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Sunday, 15 December 2013

Ernst’s Economy at BNR Newsroom: The “stock exchanges in 2014” edition! Pt I

On Monday 9 December, I was again in discussion at BNR Newsroom: the semi-live talk-radio show, presented by my good friend Paul van Liempt.

Paul van Liempt of BNR Newsroom
Picture copyright of: Ernst Labruyère
Click to enlarge
This week’s topic were the national and international stock exchanges in 2014.

The year 2013 has been an extraordinary good year for investors. This, however, could be a burden for 2014, as it will be very hard to match the rate increases of 2013.

What will happen at the international exchanges in 2014?

Paul van Liempt looked for answers, coming from a number of distinguished guests:
  • Marijn Jongsma, editor Financial Markets of Het Financieele Dagblad (FD);
  • Luc Aben, chief economist at Van Lanschot bankers;
  • Edward Loeff, independent technical analyst;
  • Corné van Zeijl, fund manager of the SNS Dutch Stock fund and 3 times winner of the Best Dutch Investment Expert award;
  • Willem Burgers, manager of the Add Value Fund investment fund;
  • Marco Groot, FD columnist and independent investor. 
Instead of writing this whole article in interview form, I decided to publish an extensive summary of the opinions and analyses from these investment experts. 

This first part handles the first three guests, while tomorrow’s article will show the second series of guests.

During the radio broadcast, I had my share of topical questions again, but I decided not to write them down separately. If you want to hear my questions and the other ones, please listen to the first and second part of the radio broadcast integrally. Knowledge of Dutch is of course paramount here.

The opinion of Marijn Jongsma:

“2013 has been a very good year for investors. Somewhere in July, we found the upward trend. The 400 point boundary in the AEX Amsterdam index is only a matter of time, in my opinion. The question, however, is what will happen next...

The price of most stocks has risen, while the profits hardly rose in the meantime. This means that the price-to-earnings ratio is significantly higher now than at the beginning of 2013. And now, we are in a kind of twilight zone, where danger lurks.

Marijn Jongsma of Het Financieele Dagblad
Picture copyright of: Ernst Labruyère
Click to enlarge
In other words: stock rates are higher now, as a consequence of this rising P/E ratio. This means, however, that a lot of future profits have already been priced in the stock rates today. Now it is important that those profits indeed emerge.

These profits SHOULD come from economic recovery, but does this recovery indeed happen?! 

Most banks reckon with a moderate recovery, in combination with low interest rates. This is the pillar under the current rates. And there is hardly an alternative for stocks in the current market, if you really want to earn a few bucks.

However, there is a certain paradox in economic recovery, in combination with low interest rates. Normally, those two don’t combine well. Either you have economic growth and then the interest would rise often, or you have anemic or no growth and then the interest rates remain low.

Summarizing: there is a lot of expectation priced in in the current stock rates: these expectations must become true now”.

The opinion of Luc Aben:

“2013 was the year that finally showed some economic recovery. You must know that a recovery is notoriously hard to predict. When we thought that we mastered the process of predicting it, it led to an implosion of almost the whole system.

In 2014, just like we did in 2013, we will see that the economy will remain cautiously in motion. Greenshoots of this moment are:
  • Producer confidence;
  • The less pessimistic consumers 

However, the biggest impulse to the economy should come from the US, as this country is the locomotive of the world. This locomotive is indeed riding now. 

You know, the main goals of an economy are: a. making a profit and b. that most people in it have a job. Ben Bernanke made a healthier labour market one of the main goals of his policy. However, the broad indicators on the labour market are not favourable yet:
  • The average length of an unemployment period;
  • The number of people, who are long-term unemployed;
  • The number of people, who are discouraged and withdraw themselves from the labour market. 

All these indicators are still at an unfavourable level, meaning that the US labour market has definitely a long way to go. 

The development of wages is not positive yet. The median income is only now rising cautiously. The recovery of the US economy is still very moderate. 

In my opinion, Bernanke and Yellen will remain stimulating the economy for the time being and the interest will remain low for at least two years.

Luc Aben, chief economist of Van Lanschot bankers
Picture copyright of: Ernst Labruyère
Click to enlarge
And The Netherlands?! 

This is a country with a lot of angst. It muddles through the economic slump, instead of getting the bull by the horns. 

Economic growth must come from knowledge and entrepreneurship. The Netherlands does not dare to develop a grand vision upon the future. It doesn’t ask itself: ‘How can we start to grow again in a globalized world?’ 

More countries have a similar problem: they take too many small measures and hardly develop a grand vision.

We must leave society free to find out things itself. The current mentality of governments points to more rules and control. 

We should instead allow more liberties: private initiatives are trampled now. We must develop the supply side, so that new initiatives can pop up. The supply side will subsequently lead the demand side, as good products lead to an increase in demand.

The vision and attitude of the Dutch government should stimulate that value is added to things. We should level barriers and make sure that the social welfare state remains viable. The government must make room for civilians and entrepreneurs, instead of tieing them up with rules and conditions.

The imminent stress test for banks in the Euro-zone should point at a number of problem areas in this Euro-zone, otherwise it will not be taken seriously. 

On the other hand, banks are preparing themselves already, by cleaning up their balance sheets. This stress test will be executed by the ECB; the same organization that will do the supervision upon the banking industry in the future. This is a whole different ball-game than the previous stress tests were.

Banks look at themselves more stringently these days. You should not underestimate the efforts in the banking industry. Officials in the banks are more focused on their own balance sheets. I expect some minor problems, but no major accidents.

When a bank will come into trouble, however, we do have a problem. 

The current finance ministers of the Euro-zone are negotiating about this subject: 
  • Who will pay for what?!
  • How will the financial legacy of a defaulted bank be settled?! 
In my opinion, the European Banking Union is a precondition, but unfortunately not a warrant for economic growth. Without the EBU, however, economic growth is hardly possible.

The opinion of Edward Loef:

“In my job as a technical analyst, I let myself guide by the laws of growth and decay in nature. Every action calls for a reaction. There is a certain structure in growth and decay and a similar structure is visible within the financial markets: it shows itself through demand and supply.

To make an example: almost every rise of the stock rates is followed by a drop of – mostly – about 61% of the total increase. This happens especially, when the same ratio is occuring in the time between the peaks and troughs.

Technical analysts look at how rates are developing in a chart. The ratio between troughs and peaks. 

When troughs and peaks are both rising, you are in a rising trend. By connecting these troughs and peaks, you get a kind of highway with a crash barrier.

Edward Loef, independent Technical Analyst
Picture copyright of: Ernst Labruyère
Click to enlarge
At a moment that the car (i.e. the stock rates) breaks through the crash barrier, that is a moment for action, positive as well as negative.

From the trough in 2009, the trend has been rising. At the end of 2011, there was a break-through moment. Since then, we have been fantasizing about reaching the all-time peaks again [703 points in the year 2000 – EL].

I have doubts about this, personally. If you connect the peaks in 2000 and 2007, and extrapolate them to 2014, you will see that the maximum index rate of the AEX will lie at about 440 / 450 points.

On the other hand, Quantitative Easing was a kind of game-changer. 

According to stock-rate patterns of the last hundred years, there should have been a peak in 2013 for the stock market. This did not happen, however, as the stock rates continued to rise. I certainly think that QE intruded with the natural rhythm of cycles in the stock markets.

Personally, I have serious objections against QE. People at the central banks are people like you and me. Consequently, they are vulnerable for the effects of natural defects in the structure of things. These defects blind their vision. 

Although Janet Yellen denies it, there is a bubble emerging in the stock markets: at least according to my technical analyses. Investors, economists and central bankers are too much focused upon the news of the day. It would be better, when they took some more distance to the markets, in order to see the long-term trends.

For example: since 2000, the amplitude of the peaks and troughs of the AEX Amsterdam Index has reduced. In the Dow Jones Index, on the other hand, the amplitude of those peaks and troughs has increased dramatically over the years. 

Somebody has thrown a stone in the pond, at the end of last century. The waves that this stone caused are now turning into a kind of tsunami, with ever bigger peaks and troughs. This seems to be a bubble indeed, which might pop in the coming years.

And the end of this crisis? If I look at long-term waves, like the Kondratieff wave, the current crisis would last until 2018".

The official BNR Newsroom microphone
Picture copyright of: Ernst Labruyère
Click to enlarge

The second part of this BNR Newsroom show will be published tomorrow.


  1. Fear
    This is a country with a lot of angst. It muddles through the economic slump, instead of getting the bull by the horns.

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