“Jonathan has advised us for 5 years and always provided consistent, truly independent thinking with emphasis on capital preservation”

Tim Bacon (CEO, Colville Estate) and Marylyn Bacon (Kent) (2011)

Markets, markets, markets

Posted by jdavis on April 13, 2010

This email was sent ONLY to clients and the professional advisers who work with us. After some while we put it up on our site.

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

Please also remember, no trend goes in a straight line. Otherwise it would be called a straight line! The trend in houses and stocks is still very much down, in our view.

Who do you know who could benefit potentially from this quality of advice? You are welcome, of course, to pass this email on or suggest to them to look at our website. We will always happily speak to anyone on the phone. It is never a useless exercise or a potential waste of time. If however we feel we cannot add value to their circumstances we will always try to help informally.


Here is the chart of the S&P 500 over the last five years (click 5Y if not showing). As you see and as you may know the US stock market has risen a remarkable 80% since the extreme low of March 2009. We have stated since prior to the New Year that the thrust up was slowing. As a precaution we recommended reductions in markets’ exposure. We said at the time that we saw a significant correction “over the next couple of months”. Well, the market did fall c 10% and promptly rose again to where we are now. The net gain over 4 months is c 9%. Hardly, as the media will increasingly assert, a massive surge. However, a good amount nonetheless. Hence, we feel it may soon be time to sell some more. We will keep a watchful eye over the markets. We will not recommend to sell at the first sign of a downturn as they can be false moves.

Please remember, at Jonathan Davis WM, we try very hard not to sell at lows and buy at highs – which is what we have seen stockbrokers, “financial advisers” and so-called professional investors (eg pension funds) do throughout recorded history. Many of you will know one of our mantras – Buy Low, Sell High.

I have had so many conversations recently where I have repeatedly stated other “advisers” find it very easy to have you buy but do they ever attempt to have you sell?

Why not? Because they only earn when you are invested. Thus, they are vested interests in markets, property etc. On the other hand, we are as impartial and non-partisan as you could find. We advise you and we want only the best outcomes for you.

There are many reasons for our increasing concern over prices. When I read that serious experts (as opposed to TV rent-a-quotes) are selling I sit up and take notice. Philip Gibbs has moved to 52% cash or cash equivalent. Philip Gibbs - one fund manager I rate very highly

Some of our clients have remained largely in cash or in low growth / low volatility funds during this rise and we have been increasingly comfortable with this stance given our forecast of a sharp deterioration in markets. Portugal, Ireland, Italy, Greece, Spain, Latvia, Iceland, Lithuania, UK, US, Japan, China and the list goes on of economies that are in dire straits. There is no alternative to public sector cuts in so many countries around the world. Whether it is medicine taken voluntarily or imposed by the IMF (aka The USA); whether it is started this year or next or even later – is immaterial. Reality will eventually hit home. If they try to avoid it and continue to print (aka Quantitative Easing) the global lenders will hike our interest rates irrespective of what blatantly corrupt political elites will do, such as keep ultra low central bank interest rates. In The UK and elsewhere we have the entirely inappropriate central bank rate of just 0.5% - inappropriate to those of us who believe that Keynesianism is bonkers and borders on corrupt. The long run interest rate average is 5.0%. It continues to astound me that people cannot envisage the inevitable return to the long term norm. What will that do to the economy and the property market?

NB. I talked about public sector cuts immediately after the Budget, last month, with Jeremy Vine on Budget Day. Click here if you would like to listen to the debate.

NB#2. I’ll be filming with BBC2 in Banbury in early May talking about the economy with specific regard to pay and employment, for a programme going out after the election.

Incidentally, for the property watchers amongst you, March 2010’s Royal Institution of Chartered Surveyors’ (AKA estate agents) survey is notable. RICS March 2010

What we see is Supply rising (New Vendor Instructions chart) and Demand not following (New Buyer Enquiries chart). The (first) chart of changes in property prices over three months, since 1997, shows a distinct falling trend during the great housing bubble (c 1997 to 2007) and beyond with lower highs and lower lows. Notable also is the big falls in volumes of sales over the years. Recovery? Most unlikely. Our forecast of house prices remains at a further c 25-35% fall over the next 2-3 years. Commercial property will be similarly hit, or worse. In real terms (vis-à-vis inflation) the relative fall will be even higher. In crashes, real house price falls of 35% are the norm. The current ongoing crash could easily be 50% in real terms.

Click here for chart of house prices over c 40 years


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