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Black, purple polka-dotted swan or capitalism's swansong?

Between statistics and the realistic is the vibe, writes Michael West.

Between statistics and the realistic is the vibe, writes Michael West.

IF HISTORY is any guide and let's face it, history is the only guide it is a good time to buy shares. Not that we are recommending it we don't boast a financial services licence for one but merely pointing out that it is statistically logical.

Research from Mark Hancock's Precept Investment Actuaries puts the return from Australian shares for the 20 years until June 30, 2012, at 8.9 per cent. That is, if you bought, sat there, raked in the fully franked dividends and didn't trade.

As the endangered species of the self-funded retiree can attest, the average market return over the past five years has been negative 4 per cent. That is -13.4, -20.1, 13.1, 11.7 and -6.7 per cent respectively, which suggests the worm of probability should have turned.

"Based on the last 20 years and even the 10 years prior to that, in our opinion it would be statistically unlikely to have another negative five-year period going forward from 2012 to 2017."

That's on a five year-view. As Hancock points out, negative years tend to correlate, so it might be a smidgen more likely that this year will be negative too.

This marries with our own highly illogical and unmathematical view call it a vibe that the bottom is yet to arrive and that recovery, when it comes, will be tedious and faltering as the world slowly deleverages from its debt binge.

Besides, markets tend to turn when there is universal pessimism and there are still one or two bulls still forlornly moping about the market paddock.

Over the 20-year period, Hancock calculates the average capital gain on shares at 4.6 per cent and the average dividend return at 4.1 per cent. In other words, virtually half the sharemarket's returns came from dividends and associated franking credits.

Yet, of those 20 years, only five produced a negative return, and three of these five have been in the past five years.

As an aside, the average return from a share fund or balanced fund during this time may amount to only half of Hancock's average yearly 8.9 per cent, or thereabouts, once the bevy of middle people had all taken their cut. The Precept report doesn't go there though. It just calculates compound returns from the ASX 200 Accumulation Index, which excludes small and illiquid stocks.

On the numbers, this financial crisis is surely a "black swan", a once-in-a-lifetime event already similar in scale to the 1929 crash and its aftermath. And it's not over yet.

The question is, is it something grander and more sinister a slow end to the present economic system? A purple polka-dotted swan perhaps?

Even radical central bank intervention, rabid money printing, interest rates pinned near zero and bonds at record low yields, have not been enough to fire up the world economy again.

Playing devil's advocate to the logic of Precept's equity market statistics, the boom of the early '90s until November 2007 was accompanied by an explosion in leverage. Average household gearing rose from about 60 per cent to 160 per cent.

At the same time, Australia's economic growth was fuelled by unprecedented Asian industrialisation and the computer and internet revolutions. These won't come again, although their effects persist.

Countervailing these dramatic "one-offs", the 30-year return from the All Ordinaries Index, from June 1982 to June 2012 that is, (excluding franking credits) is 11.9 per cent. Over time, equities tend to deliver 10 per cent growth, on average, yearly.

Say gross domestic product growth runs 2-3 per cent and inflation runs at 2-3 per cent, company earnings should be at least 4-6 per cent, before dividends. Even accounting for a "Japanese lost decade" scenario, and structurally lower equity returns, they are still likely to surpass bonds and other asset classes. Statistically, that is.

If the statistical assumptions are off the mark, watch out. The unassailable logic of hindsight may one day tell us we should have bought gold and headed for the hills.

HAVING been away for the past two weeks, we are deeply saddened to have missed the opportunity to pass comment on the David Jones imbroglio. Such gift horses are too rare.

It was hardly a surprise, however, to come back and find another banking scandal, offshore naturally. The Aussie banking cartel is as pure as the driven snow, apart from the standard bastardry.

There is none of this money laundering for drug traffickers and terrorists, mafia-style bid rigging against local governments, insider trading, front-running, mortgage fraud, or committing all manner of other frauds with impunity while being mollycoddled by the government. Nothing that springs to mind.

And now there's the Libor scandal where the likes of Barclays, HSBC, Deutsche, UBS, JPMorgan and Citigroup and a couple of French banks are under scrutiny for manipulating interbank lending rates basically robbing the whole world. Quelle surprise!

Banks have been batting off bad press since servicing the Nazis during World War II. They have always been big on servicing dictators.

The big difference now, indeed the great danger, is that they are too big to fail. They are the system.

So, if anyone has another massive fraud story, or a yarn about cheating, thieving, collusion, bribery or whatever, pop it in the anonymous tips box.

A real scoop would be preferable though maybe a banker serial killer angle. Or better, a banker goes to jail . . . or even, heaven forbid, a banker has to pay back bonuses.

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