Current Investment Markets
Posted by jdavis on September 20, 2007
This is our view of what is happening right now and for the foreseeable future. It is perhaps more relevant to those of our clients who have accumulated holdings invested through Armstrong Davis and who, mostly, hold significant cash holdings in pensions, ISAs and offshore bonds etc, rather than those of our clients who are building capital on a monthly basis. However, we hope it will be of interest to everyone.
The Office for National Statistics have announced today that, amongst other statistics, spending in household goods’ stores fell by 2.5% in August, which I feel reflects a slowdown in the housing market. We don’t buy new kitchens etc as much when we stay put as when we move a lot.
The Bank of England, in the shape of the Governor, Dr Mervyn King, and senior colleagues, has today given evidence to The Treasury Select Committee on the Credit Crunch, the problems at banks such as Northern Rock and the wider financial issues such as the US Sub-Prime Mortgage problem (crisis!).
What I deduce from it is the following:
• Banks will pay more to borrow funds thus there will be less money sloshing around the system to be loaned to people and companies, thus asset prices will fall, including houses, commercial properties and company shares.
• Deposit taking has been, temporarily, Nationalised as the Chancellor has stated that all deposits in the UK will be guaranteed for now. This is generally inflationary.
• The US Sub-Prime crisis is huge and banks – globally as well as in the UK – will realise probably hundreds of billions of dollars of losses.
The US Federal Reserve slashed the bank rate (The Fed Funds Rate) by 0.5% on Tuesday evening. They did this because they know the US banks are in grave trouble as well as the US economy. They have sacrificed the fight of inflation for a short term Band-Aid which will heal the wound but not the major organ failures of the financial system. Globally, as everything is priced in US Dollars (wheat, sugar, oil, gold, beef etc) inflation will take off and interest rates are likely to be higher in 2 years than today.
The last time The Fed helped out the banking system, in this way, was in October 1998 during the Asian Crisis. It didn’t stop the stock market falling from 1180 to 920 (S&P 500) during that period – a fall of c 22% from top to bottom. Also, looking at the volumes of transactions in the markets, I do not believe that the stock market will continue the rise it has seen in the last couple of weeks and in particular since Tuesday evening. I expect the market to tumble.
Hence, your adviser continues to advise that you hold the strategy you have and I believe we shall yet see a far better time to re-enter the market. I believe this short term rise to be a fool’s rally.
I want also to mention gold. As many know, this is my #1 investment opportunity for the long term and, indeed, gold and gold related stocks have had a brilliant recent run – gold has risen from $640 to $730 per oz in recent weeks. However, (and this is a very close call) looking at history, history tells us that gold generally does well in August/September (don’t ask me why as I do not know) however it retraces within weeks or a couple of months. Again, volumes of transaction during the last few days have backed this up. Thus, again, I believe there will yet be a better time soon to invest further, for the long run, in this area.
Finally, consider this. The S&P is just 2% off its high in late July 2007. What has changed since then that The Fed needed to cut by 0.5% in one go? The answer is not a lot i.e. there is huge risk out there and it will likely come into the open over the next weeks and few months.
For those who may be interested, I am booked to appear on Money Box Live on BBC Radio 4 on Monday. Also, I have been told I shall be appearing on Channel 4’s Dispatches on 1st October. All such programmes are subject potentially to short term change.
I hope this has been of interest and of use.