Poll of polls

The voting is over, the result is in and by an overwhelming majority no one has the foggiest idea about what actually comes next, which is a small vote for sanity as those who profess to “know” are due a good “shipwrecking on the laughter of the gods”.

 There have however been some excellent ruminations. In the red corner the supporters of the end of the world include Robert Prechter of Elliott Wave fame (www.elliottwave.com) whose targets I wont trouble you with for fear of apoplexy (at best!). He is also one of the founders of the study of Socionomics of which more anon. For the rabidly bearish I can also recommend the Daily Reckoning (www.dailyreckoning.com) writ large by Bill Bonner who is both plausible and terrifying at the same time.

 In the blue corner the doyen of value investors and sometime Yorkshire man Jeremy Grantham at GMO (www.gmo.com) is a steady buyer of equities, but admits that the curse of the value manager is to be too early. My good friend David Fuller (www.fullermoney.com) is also siding with the bulls but would be a lot happier if a touch of confidence returned to the market; after all, as he points out to the battered and bruised investors of the class of 2008, “bear markets don’t last forever”.

 The mega bears, of course, see little hope, other than a rally in an ongoing downward spiral, whilst the bulls admit to the possibility of more downside before the next bull market takes hold. Not surprising, I suppose, given the diametrically opposed views and the extreme volatility that we have been getting used to, but does any of this help us mere mortals to invest our money with any confidence?

 The only spark comes from the universally held opinion (ex the mega bears who have eyes only for gold) that investment grade corporate bonds are a steal; certainly relative to government issues where yields are at decade lows. Historically corporates tend to lead equity markets on average by about six months but in today’s volatile market place six days might do it! In fact US corporate bond yields peaked at the very end of October and the S&P 500 bottomed in mid November so we may have had the signal already!

 As ever there is a caveat…or two. All bond yields have done is to retrace the spike bought on by the October downdraught when it was “sell everything and buy T-bills”. So in effect the gun has been reloaded awaiting the next panic attack. In the meantime in thin holiday markets the indices are trying to rally and the bulls will be hoping for the momentum to carry over into 2009.

 The second caveat is the worsening state of world “diplomacy” if it can be called that. The basis of Socionomics as preached by Prechter is that social mood precedes social and economic events. Simply put we don’t feel bad because we are in a bear market it’s the other way around! We experience a bear market because we are in a bad mood. Same with wars and conflict. Social mood turns ugly and the ammunition starts flying around. Now you can take this theory or leave it as far as I am concerned because I know how painful it is giving up sacred cows but there is no doubt that, increasingly, the world is becoming a very unfriendly place.

 Gaza is on the brink of catastrophe. Neither side is prepared to give an inch and never has. The 1948 boundary demarcations were anathema to Israelis and Palestinians alike and no amount of diplomacy will get them to see it differently. It’s been a problem for 60 years and isn’t going away. India and Pakistan are posturing towards conflict and South America is reverting to true bandit territory. In parts of Mexico over 90% of the police force is in the pay of the drug cartels. A senior ranking officer in the President’s security council was recently arrested for taking bribes (allegedly $100,000 per month) to keep the cartels posted on Calderon’s movements; supposedly so they could keep out of his way and not attract police attention to their illegal activities.

 Ecuador has reneged on its foreign debt and is broke; the government is raiding the social security fund (“social security” there’s a euphemism…) but the writing is on the wall. The rapid decline in the oil price has been the significant factor and this is causing pain and angst to many bigger fish including Venezuela and Russia, not to mention the Middle East “families”. With no sign of any uptick in the oil price (and many of the oil exporters need the price to double from here to make their budgets balance) social upheaval will inevitably follow.

 So before you reach for the razor blades, the rational response to the markets’ capitulation in 2008 is to accumulate things that look cheap, which covers pretty much everything if you have a reasonable time horizon! I just wish I could tell you how long that period of time needs to be! Happy New Year!