Wednesday, November 01, 2006

"As good as it gets"

Access Economics is one of Australia's most followed and considered independent economic research firms.

Access Economics director Chris Richardson said expected falls in mineral prices would almost double Australia's trade deficit to $38.1 billion by 2007-08.

"At the moment, the Federal Government is rolling in revenue, the Australian dollar is stronger, the sharemarket is looking impressive … and it's due to (the strength in) commodity prices," he said. [But see the stealth disconnect of the Aussie stock market and the commodity index.]

"But what forecasters have repeatedly been saying is that today's surge in prices, which has been supporting Australia's economy, won't last. This is as good as it gets." Pain will come, but has been delayed

Commodity boom wipeout fear
In its September 2006 Minerals Monitor, forecaster Access Economics says demand for commodities remains fired up, with average base metal prices triple what they were in late 2003.

"The consensus view remains that prices for most base metals have already peaked, while prices for most other minerals are expected to peak at some stage during 2006/07," it said.

"Commodity futures markets suggest that only half of the price increases seen since 2002 will be retained in the longer term," Access Economics said.

"The overall consensus among the forecasters we survey is that the peak is here already and that almost half of the price gains seen since mid-2003 will have disappeared by mid-2009," Access Economics said.


Miners say high commodity prices to stay
Sustained Chinese and Indian demand will help ensure the current strength in the metals prices cycle does not deflate in the long-term, a body representing the world's largest miners says.

Paul Mitchell is secretary general of the International Council on Mining and Metals (ICMM), a forum comprising the chief executives of the world's 15 largest mining companies.

Mr Mitchell said most members of his group viewed the current commodity price cycle as having enough momentum to last the long-term.

The ICMM includes BHP Billiton and Rio Tinto and a host of national mining bodies, government and non-government organisations.

Temporary versus permanent returns

I've [John Hussman speaking] noted before that the “median” bull-bear market cycle is 4 years in duration (with a regularity that is typically attributed to the election cycle). Since there's some variation though, the average is closer to 5 years: about 3.75 years of advance, at roughly 28% annualized, and about 1.25 years of decline at roughly -28% annualized. While the individual variations are very wide, an “average” bull market return is 152%, followed by a decline of about -34%, for a total return of about 67% (roughly 10.7% annualized).

It's important to notice what this implies. An average bear market ultimately turns a 152% bull market total return into a 67% total return over the full cycle. That is, less than half of a bull market's trough-to-peak gains are typically preserved when you measure from trough-to-trough. It's hard to emphasize this enough.

Consider even the unusually long advance from December 1994 through September 2000. During that period, the S&P 500 achieved a total return of 277%. During the ensuing bear market decline (to the October 2002 low), the market lost about 46%, resulting in an overall total return of 104% for the complete 8-year period. Even if you take the whole span from 1990-2000 as a single bull market, the ensuing 2-year bear reduced the total return from a 536% total return to a 245% full-cycle return.

In short, bear markets typically nullify over half of the preceding bull market advance. This is helpful to remember as investors rush to chase the speculative tail of an already aged and overvalued bull run.


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