“Economist/Wealth Manager tells it as it is rather than what you want to hear. Advice built on hard economic facts, tailored to your needs”

Roy Duncan FCCA - Chartered Accountant and Recruiter (C London) 2012

Broken record?

Posted by jdavis on November 11, 2010

Dear Client

Every day, we are grateful that 35 families have entrusted 39 wealth portfolios to us, amounting now to over £20m placed with us (not counting the c £30m in assets not with us).
In 2004, when I established the practice, I started with the first client and we have built slowly but surely since then.

I am very much looking forward to annual reviews with clients, starting next month and continuing through February.


Sometimes, I understand fully, hearing the same message from one source starts to sound like a broken record.
I offer you a new voice, Mr Jeremy Grantham – Chairman and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO) – the hugely respected, Boston, MA-based funds company which looks after the trifling sum of $104Bns (that’s more than the economies of most countries on the planet).

Literally, today, Mr Grantham was interviewed by CNBC and here it is. It is an extended interview of some 30 minutes. In it, he explains clearly how the Federal Reserve can detrimentally affect the economy structurally(ie long term), however also, how it can positively affect the stock market and other assets, such as home prices, in the short term. In the 17th minute he talks of fair value on the S&P 500 – at a level far lower than we have today. He talks of bubbles. He talks of commodities. He talks of the real economy. In fact, I suggest he talks of all the issues I do and in a far more authoritative way than I can.

So, if you wish to know reality to help you know what to expect in the future, watch the interview.

G M O website.

Incidentally, this is an excerpt from Mr Grantham’s Q3 2010 economic update:


Postscript: Australian and U.K. Housing

I happily concede that the U.K. and Australian housing events are not your usual bubbles.  Australia, though, does pass one bubble test spectacularly: we have always found that pointing out a bubble – particularly a housing bubble – is very upsetting.  After all, almost everyone has a house and, not surprisingly, likes the idea that its recent doubling in value accurately reflects its doubling in service provided, e.g., it keeps the rain out better than it used to, etc.  Just kidding. So,
the house is the same. Perhaps the quality of the land has changed?  In any case, Australians violently object to the idea that their houses, which have doubled in value in 8 years and quadrupled in 21, are in a bubble.

The U.K. and Australia are different partly because neither had a big increase in house construction.  That is to say that the normal capitalist response of supply to higher prices failed.  Such failure usually represents some form of government intervention.  In Australia, for example, the national government sets the immigration policy, which has encouraged boatloads of immigration, while the local governments refuse to encourage offsetting home construction.  There has also been an unprecedentedly long period of economic boom in Australia, and the terms of trade have moved in its favour.  And, let’s not forget the $22,000 subsidy for new buyers. But does anyone think that bubbles occur without a cause?  They always need two catalysts: a near-perfect economic situation and accommodating monetary conditions.

The problem is that we live in a mean-reverting world where all of these things eventually change.  The key question to ask is: Can a new cohort of young buyers afford to buy starter houses in your city at normal mortgage rates and normal down payment conditions?  If not, the game is over and we are just waiting for the ref to blow the whistle.

In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable.  For example, the average buyer in Sydney has to pay at least 7.5 times income for the average house, and estimates range as high as 9 times.  With current mortgage rates at 7.5%, this means that the average buyer would have to chew up 56% of total income (7.5 x 7.5), and the new buyer even more.  Good luck to them!

In the U.K., which also has floating rate mortgages and, in this case, artificially low ones, the crunch for new buyers will come when mortgage rates rise to normal. But even now, with desperately low rates, the percentage of new buyers is down.
Several of these factors, which do not apply to equities, make for aberrant bubbles, and clearly the Australian and U.K. housing markets fit the bill.  In comparison, the U.S. and Irish housing bubbles behaved themselves.
So let’s see what happens and not get too excited.  After all, these may be the first of 34 bubbles not to break back to long-term trend.
There may be paradigm shifts.  Oil looks like one, but oil is a depleting resource.  If we could just start depleting Australian land, all might work out well.”

 

I suggest that he is very cynical that he will EVER see a bubble which does not “break back to long term trend.”  There have been 34 instances of bubbles over the centuries and regions of the planet and each one has reverted.  Somehow, I might suggest he is asking, the UK and Australia have alchemied the solution? Extremely unlikely - to put it mildly.


May I remind you of Channel 4’s programme on our national debt tonight at 11pm?


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

If any of the above is at all unclear, as ever, please do contact me for clarification.
 

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