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Anton in 2006 v 2022, it's deja vu (all over again)

Introduction: In a happy coincidence, in the same week that Anton Tagliaferro of Investors Mutual was honoured in the Queen's Birthday 2022 awards for services to charities and the investment sector, a reader sent us an article written by Anton in 2006. It is remarkable that the four reasons Anton gave for caution are the same as warnings given today. We all know what happened in the GFC of 2007 and 2008. As a counterpoint, we have transcribed new comments made by Anton at the recent Morningstar Investment Conference to bring his views up to date. I was reminded of the classic lyrics from John Fogerty's 2004 album, Deja Vu (All Over Again).

Did you hear 'em talkin' 'bout it on the radio?
Did you try to read the writing on the wall?
Did that voice inside you say, “I've heard it all before”?
It's like déjà vu all over again


By Anton Tagliaferro, written in May 2006

The Australian sharemarket, as measured by the S&P ASX300, had risen sharply and almost without pause since the beginning of 2006. The index reached a record high of 5,366 on 11 May 2006. The most recent phase of the rally was fuelled by a very narrow concentration of companies, particularly those related to the commodities sector. In recent months the moves in the prices of many commodities were actually accelerating, the higher they went. These almost-daily price gains were pushing many commodity spot prices – already at historical highs– to levels that defied any fundamental explanation.

Since peaking on 11 May the ASX300 index has fallen back to around the 5,000 mark last week, a drop of just over 6%. This fall has been primarily focused on the commodities sector and accompanied by a sharp increase in volatility of share prices.

Reasons behind the recent sell-off

What triggered this sell-off in IML’s view can largely be attributed to speculative market participants realising that there were a growing number of factors that warranted caution. In aggregate these factors, which can no longer be ignored, should serve to make investors more cautious in their outlook for world economic growth rates.

In particular, IML believes some of the following factors are reason for caution for growth prospects going forward:

  1. The end of cheap money as the US Federal Reserve Board has increased interest rates 16 times in the last 2 years, from 1% to 5%.
  2. US bond yields have also risen sharply, particularly over the last six months due to investors concerns over inflationary pressures.
  3. High energy prices also appear to be slowing consumer spending – thus for example recently, the world’s largest retailer, Wal Mart, noted that sales growth was slowing due to high energy prices.
  4. Record high commodity prices which are feeding into high raw material prices, which is inflationary.

What drove markets to recent record levels?

Since the start of 2006, commodity prices have been driven to their current levels largely as a result of a frenzied level of speculative activity by hedge funds in commodity markets. While overall demand for commodities remains firm and in some cases supply is being slow to respond. IML believes that a lot of hot money has taken many commodity prices to levels well above their fundamental value.

This frenzy was covered in a release recently published on our website (The Commodities Casino – 5 May 2006). Such events occur in all markets from time to time and are always obvious after the event, but much harder to identify during the period that a speculative bubble is forming.

Many commodities have bounced back in the last week, but in our view they continue to trade well ahead of their true value due to continued large positions held by financial players.

How are IML’s portfolios positioned?

Over the last year or so IML has maintained a below-index exposure to the Resources sector of around 10%. We believe this level of exposure is prudent for our Funds; we cannot justify any greater exposure than this given the extreme volatility of the income streams of many of the participating companies. We expect that given the above uncertainties that we are likely to see volatility in the market will continue to be higher going forward, than what has been experienced for much of the last few years.

That said, while parts of the share market have in recent months become quite irrationally exuberant, IML as a disciplined value-style manager has been focused on taking advantage of emerging value opportunities as stocks ignored by many investors in the recent frenzy become more attractively priced.


Anton Tagliaferro, Morningstar Investor Conference, 2 June 2022

It's a difficult time for the market. We had come through, not just the last two years but the last decade since the GFC, when things have been weird. We haven't really had a normal economic cycle since the GFC, with governments throwing money at problems. When COVID happened, it looked like we would have a slowdown but then we had more spending and cuts in rates and we had another spurt in growth. So where are we today? It’s a difficult question as we are facing a slowdown, inflation is going up, interest rates are up.

Companies are jostling to put up prices. They know their costs are going up, do they wait and then it's too late? Inflation is not going away in a hurry. The big thing now is whether it starts turning up in wages inflation, and it has to at some point. The inflation number in the UK came out recently at 9%. Anybody who's lived in the UK would know that a teacher or a train driver or a nurse is struggling anyway. If their costs rise 10% from a year ago, they must receive a pay rise of 5% or 6% or 7%. Then inflation becomes a cycle, ingrained within the system, and that's the bit we haven't seen for decades. Not long ago, central banks were talking about inflation in the 2% range? Well, it seems like decades ago already.

We're always defensive in our stock selection, but I think now you have to be extra defensive because there's so much uncertainty. Now clearly, inflation is too high because of oil prices and supply chain issues. Some of those things are temporary so inflation will come down, but interest rates have to go up now. How high, nobody knows because it's whether inflation gets ingrained in the system through wage rises. The economy will probably slow but it isn't really showing yet. So to us, defensive companies are the way, we’re not even thinking about cyclicals like James Hardie or Seek because we don't know how hard the economy will slow.

I remember when I joined Perpetual in 1989. My boss always said, don't take extreme views. It's easy at points like this in the cycle to take extreme views, things are gonna go down or everything's gonna be fantastic. It's normally somewhere in the middle.

Climate change is a very complicated issue. It’s very strange that a country like Australia with all the gas and coal and uranium in the world and we've got an energy crisis. We export gas and oil to every part of the world, they can use it but we are not able to use our own. What baffles me is everyone's talking about shutting coal-powered power stations but what's going to replace them? People also want electric cars, which adds 30% of electricity usage to the average household. Where will the electricity come from if we shut out coal powered stations? We've sold all our gas for the next 20 years. What's the alternative? What’s the plan? Someone has to have enough guts to say the transition is going to take much longer. This is not a matter of whether you believe in climate change. We all want to have air conditioning, we all want our electricity. Obviously, burning fossil fuels is having a bad impact on the environment and things have to change but we just can't do it overnight.

There are opportunities. We own New Hope Coal, we own Aurizon that transports the coal in Queensland. Aurizon will be shipping coal from mines to ports for the next 20 years, countries in Asia such as India and China need it whether we like it or not.

When you get market downturns as we've had in recent months, everything falls and the market doesn't tend to differentiate between companies. If you look at some of the REITs, the property trusts, they were at ridiculous valuations with huge premiums to NTA when interest rates were at record lows. Well, now a lot of the REITs have gone to discounts to NTA. If you can find a reasonable REIT at a 15% discount with a yield of 6% with bad news factored in, I'm heading towards them again. Same with Sky City, a casino in Auckland with a new one in Adelaide. It's trading as if it's never going to recover. These are opportunities we are finding, pockets of value.


And congratulations to other members of the investing community for their awards in the Queen's Birthday honours list 2022, including Ann Byrne (Unisuper, STA, ACSI, Women in Super, LUCRF Super), Joe de Bruyn (union leader and former Director of Rest), Mans Carlsson (Ausbil) and Andy Kuper (LeapFrog Investments).


Anton Tagliaferro is Investment Director at Investors Mutual Limited. This information is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock.


Philip - Perth
July 14, 2022

It's always fascinated me that so many think they know anything about investing - given that it's all about tomorrow, which hasn't happened yet! The very best we can ever do is understand the RISKS of what may go wrong and accept our limitations in limiting those risks to our assets. That's why I've always suggested that no one in their right mind would ever risk more than 50% of their life savings in 'growth' assets, BUT that they should have (up to) 50% in them (when they fully understand the risks and how to mitigate/avoid them) and the rest in....(drum roll) cash - NIL risk! That's right. As a financial adviser of 40 years my advice has almost always been that and if anyone wants to do otherwise, they're welcome to do so, but on my advice... My clients don't lose money without intentionally taking the risk of that happening on board. Wouldn't it be nice if that was universal advice? Take risks - take responsibility and try to never lose what's taken you a lifetime to accumulate...

June 27, 2022

Always had a lot of time for Anton. Straight shooter. Asking the questions about this country’s climate change hysteria that the Libs should have.

June 26, 2022

Re: "climate change" - to paraphrase the words of Dan Pena, "the banks wouldn't finance anything if it really was an issue". There's too much money and too much self-interest involved in the particular points "for" it, which is fatal for a truly scientific, unbiased result. Just like COVID, "show me the science that says so", but they don't and won't. The fear ? Look no further than the MSM for that, THEY are the ones who blew all this out of proportion, whether it was COVID and cancelling Christmas in the interests of "keeping us safe" - so "get a jab or lose your job, "cost of living" costs going up, house prices going down because no one can afford an extra 2% on their mortgage, the sharemarket's "horror" days of -4% (but don't mention the +4% days) etc. Things used to be normal, able to be parodied and laughed at. Except now, everything is ridiculous, we can't parody it and no one is laughing.

June 26, 2022

Ever since the mythical Year 2000 bug, I have ignored outbreaks of mass hysteria, self serving alarmists and prophets of gloom. These last few weeks of market volatility have created the best buying opportunities all year to top up on good quality Australian companies with sound fundamentals. The time to buy is when something is on a 20% off sale.

June 26, 2022

If you bought at a 20% off sale in 2008, you'd have watch the market then fall a further 30%....
Too early to buy yet IMO.

June 25, 2022

It really does not matter if climate change is a belief or not. The weather patterns are changing. How we are going to cope with with the changing weather patterns is the question which no one wants to answer. The trend of extreme weather events is causing problems here and world wide and there is no real mechanism to deal with it. This is in addition to geopolitical events which humans seem to be hell bent on unleashing as soon as one event is wound down. Looking ahead there are lot more problems which we are unable or do not wish to prevent or solve.

June 25, 2022

This is some of the stuff I agree with

Martin Lenard
June 24, 2022

The S&P/ASX 200 went up another 38% after Anton published his cautions.

June 23, 2022

I'm sorry guys but am I the only one who is a bit over the media hype? 5% inflation, 2% above the target and the worlds going to end tomorrow. No shortage of folks on TV saying they have spent 60% more on groceries than last week. Blah Blah. 5% means what cost $20 a year ago now costs $21 (in totality). In a world where people pay $5 for a coffee they could make for 50c. And if you took out a mortgage and can't pay 0.5% more (from record low rates) well you shouldn't be allowed to borrow money. Or maybe just drink less coffee? Since Covid became yesterdays news it seems the media just had to find something else to scare us with (this seems their prime modus operandi these days) and here it is...COST OF LIVING CRISIS!!!!. Like a bad 60's B movie. Hmm, just realised that media these days is actually a B movie at best....... Below used car salesmen. And sinking.
As Buffetts well worn quote goes about being greedy when others are in fear - what causes the fear? The media?

SMSF Trustee
June 24, 2022

Steve, I agree there's a lot of media hype, with constant talk of the "cost of living crisis" that is overblown and often misleading.
However, the truth is that Inflation has hit double digits in the US and UK and the policy response to bring it down without causing a severe economic downturn is going to be tricky. That's not media hype - that's a legitimate concern that will impact upon Australia.

June 25, 2022

I agree to a point but so far the inflation story is not a repeat of the 70's where wages growth was a key factor. Vegies are more expensive due to heavy rain. Energy has jumped (but plateaued) due to Russias invasion of Ukraine. But if we take a longer term such as 5 years, the overall inflation is probably still barely in the 2-3% per annum range. And if these one-off causes of current higher prices don't continue to push prices up, inflation will come back to a more sensible number.
Also find it funny how everything was Scomos fault before the election, now he's gone the problems have not changed (another media game). Not saying the coalition didn't deserve to be removed but the universal blame that they caused every ill in the world was never going to be fixed by a change of govt (how do we influence the price of oil??).

June 25, 2022

Very very well said.

Pete Latham
July 10, 2022

To Steve (once again). Your assessment of the causes for inflation is unerringly accurate. It is as a result of record low interest rates along with a “providence” of world events leading to shortages and subsequent higher prices. The (hopefully) one-off events will subside and things will eventually return to the norm, (whatever that is). Perhaps we should have blamed “Norm” for all of Australia’s woes rather than poor old ScoMo who really did have the Dickens (Charles) of a time (in more than Two Cities!)

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” Charles Dickens. A Tale of Two Cities.

Pete Latham
July 10, 2022

Steve, what a wonderfully refreshing and accurate post pointing out how the media plays on consumer frailties, and in doing so emphasises the worst that can befall those who are not practical thinkers or who have failed to adopt a prudent lifestyle. I can even remember when the ABC used to broadcast “news” rather than gossip !

John Chambers
June 23, 2022

Two comments: 1. Climate change has nothing to do with ‘belief’ just like evolution or the earth not being flat, all such matters are scientific facts. What a person believes is irrelevant.
2. You may be correct the transition away from fossil fuels will take much longer than we think but we should also acknowledge clearly the price our children/grandchildren will pay for our gross failure to act sooner and implement an intelligent plan for the future.

SMSF Trustee
June 23, 2022

If the "facts" are not constantly doubted, challenged and tested then they are not actually scientific - they become then the product of zealots. Science by definition only ever has hypotheses that haven't yet been disproven. Our views of the observable, material world - including climate - are thus never "settled" or unarguable "facts".

June 24, 2022

Nice one SMSF. Australia is not going to save the world no matter what plan we implement including turning out all the lights. Its wrong to take an extreme position and expect broad consensus given we all know China, India, Turkey etc are planning on building an additional +500 coal power stations (on top of their 3000 existing) over the next 10 years and we have a total of 5 remaining now marked for shut down. It has to start somewhere is the mantra but it simply reinforces my believe that such "movements" are for people that want to feel part of something big and important.

June 27, 2022

So you think there is a chance the earth is flat? And that biological life isn't slowly evolving?

August 01, 2022

SMSF Trustee - While what you say about science is technically true - its not useful. We can use the word "facts" or "proven" loosely and accept them as such (ie Unlikely to change as opposed to 100% certainty.). Once we do that about climate and our role in it we change the way we behave. That is useful.
So you understand what I mean. Your point can be applied to the sun coming up tomorrow. It's not a fact or proven that it will. However its useful to treat it as a proven fact and then plan for tomorrow on the basis of it happening.

SMSF Trustee
August 02, 2022

Tim, you make the mistake of aligning climate theories with things like the planets orbits. (Our understanding of which was, by the way, only established by scientists who didn't accept that things were "settled".)
What I say is perfectly useful. It reminds us that we are dealing with risk management scenarios, not established facts tested over and over. That changes the approach to policy and brings rationality into the debate instead of fear-mongering and a new kind of religiosity to climate change.
I'm not saying we don't take it seriously. I'm saying we do it in the way that respects the scientific process which is to question challenge and test every hypothesis.

June 23, 2022

Exactly Jack.Which is why I try to ignore the noise.It does my head in otherwise.Market up take some profit - Market down buy a little bit more.Get on with other things.

June 23, 2022

It's not only 2006 v 2022. It's today versus tomorrow, masses of overnight commentary that changes the next day, as if one day makes any difference over 30 years of investing. Thousands of the smartest people analysing one day's market movement and then pretending it says something about the future.


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