Where are we after they have nationalised the West's banking system? Wow!
Posted by jdavis on October 13, 2008
We wrote, on 24th January 2008:
“In FTSE 100 terms, we were above 6700 in October and we went to 5300 this week – a fall of 20%. That is a crash by any other name.
In the Far East, markets have fallen even further – Japan went down 28% and Hong Kong (closely linked to China) went down 33%!
The global banks wrote off c $100 BNs last year, in the second half.
In three weeks this year, they’ve already written off 10s of $BNs. There are probably hundreds still to come! We may not be at the bottom yet.
In our view, there will be a further leg down… “
We wrote, on 17th March 2008:
“I have continued to be strongly bearish on the real economy – house prices collapsing…… huge numbers of repossessions, bankruptcies, job losses etc and the stock market is NOT the real economy. It looks ahead ... The recession may yet be much much worse than even I forecast.”
We wrote, on 20th May:
“There are still huge market and economic risks out there…as the $ continues to rise, in the short term, we can see a significant pullback this summer on commodities and gold.
Another important issue is the €. We feel that it has topped out at €1.6 to $1. Thus, it could well be time to move out of €.”
Our clients took action and saved themselves from huge losses.
Sure, commodities were hit hard over the summer however, as we have said on numerous occasions, commodities (gold, agriculture etc) are in a secular bull market and we expect strong average rises (with volatility) for the next 10 years or so. Hence, over the last year or two we have advised our clients to increase their exposure to these areas.
All in all, the last few years have seen us steering clients away from property and largely out of stocks since 2006/07.
Residential prices are back to February 2006 levels (Halifax). Everyone knows that we believe house prices will fall until they go to 2003 or 2002 levels.
The stock market is back to early 2004 levels (FTSE 100). The market is 40% down from one year ago. As it happens, at 60p in the £, this may be a useful time to start moving back in – on a medium term view (‘start to’ being the operative phrase). Remember one of our adages – Buy Low, Sell High!
Western governments have, to all intents and purposes, nationalised (globalised?) the banking system. We truly are in a new world post 2nd World War. It would appear that there will be tighter lending going forward. Look at Northern ‘Wreck’. Immediately, the new management hiked the rates charged and reduced levels of lending. This was to have as many borrowers as possible redeem so that the bank could repay HM Govt.
Also, I can see only one result, fiscally: after the next election there will be higher taxes and/or very much lower public services and state benefits.
There is deflation of the amount of money in the system. However, looking out, as companies go bust there will be significant industrial consolidation bringing back pricing power i.e. inflation.
Also, we feel that with all the printing of money seen in the world over the last few weeks, this will be the presage to high inflation down the line, whatever happens in the short term. Cash may be king now but not in the future.
Going forward, £ and € will not be good homes for holding value. The $ will also restart its long term decline (started around 2002/03) – then long term interest rates will go through the roof. Hence, investors MUST ensure their assets are secured against devaluation of their currencies and inflation. We’ve had low inflation for over a decade now and investors have almost forgotten what double digit inflation feels like it. They’ll feel it sooner rather than later.
We can safely say that the ‘hole of light’ at the end of the stockmarket tunnel is widening. Clearer daylight is foreseeable. That is not something we have been prepared to say for a long time. Thus, we are starting to be able to see ways of making money rather than preserving what we have – which has been the focus for what feels an eternity.
Remember, the stock market IS NOT the real economy. It forecasts the reality – banking losses, lower corporate profits, bankruptcies and a recession.
Inevitably, the stock market will come out of it’s malaise BEFORE the economy pulls out of it’s. However, whatever happens to the stock market, it is our view that commodities will rise in the medium and long terms.
As we have repeatedly stated: at point of maximum pessimism is the point of maximum opportunity. (Last year we talked of maximum euphoria and maximum risk.)
Our longer term intentions: we are trying to take investors off the roller-coaster. The way to make money from long term investing is to keep it after you’ve made it. Most investors make it then lose the gains. Thus, their long term average annual returns are not much greater than cash. What’s the point in taking all that risk and receiving a return not much more than the risk-free rate?
Hence, we strongly believe that our clients’ long term returns will be significantly greater than the risk-free rate, as they will enter the next bull market from a higher point, with their savings intact. Also, this will be with much much reduced levels of risk.