and there is the risk of contagion but most experts dismiss any real threat. Japan however is devaluing its currency and mobilizing the world’s largest savings pool to try and dig its economy out of a demographics-driven, multi-decade funk.

If you can make perfect sense of all this and predict the market’s reaction to it…you might just be kidding yourself.

Our response is to stick to quality and value and while this strategy may go through periods where it does not beat the latest hot tip, nil-profit, exploration hopeful, we know that over the long run, it means we don’t have to worry too much nor employ any economists.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.