“As new clients of Jonathan Davis Wealth Mgt we held them in very high regard. This has increased as our relationship has developed. ”

Brian Norman (Mgt Consultant) and Brigit de Wever (Languages) (2012)

Turn Turn Turn (The Byrds 1965)

Posted by jdavis on June 23, 2009

This was emailed ONLY to clients and the professional advisers who work with us. Then after a few weeks we put it up on the site.


Since roughly the beginning of May the stock market has done everything but move out of its tight range. Until yesterday!

We said, on March 20, that we could see a rally here of between 40 and 80%.  Well the S&P 500 rose from 666 to 956 , at its recent peak – a rise of 44%.  Hardly seems possible when you consider the abject despair at the turn of the year and into March. Yet, it was almost inevitable.

No trend goes in a straight line.  The trend is still down medium term as far as we are concerned.  The economy, globally, is shot to pieces.


• We will have 100k extra unemployed PER MONTH from now to year end, going to 3.25 to 3.5 m unemployed next year compared to 2008: 1.7m
• Banks still have huge bad debts which are hidden – commercial, residential and credit cards
• The Government has the biggest peace time debt we’ve seen
• Household debt is the biggest ever
• Taxes will rise after next May and public spending will fall (no doubt)

The economic position we have is as bad as you can get.  I hear all the time of ‘green shoots’.  Phooey!  Those who talk of it are in economic cloud cuckoo land or desperate to sell houses or win votes!

According to The World Bank, Global GDP is falling faster than the ‘experts’ previously forecast (funny that!).

In due course, lenders to government will seek a higher return on their loans as risk (of default) premium.  Thus, this will produce higher interest rates and inflation.  The 30 year US Treasury yield rose from 2.6% to briefly touching 5% from January to June.  It seems likely this will now continue to pull back short term, as it has done very recently, indicating increasing risk aversion i.e. more investors shying away from equities to government bonds.

We do not actually believe this to be the start of a retest of the March equities’ low.  We go back to our 20 March view – 40 to 80% rise. Sure, we’ve had 44%.  Yet…we currently take the view that the pullback will not be to retest the March lows.  Instead it is a pause for breath before a further steep rise.  How long will this take?  We have no idea?  Our best guess would be within 12 months.

We are cognisant of the maxim ‘Sell in May and Go Away.  Come Back St Leger’s day’ (mid September).  If the rally has been halted then this adage may be proven accurate yet again.

We are also still very much in capital preservation mode.  However, this does not mean one should chop and change every couple of months to try to finesse.  Inevitably that is a mug’s game (or George Soros’ game).  In any case, most of our client funds are managed by active asset allocating fund managers.  The long term strategic holdings are in commodities.

The question we ask ourselves is, however, should we shave a little off the table now or leave what we have and watch a pullback followed by a rise?

Well, our current view (and it could change in a week if something major, globally, were to happen) is that this is a minor pullback to be followed by a continuation of the rally.  Though, if you read the papers and watch the news, it will be deemed a major crisis.  It may be just that.  However, that is not our view at this time.  The banks are being bailed every time they cry.  This, we believe, will keep the market afloat, for now.

We are looking at the S&P 500 as ever.  The closing price last night (22 June 2009) was just a tad below the 50 day moving average.  This indicates a possible turn down. However it is not at all conclusive.  We will know more this week.

For clients with largely low volatility portfolios, there is nothing to think about really.  The funds are less correlated to the wider market.  The funds largely aim for capital preservation and, so far, our chosen funds have effectively achieved that for you.

The higher volatility portfolios are more like the wider market.  In particular, the commodity funds will be exposed to the wide swings in these areas.

In the monthly commentary of the fund manager of the Eclectica Agriculture fund, in which many of our clients are invested, the manager writes he very bullish on this sector.  And so are we, for the medium and long term. 

Amounts held by our clients in commodity funds are not over the top.  Thus, no-one is more exposed than is appropriate for them individually.  In our view, commodities are in a secular (long term) bull market with the expectation of long term rising inflation. Balanced against lower volatility holdings, overall portfolio volatility is reduced.  (Volatility, remember, is NOT how much it falls.  Volatility is how much it moves from where it started.)

The time of maximum opportunity is the time of maximum fear.  I am not saying we are at maxima for either.  Ultra short term we may have to gulp a bit.  However, we are confident our client portfolios are very well placed to benefit from the opportunities arising, with lower volatility than others experience.

Just because the economy is on its knees does not mean the stock market will be the same short term (weeks and months), nor specifically, the sectors we are focused on.

If gold, agriculture and commodities pull back significantly here over the next few months – it’s possible – then we may add a little on.


Now, I turn to our favourite subject – the housing market! (No, not Britain’s Got Talent as some of you may have thought!  To give you an idea of the state of our media – I was recently ‘dis-invited’ from a live radio programme so they could spend more time talking about Susan Boyle ie I was waiting to go on then they said they didn’t have the time.  Is that an example of the media’s priorities?)

Let me remind you of the general position:

• No trend goes in a straight line.
• Mortgage rates have risen during the last few months
• Deposits required for the best rates are now 30-40% (!)
• We will have 100k extra unemployed PER MONTH from now to the year end, going to 3.25 to 3.5 m unemployed next year compared to 2008: 1.7m
• Banks still have huge bad debts which are hidden – commercial, residential and credit cards
• The Government has the biggest peace time debt we’ve seen
• Household debt is the biggest ever
• Taxes will rise after next May and public spending will fall (no doubt)

In that environment, can anyone seriously believe house prices will rise sustainably?  The spring bounce we have had has been merely a blip up on a longer term trend down.  I repeat - No trend goes in a straight line.

The next question is after they fall considerably (our view is 20-30% from this point to end 2010/begin 2012), what will they then do?  (As you may recall, our forecast stands at a national net average fall of 40-50% from the September 2007 highs.)

We feel that people have seriously underestimated the effect of the easy lending bubble of 2005-2007.  As we have now a credit crunch, and we believe we will have this for many years, house prices will not rise much after 2012, even with rising inflation generally.  Why?

• Inexorably, we believe interest rates will rise and mortgage costs will rise
• Banks’ loans will turn bad for years
• We believe unemployment will stay high for years
• Demographics indicate that we have an increasingly ageing population who will NEED to sell their large homes to fund their comfortable retirements, thus years and years of downward pressure on higher value homes
• Taxes will likely rise
• Public sector will likely be cut back thus fewer stable jobs

So, even if, as we believe, inflation is a-coming (perhaps 5% by 2015 and 1970s style by 2020), we cannot see, at this time, how house prices will rise faster than inflation over the next decade.   Thus, those who expect to create wealth (or preserve it) by investing in houses are likely to see their wealth in fact diminish in terms of purchasing power.  Over the next 10 years, in our way of thinking, yes surely they will preserve or grow capital.  However, if, for example, petrol were to be £5 a litre, preserving capital will be useless.  Preserving purchasing power will be what is necessary.  (I have no idea what the price of petrol will be – most of the retail price in the UK is taxation.)

I was asked recently why I believe I can see what is going to happen over the next 10 years.  Great question.  I would not be so invidious to suggest I know what will happen.  All I can do is look at the data and join the dots.  We also speak to many top flight economists and fund managers frequently.  We also research markets and economics and politics.  Then, I turn it into general forecasts using logic and feel.  In other words some objectivity and some subjectivity.  At some point, we believe, in order to provide financial advice we have to have views on what is likely to happen and that informs the advice.

Please remember, investments can fall as well as rise, and they will.


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