Given the current global political uncertainty, coupled with an ever-escalating Islamic fundamentalist jihad causing atrocities around the world, why is the FTSE 100 sat virtually at an all-time high?
This is currently the most frequently asked question by my clients. I’m going to give you my best shot at an answer. Because it doesn’t stack up. Until recently, shocks like the kind we are seeing weekly would have the markets up and down like a yo-yo.
Actually the FTSE 100 just looks average in relative terms
Monday just gone, was the third Monday of January, so that makes it “Blue Monday” in the UK. The fabled most depressing day of the year. Meanwhile in the US, the exact same Monday was Martin Luther King, Jr. Day. A public holiday and a day to celebrate.
February 2nd is Groundhog Day. According to folklore, if it is cloudy when a groundhog emerges from its burrow on this day, then spring will come early; if it is sunny, the groundhog will supposedly see its shadow and retreat back into its burrow, and the winter weather will persist for six more weeks.
The film Groundhog Day was made in 1993 starring Bill Murray. You know, the main guy in Ghostbusters. The plot was simple enough and I remember it as being laugh out loud funny.
Murray plays Phil Connors, an arrogant Pittsburgh TV weatherman who, during an assignment covering the annual Groundhog Day event in Punxsutawney, Pennsylvania, finds himself in a time loop, repeating the same day again and again.
It’s nearly Groundhog Day in more ways than one. It looks like history is about to be repeated.
All that lovely growth in our portfolios that was achieved in the last 12 months has been taken away from us. Much of that loss occurring in this last two weeks.
2015 now counts for nothing. We start over again. Every doomsday merchant has been out revelling in “I told you so”. However these pundits are just like broken clocks. Even a broken clock is right twice a day.
As I have said many times before “I eat my own cooking”. When my clients lose some of their growth, so do I. I know times like this come around. The last time was in 2011. Back then I spent no time dwelling on what had just happened, I simply planned what I was to do next. Nothing changes.
Due to the generous recommendations from our existing clients, 2015 brought a dozen or so new clients. Many of my new clients however haven’t just lost some growth, they start February with less than they invested. Long term investors know that this hurts more at the beginning but does get better over your investing lifetime.
What has just happened?
The markets are not rational. They behave like any group of individuals. They behave much like kids in a playground. When a fight broke out at Farnworth Grammar School (It wasn’t ever me), every kid wanted to watch or join in. Many kids missed seeing it, the fight was usually over before word got out. But the playgrounds of our school days have changed. In today’s playgrounds, every child has a smartphone. The second a fight breaks out, all the other kids know and come running.
Investment theory demands markets are rational, filled with rational investors. I don’t buy it. I’ve never met an investor free from all biases and bad behaviours. Myself included. We can feel worried and we contemplate doing irrational things. The markets today are mostly inhabited by supercomputers that buy or sell in a fraction of a second. The computers are pre-programmed with complex algorithms, set to sell at the first sign of probable fisticuffs. One computer sells, triggering another and so on. The speed of change has become breathtaking and of course introduces much more volatility.
China’s fault, eh?
What triggered this stampede for the exit?
It would be nice to blame China but that’s not the likely answer. Their fumbling stock market is state run and closed to foreigners. A crash there maybe should only cause falls in Hong Kong.
The Chinese can’t buy our exports now, so every countries economy is now doomed?
Er, no again. Only 1% of US exports go to China, therefore the US market shouldn’t have fallen. The answer is more likely due to problems in the Middle East.
David Bowie, Glen Frey & the Organisation of Petroleum Exporting Countries
All recently dead I’m afraid. Even though OPEC refuses to acknowledge it just yet. When it kicked off in the Middle East playground in the past, it was bad news for us punters. Oil leapt up in price as production looked like it was set to be disrupted. But look now. Absolute bloody carnage and turmoil right across the Middle East but oil sits at $27.00 a barrel. It should be $127.00 based on history being repeated. $27.00 is great news for us punters now, so why have stock markets crashed?
Supply & Demand
The number of buyers versus the number of sellers always dictates the price. Saudi Arabia is skint and getting more skint every day. They are not making any money by flogging overpriced oil to the rest of the world anymore. They have the worlds largest Sovereign wealth reserves of any country. Since last year reserves have fallen by 10%. They were once regular buyers of everything, but now they are regular sellers. Many members of OPEC are in the same boat. With billions of dollars of shares, bonds and gold being sold, it’s not surprising the markets are struggling to rise and the sell computers have been triggered.
Many good companies’ shares are being given away by the oil rich (poor) nations at the moment. Needs must. Babies out with the bath water. A regular contributor to my blogs mentioned that the Al Saud family could fall this year. Many think the same.
Where’s the positive
Well computers sell first and think second. So the selling pendulum will undoubtedly swing too far, and should change when the buy side computers feel prices are now cheap enough.
Saudi Arabia and much of the rest of the Middle East has made obscene fortunes by running the cartel that kept oil prices artificially high since the 70’s. Indeed ever since my days at Farnworth Grammar School where I hardly ever got into a fight. But now the tables have turned. Every man, woman, household and business in the world is slowly becoming more profitable and saving money because energy costs have fallen. Oil prices will stay low for longer too. Interest rates will rise slower, again good for borrowers and businesses and stock markets .
Mind the gap
The world is adapting. It’s a whole new world order. The oil producing nations triggered the panic selling. There won’t be any panic buying I’m afraid. OPEC are immediate losers. We are all the winners but our benefits will take longer to be seen. But as the outlook continues to gradually look rosier for businesses, share prices will continue to rise. As everyone saves money on fuel, we will spend it, making businesses even more profitable as turnovers rise. We are currently in the gap.
Its time to balance up the bad news with some good news.
The world is worried about China. Some say…We will be brought to our knees because their economy is no longer growing at 7.5% compound. It’s an irrefutable fact that the Chinese economy is slowing down, but since they regularly engineer their economic results it’s very hard to say with any accuracy, just where it was, just where it is and just where it’s going. The projection is 6.8%, which doesn’t look like a disaster to me.
American commentators are worried that many global companies will struggle to make large profits in the future if the Chinese can’t afford to buy anything anymore. That’s not news. What is news is that the Chinese Authorities have finally found something they can’t control. It has to remain that way. We sold our Chinese funds because Im not happy investing where a Communist regime can control things.
Should we care? Robert Peston at the BBC seems to think so, but frankly I’m not as worried. Firstly I don’t get paid to be a cross between a drama queen and a scaremonger. I get paid to assess the facts, take action and not get overly dramatic during the process.
So judging by some investors recent actions, they must feel that with the Chinese economy supposedly struggling, that there will be nobody left to buy the worlds goods anymore. For those investors I have two questions.
What did investors worry about before they worried about China’s slowdown?
Here’s an interesting fact. There has never been a time in the last 100 years where we haven’t had our armed forces involved in an overseas conflict. So no point waiting for war to end before we invest. Before investors worried about China’s slowdown, they had other things to worry about.
The UK General Election
Vladimir Putin & the aggression in the Ukraine
Greek Debt – Parts 1,2,3 & 4
Kim Jong-un & his Missiles
Irans Nuclear pretentions
Arab Israeli hostilities
Osama Bin Laden & Al Qaeda
Saddam Hussein & The Weapons of Mass Destruction
OPEC’s cartel and the ever increasing price of Oil
Oil running out
An Oil glut
The price of oil crashing
House price inflation
House prices falling
Banks extortionate profits
Securitised Debt Obligations
Interest Rates Rising
China Overheating (hard to believe now worries centre on the Chinese Slowdown)
We never will have “Goldilocks Investment Conditions”, they simply don’t exist. Whilst many individuals worry and are worked up into a frenzy, patient investors just invest patiently.
Who bought the worlds goods before the Chinese supposedly bought up everything?
Since WWII it has been the American consumers. Us Europeans did our bit too. So is there any chance we won’t need the Chinese to buy all the worlds manufactured goods in the future?
Well an interesting set of conditions are appearing in the U.S. and the UK.
Life support given by quantitive easing has finished. The next direction for interest rates will be upwards. That’s a good thing, it confirms economic recovery is robust.
Unemployment is way down, debt is down.
Wages are rising, house prices are rising.
Consumers are benefitting from the fall in oil prices
Try to find an empty restaurant, or car dealership or shopping complex. Most working people have a bit more “Jangle in their pockets” and they are no longer afraid to spend it.
Low energy costs alone have reduced inflation to zero, something the Bank of England couldn’t manage to achieve in 5 years of trying. This unexpected regular cash windfall seems to be a more effective stimulus to the economy than all the Quantitive Easing added together. Because these savings are all going to the man in the street, not to the banks.
It may seem something or nothing, but the savings we are seeing on fuel costs have created an interesting statistic. The fastest growing economy in the Eurozone in the first quarter was – Greece. Honestly you can’t make this up. All the debt management in the world has been defeated by the Greek people just having a few extra Euros left to spend on themselves and their families.
This consumer benefit is being spent and is boosting economies locally. With so much U.S. fracking moth-balled until oil prices climb a little, I don’t expect to see oil at $100 any time soon. OPEC’s stranglehold over us is dead. Saudi Arabia is starting to borrow money, it knows it will be needed in the long term once their cash reserves have disappeared.
Most businesses won’t need the Chinese masses as we have our own consumers.
Do we have to fear the worlds larger stock markets falling?
As Brits, we watch the FTSE100 index. The FTSE100 has suffered badly, but I have written before about why that index is no indicator of individuals investment returns. Since our last valuation was sent on 6th July the FTSE100 has fallen over 8%. Our moderate portfolio is just over 2% lower. Now today will be lower again, but the ratio will remain the same. A 5% fall in the FTSE 100 just doesn’t equate to a 5% fall in our Moderate portfolio.
To remain healthy, stock markets require small corrections periodically. The alternative is these corrections don’t occur and full blown bubbles build which eventually pop dramatically. We will be taking this opportunity to re-arrange our portfolios, hopefully bagging some bargains.
The scores on the doors.
After “The worst week for markets ever, ever, ever”, and the headlines which will undoubtedly follow in the next day or so, I thought it was an opportune time to confirm why we shouldn’t worry about the short term which is always based on the toss of a coin. We need to concentrate on long term results. Here’s a short film on how our Moderate portfolio has done, along with some soothing music. Investments tend to go up 3 out of 4 years. Even if this year is a negative, (It would still need to fall significantly from here for that to be true) long term returns will remain comfortably ahead of cash returns and inflation.
QUESTION 1: The alternative to China slowing down is that China continues to grow at 7.5% per annum. They become stronger and stronger as a nation. Do we want to see that?
QUESTION 2: We did rather well by investing in China but pulling out. As of Friday we could buy the exact same China fund as we sold at the price we paid for it in October 2014. I think it’s clear why I haven’t been tempted to invest again.
At Christmas, when I was a lad in the 60’s, every family bought a full grown plucked and be-headed bird and then tried to stuff it into a Belling oven for hours on end. The heavier the turkey in lbs., the greater the bragging rights. Bernard Matthews later popularised the bird and taught us that Norfolk turkeys were for life, not just for Christmas. He transformed them into basically cylindrical shapes that came wrapped in polythene. It still tasted like chicken, but drier. Anyway, the small detail that had been kept from me in Bernard’s TV adverts, was that turkeys are plain nasty creatures. You should see the way they treat each other when kept in captivity. Most birds are territorial, anybody who has witnessed the darker side of our common or garden Robin understands they are always up for a good scrap with another Robin. Robins are not cute like depicted on our Christmas Cards.
You see, a turkey isn’t smooth and cylindrical and wrapped in polythene from birth, it’s full of deadly sharp bits that can peck and kick. Turkeys kill each other in captivity if allowed to. A turkey farm resembles the “fly on the wall” staple numpty TV, that is so popular these days. “I’m a celebrity, get me out of here” & “Big Brother”. The format is much the same in both shows. A group of strangers are kept in captivity, gangs start to form almost spontaneously. Eventually the weakest are picked on by the others for the supposed amusement of the TV audience, baying for gossip and blood.
A weak vulnerable turkey can’t claim celebrity status or be voted off the farm. In a turkey farm the farmer could step in and protect the most vulnerable bird at any time. But he doesn’t. The farmer lets the bullying go on. Cock fighting for sport may be outlawed, but in turkey farming, better one dead bird than a whole flock of bruised and battered birds, with so many scars they are only fit for sausages. The outcome is always assured, the bird eventually dies, the carcass is thrown away and the turkey gangs start pecking the next weakest bird on the farm.
Greece is the weakest and ugliest bird in Europe. For three years Greece has been continuously patched-up and kept alive on financial life support by the European Central Bank, the European Commission, and the International Monetary Fund. There is an argument that Greece deserves all the grief they get, having falsified their entry paperwork when they joined the EEC. But maybe the press and the readers of those newspapers have also become complicit in this endless bullying. After all we know that Greek men never really work a day in their lives, they pay no tax and retire at the grand old age of 40. I read that in “The Daily Truth” so it must be factually correct.
The Germans, the French and us Brits collectively are the biggest bullies. Continually chastising the Greeks for continuously borrowing when they can never repay what they owe already and refusing to put their house in order. Well hello! UK Government debt stands at £1.3 trillion and climbing. We don’t produce olive oil, we’ve had the real stuff flowing for 40 years or so. Norway had oil too and instead of owing like us, they have around £1.5 trillion invested in their sovereign fund. Where has our prosperity gone?
The German’s talk a good story, but they don’t even count the massive cost of re-unification of the East and West of their country in their total borrowings. That’s creative accountancy more than equivalent to Greece’s little errors and omissions. The European Community financial accounts have not been signed off by the auditors for 17 years because they don’t reflect reality. Talk about the kettle calling the pot black.
All eyes have already started to look for the next sacrificial turkey in Europe. Portugal, Spain or Italy. They are all potentially lined up. If together they agree to just keep pecking with the others, they just may not get pecked themselves.
To the other members of the EU it’s important Greece is kept alive, but if they do default what can their creditors do? Repossess the Tavernas? I don’t think so. Most of the debt has not been lent against something that can be repossessed. Angela Merkel can’t criticise Vladimir Putin and then just send her panzer tanks in to Greece like Vladimir annexed the Crimea. The debt will be just written off because it’s tiny in relative terms to the overall level of Pan-European debt. And besides most of it now comprises interest. At the interest rates charged, any lender has had a fair return by now. What’s left Is mainly owed to European governments, central banks and the IMF. Any small investor who loses out this late in the game cannot say he hasn’t been warned.
You will no doubt be relieved to hear we have held no Government Debt in our portfolios since 2012. Modern Portfolio theory suggests we should hold 40-60% in fixed interest investments. The interest rates currently offered, just do not compensate for the possible risk of not getting our original capital back. Every country in the world has defaulted on some debt at some point in its history, except for 5 I believe.
“So Mr UK Government, you want to borrow more money at only 2% interest rates, with long term inflation running at 2%. You currently owe £1.3 trillion, and you have a history of never repaying your debts off. I don’t think so”
Never a lender or borrower be. My Mum taught me that.
We received a letter from a client this week. Nothing strange in that you might say, but “eagle-eyed Melissa” noticed that it had several stamps on it and one of them was a 5.5p stamp. Being married to a postman she notices these things and chuckled. She had not seen anything with an halfpenny on it for a while and a quick Google search confirmed the client must have had this stamp at the back of his drawer since at least 1975!
Now in 1975 5.5p was enough to send a second class letter. Today it’s 54p. Just 40 years later on the price is 10 times higher almost.
Deflation – That’s bad isn’t it?
Beautifully by coincidence, this week we hear inflation has turned negative for the first time since the 1960’s. Prices are falling. Normally that’s a bad thing because we will just delay making purchasing decisions if we feel that by waiting, the things we want to buy will become cheaper. I’m not talking about food and essentials like that, but cars, clothes, electrical items. Put up with your old stuff for now, because next year you can replace them for bright shiny new stuff – and cheaper than today. Economies go nowhere when people don’t spend.
You say Deflation, I say Dis-Inflation
It looks like a play on words but it isn’t. Dis-Inflation is what we have now. Stuff is cheaper because of;
Cheap oil (a combination of over-supply due to the technology of fracking and other cheap energy sources due to the accelerating technology being created in Solar cells)
Amazing Technology (Witness the productivity breakthroughs with computers, the labour saving due to robotics)
The market size (It looks like we are no longer alone in the developed world, the whole of Asia wants to tote an iPhone and a Burberry handbag whilst driving a huge 4×4)
Blink and you will miss it
But enjoy dis-inflation whilst you can, it won’t be here for long. Soon it will be business as usual and back to good old inflation. I have written about what inflation does to cash isas here before with my blog all about Green Shield Stamps
For those retiring Inflation is important
Someone retiring today at age 55 could live for 40 years. Granted they would need a slightly better than average life expectancy. That same 55 year old today was 15 years old in 1975. For a 5.5p stamp to reach 54p over those 40 years required total inflation of 831.67% (I wrote that to two decimal places so you would believe me). Or put another way inflation over the last 40 years has run at an average rate of 5.88%. If that continues a second class stamp could reach £5.00 or more by the time the 55 year old dies. I doubt inflation will run at 5.88% on average again, but the bods at the Bank of England feel 2% per annum on average is reasonable, with our regulator preferring 2.5% per annum.
You cannot reach retirement and stand still because prices will overtake you fairly quickly. That’s why the investment return uncertainty of Flexible Drawdown, is a risk that usually has to be considered and taken. A level annuity just can’t keep up over the long term. An annuity that rises with inflation just starts too low today to make ends meet, unless you have an absolutely humongous pension fund. You can’t live for 40 years without keeping your pension fund invested.
The good news is that investment returns received over the last 40 years have trounced inflation and odds are they will continue to do so in the future.