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Michael Pinhorn - Telecommunications Consultant and Saleha Pinhorn (Languages) (Berkshire) (2009)

Superman - the sequel?

Posted by jdavis on January 25, 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 our type 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.

It took just three days of hard selling last week and the stock market is back to mid November levels as of early this morning. Thus, time for a quick update.

You will recall we sold some 20-30% of exposures to markets, especially commodities, during October and December, in anticipation of a significant correction. Significant, in this case means c 20%, which would take us back to June / July levels.

We wrote why we believed the markets were heading for a fall : US Dollar strength – confirmed (Euro down c 8%), gold weakness – confirmed (gold stocks down c 20%). We also had an internal forecast of Government Bond weakness – also confirmed. We then waited for the senior money managers to return from the slopes and they did last Monday. And, hey presto!

They didnt like what they saw:

  • Bad unemployment numbers in the US
  • Dollar, gold and bonds as above
  • Bad Retail sales numbers
  • China reining in bank lending (again)
  • Obama slapping taxes on investment banks

Then the piece de resistence : "The Volcker Rule" proposed by Obama – deposit taking banks not to use such funds for proprietary trading

Result – heavy selling i.e. over 5% in 3 days and on very big volume.
This is just the start of this downtrend in our view.

Superman - The Sequel?

We have some potentially excellent news from Washington.

The greatest central banker of the 20th Century could well be the greatest of the 21st, were he still a Central Banker. Step forward “The Big Man”, as named by Barack Obama, Mr Paul Volcker (all 6 Feet 7 inches, in old money).

For Carter and Reagan, Mr Volcker did something that made him an isolated figure in Washington – he didn’t do what the bankers wanted. (What? A Central Banker didn’t act as a poodle to investment bankers? Strange but true!)

He hiked interest rates in an inflationary recession to 21.5% in the late 1970s, resulting in the needed routing of the previous malinvestment. He got the snouts out of the troughs, and he set the US and the global economy on a quarter century growth phase. Then, Greenspan and latterly, his protégé, Bernanke, destroyed the incredible legacy that Mr Volcker gave to the current middle-aged generation.

His advice, wisdom and integrity appear to have resonated with Barack “Change” Obama, contrary to the grotesque and utterly wrong advice of those poodles Summers and Geithner – the Terrible Twosome in charge of US finances.


I have long called for the splitting of banks "too big to fail?.  (Aren't they too big if they bring down your economy?!)

This, of course, has been poo-pooed by Himself in 10 Downing St and thus far by the Twosome.
Yet, that's what Obama with Volcker has said he will do.

I surely hope he will – it would be a marvellous step forward and would start us on the path to sorting out this dreadful mess. We have to wait and see the detail and the Washington negotiations with the hugely powerful banking lobby but we live in hope – that’s not something you read very often in these pages about the global economy.

As well as the Volcker rule, briefly described above, we may also see the splitting of banks between “casino” trading banks and commercial lenders – deposit takers and property and business lenders. This would be effectively a return to the eponymous Glass-Steagall Act of the late 1930s which Clinton repealed in his latter period of office. The UK had allowed the two types of banks to be one, long before, and the US banking lobbyists argued that Wall St needed the same opportunities to develop [with the risk held by the state and potentially to lose bucketloads of tax payers' money…]. They got the opportunity and, less than a decade later, look what happened.

Quelle surprise.

If these proposals are effected – and we are a long way from that – stocks, commodities and property would likely fall again very significantly. Companies would go bust in their thousands.
To which you may say “And you say this would be marvellous?”

As far as we are concerned, all these are likely to happen anyway and, as I wrote previously, better that it is short and sharp (say 3 years) than long and inexorably socially corrosive (10-20 years).


We expect a c 20% fall in markets generally, from the highs a couple of weeks ago, over the next couple of months.

If and when we get there, then we will re-evaluate.

Our current thinking is that there still is too much negativity generally for this to be the end of the cyclical rally started in March 2009. In other words, there may well be many sellers now but not the major participants such as insurance companies and mutual fund managers. Thus, we believe this will be an opportunity for the hedge funds et al to buy more at lower prices in anticipation of a further rally into the summer. Then, when the big fund managers and pension fund trustees move from negative to positive (at exactly the wrong time as usual) and buy in a fulsome manner at even higher levels, having missed out on one of the greatest rallies in history, the serious investors would then be inclined to sell fulsomely.

We expect to be buyers again at c 900/950 on the S&P 500 (having sold at 1080/1100) and we will probably buy commodity stocks earlier than that as they tend to bottom out (and top out) earlier than the wider market.  Gold and silver stocks have already fallen c 20% with probably more to come.

Comment on our advice process
A question arose recently during an annual review with a client and I wish to clarify one point.
When we send out commentaries such as this and we say we will be contacting clients with investment / divestment recommendations we look at 100% of our client portfolios and we email individually and bespoke. Just in case you were wondering.


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