“Jonathan Davis Wealth Management have saved my wife and me from losing 40% of our net wealth over the last 12 months”

Robert Gaunt - Outsourcing/Offshoring Consultant and Renate Hechter (Sydney Australia) (2009)

Festive Markets and Economics Update

Posted by jdavis on December 23, 2011

I envisaged* a Santa Claus stock market rally, when I wrote at the end of November.  Indeed, it has risen from 1160 and is now over 1250.


There has certainly been a Santa Claus expectation rally at our house.
I wonder, when Santa and the reindeer come, if Rudolph will, like last year, eat HALF his carrot and Santa HALF his mince pie but, curiously drink ALL the whisky…?
As we work on probabilities, I can say WITH 100% CERTAINTY, that Santa will indeed empty the glass again this year!


As you see, in the chart below, the Dollar is showing signs of strength, having risen a significant 9% since the Summer.  Thus, the major global pairing, with the €uro, is seeing the € weakening, as we forecasted.

 

 

(Against the £, the US$ continues its upward trend.  Should clients wish to put more from £ to US$ - of non-investment or expenditure cash holdings - that could well prove to be a good move over the next 6-18 months.)


The US$ is back to the levels of about a year ago, when I started to forecast a strengthening US$, with a weakening global economy and stockmarkets.  Clearly, I was a few months early.  There were further falls to come, with the Fed’s money printing exercise in late 2010.


China is slowing down sharply and the EU (and UK on its own) is very likely in recession as is probably the global economy.  We have a falling € now due to the recession in the EU.  Thus, as currencies are a zero sum game the US$ is rising vis-à-vis € and the € is the major proportion of the US$ index above (the basket of major currencies).


There are clear signs this rise has legs.


The US ratings agencies (yes those who said that Mortgage Backed Securities and Irish Banks and EU banks were all AAA rated – then they went bust almost overnight!) amazingly are still listened to.  The point to note is they have said that they would put EU countries under review for downgrading over the 2 - 3 months.  If they downgrade then all the European Central Bank lending will cost more and Brussels’ and Merkozy’s attempts to pretend all is well will be for nought.  And yet more hundreds of Billions of taxpayers’ money will be seen as squandered on bankers and politicians.  In this scenario the € would likely fall sharply.  Thus far, it is down c 10-15% vis-à-vis the US$.  It has a lot further to go down, in my view – but, as ever, not in a straight line.^


As we know, there is a high inverse correlation between the US$ and the stock market and commodities, including gold and oil.


In my view, this US$ rally is likely to be last major rally before it totally collapses over the next few years.  Thus, in the medium term, after a collapse, commodities and commodity stocks will then rise for a long time in US$ terms (and £ and €).


NB.  It does not mean other currencies will strengthen. In fact, there appears to be a race to the bottom by pretty well all governments hugely to decimate currencies.  Thus, our base case is still that we will move into permanently higher and higher inflation.  (As it happens, due to our current recession inflation will likely fall, short term, into 2012, as I have been telling clients for months.)


Govt bonds i.e. lending to the UK, US and Germany have rallied hard in this Depression era as global investors have sought security.  Thus, as you may have heard, interest rates paid by these governments are at all time lows.  The implication, the politicians and media tell us, is the markets see us as safe havens.  The TRUTH is our Bank of England is printing money to buy (lend) UK debt from (to) H M Government.  Thus the prices of bonds have risen and the yields (the interest rates) have fallen.  Think about it for a couple of moments – it’s the ultimate funny money.  If they don’t stop, our currency will become valueless and we will have super, maybe even (God help us) hyper inflation.  Great for bankers and politicians and terrible for everyone else.


If the other buyers (pensions funds etc) hold on to these assets, long term, they will lose big time.  It is irrelevant, as the politicians espouse, that as we have our own currency, we can always pay back our debts.  That is undoubtedly true.  However, the lender will be repaid with significantly devalued money.

The stock market has, net, move sideways for c 18 months and down for some 6 months (see next chart).  (I remind you we turned medium term bearish again in the Summer of 2010.)  We are more bearish now than we have ever been.  And that’s saying something!

 

 

In our view, the EU and/or the €uro will, in some way, fall apart over the next 6-18 months.  Who knows, it could be late 2013.  However, the longer the politicians and the bankers scheme, the longer the whole charade can continue.  However, the end is nigh.


You might have read the ECB, this week, loaned c €500 Bns to 500 banks to tide them over for 3 years.


It is estimated the banks need a further €1,500 Bns in 2012 to really tide them over.  It’s funny.  I very much doubt we’ll see 3 years before that (tax-payers) money is lost forever.


A client once asked me, ‘where has all the money gone?’  Voilà!  You’re seeing it go in front of your eyes.


With the € falling apart, the US$ would soar.  We must preserve our capital for this most likely – and our expected – scenario.


Santa did come for most of this month.  Now, in our view, we are close to the end of the Autumn/Winter retrace of the Summer falls.  Our view is that the stockmarket is topping out around these levels and will resume the cyclical bear market, started in August.  (The cyclical bull market was March 2009 to July 2011.  The secular bear market started in 2000 and we forecast it will continue still for years.)


Thus, next year or so will see major falls in our view.


We put it at a minor probability i.e. possible that the stockmarket will go back up to the Summer highs.  If it does, in our view, it would be unsustainable.


We would be surprised to see ratings agency downgrades of EU states over Xmas.  However, they are possible.
We are likely to recommend increases to our short fund early in the New Year.  If downgrades happen next week we’ll make the recommendations then.


We are likely to recommend reductions in exposure to commodity funds, where clients are top heavy.


We are likely to recommend reductions to holdings of the Barmac Castleton fund as we feel we are unlikely to see any rise in this fund during the expected crash.  We would use the released cash to move further to Eclectica Absolute Macro and short.


At this time last year, we were saying we ‘would be unlikely to make you money over the next year’ so keep it in cash.  This time, however, clients with large cash holdings in banks are advised to place with us for the following reasons:

  • Our chosen investment and administration partners are extremely unlikely to go bust, compared to banks which are technically insolvent – pretty well all of them
  • During this year, we have witnessed that investing through banks and stock brokers, client funds literally have been taken and used as institution funds (AKA commingling) and then lost for ever
  • We cannot know for certain the government will honour the £85,000 taxpayer-backed deposit guarantee scheme (will the
    government / taxpayers have the cash?)   

 

  • New funds will be apportioned c 80% Eclectica Absolute Macro / 20% Short S&P 500
  •  In a general crash, this discrete portfolio would be likely to return a decent profit, after which the portfolio will be brought into the general client portfolio to take advantage of the next uptrend

 

If you intend to place new funds with us, please do not delay, even for Xmas.


And on that note, once gain, I wish you and yours a super festive season and all the very best for 2012.  It’s shaping up to be very hard.

 

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