“Reassuring we have advice and support from a firm that understands the markets and ensures that action is taken at the right time”

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

Armageddon or bust!

Posted by jdavis on August 5, 2011

Dear Client

Barring a big upday, 5 August 2011, in the stock markets this will be the biggest fall in a week since the end of the late 2007 to early 2009 (biggest in history) crash.

The S&P 500 is currently down c 12.5% from the early May 2011 high.

To say I was wrong that there may be one last gap up before a significant fall would be accurate.

I would ask clients, who reduced their exposure to the inverse fund, to note that they still held a good amount of it AND they held/hold some 2-2.5% of the original inverse fund holding in the Eclectica Absolute Macro Fund which is up 7-9% since you starting investing in it.  The bulk of that rise happened during the last 2 weeks.  I always said that we would hope it would not lose money during a market rise (it didn’t) and that it would make money during a significant fall (it has).

I have not checked thoroughly however, given the way we structured portfolios, I believe no-one made any real money over the last year and no-one lost any either.  To put that into perspective, the stock market is now lower than the May 2010 highs, before the Summer 2010 fall, which preceded QE2 – which brought about the rally in late 2010 and early 2011.  Remember what is QE.  It is money printing i.e. borrowing from banks by governments to ‘stimulate’ the economy.  It hasn’t worked in any way.  It did stimulate the stock market and raised the price of commodities – which, for example, meant that food prices nearly trebled in Africa.  That is the reason for the dreadful famine.  Not African politics.

I can think of no country which had huge debts which has done well out of QE2.  Only the stock market and its participants – and that could only have been temporarily.

Everyone and his dog was saying in the media to buy houses and stocks.  Well not everyone…  Almost everyone.

I have, for some time now, expected the global risks to result in a strong buy of the US$.  That is happening.  This would have a negative effect on commodities as well as the wider market.

As I type the S&P level is sitting on its 200 week moving average line.  This is probably the most important trend line in markets’ analysis.  If it breaks it convincingly then we will likely have another 2008 right here and now.  That would take the FTSE, for example, down to perhaps 2500 setting up the buy of a generation.  On the other hand, the US announces Non-Farm Payroll numbers today – an economic indicator that often moves markets.  If it is a good number then the market could rise.  However, my suspicion is that we may well be indeed in ‘2008’.  A market rally of 5-10% may well be sold into by major market participants, just like Summer/Autumn 2008.

Thus, if we get there, I will be inclined, as I see it now, to reinstate the inverse fund for clients who have this and to start a position in it for those who do not.  The Eclectica Fund we would hold where you have it and start a holding for those newer clients whose portfolios have just begun with us.

Only if the S&P grows more than c 15% from here would I consider changing the above view.

I have long talked and written of the middle classes being wiped out – your relatives, friends etc included.  I am sorry to say it is ongoing.  It would always have been a boiling frog syndrome.

It appears my forecast of the diminution of global finance is in motion.  Say arrivederci to London house prices.  And the national average price too.

But households still have mountains of debts.  Add to that our government debts.  There will be a surge in home and business property repossessions and business failures.  Will they bail out the banks again? No idea.  If they do, it will create short term stimulus to the markets and the economy.  Then to Greece, economically, here we come.

However, from a conversation I had with a client last evening, let me demolish a myth perpetuated by those involved in the 2009 bank bailouts.  Had they let the banks fail, depositors would not have lost their money.  The powers that be (the Brown / Balls’ government) could easily have shifted depositors’ funds to a new bank and let the loans side of the banks go bust.

Clients who have cash funds in their bank accounts etc should look to invest with us now for long term wealth management.  Whichever way this is going we are able to position a portfolio such that we can take advantage of these conditions.  Please remember the time to make money in investment markets is when there is blood on the streets.  There is blood on the streets.  We have some clients who invited us to manage more money over the last year and I refused to ‘take’ the money as I could not see how best to position brand new funds amongst an existing portfolio.  It is much clearer now and I will not refuse this time.

Remember, ALL our client portfolios are safe.  We have focussed and persevered – with your support, for which we thank you greatly – on preservation of capital.  There will be, in our view, a ‘2008’ either this year or within 3 years from now.  We will be ready for it and to take advantage of it.

We urge you to suggest to the people you care for – family, friends, colleagues, clients – to speak to us.
After a year of ups and downs (resulting in a net fall) most people remain entirely oblivious to what is going to happen.  We can help.

We work with high to very high net worth families (£250k to £25m of financial assets and/or high earners).

Follow me on Twitter for every day updates.
(After comments by clients, please note you have to register on Twitter in order to follow a Twitterer.  Then you go to your page to see their Tweets.)

If you appreciate what we do for you then please spread it around?
If you don’t appreciate what we do for you then please tell me immediately.

There may be concepts in this (these) updates which are outside of your normal experience.  If ever you have any queries please do not hesitate to contact us.


With kind regards

Jonathan Davis


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