“It took us three years to find someone to manage our wealth, and we can now sleep at night! ”

Darren and Ruth Johnston (Semi-retired entrepreneurs) (N Wales) (2011)

The Big Picture December 2015

Posted by jdavis on December 30, 2015

In The Big Picture I show what is really going on and what informs our thinking.

Look at October's to see what I showed then. 

The following is a sample of what I see now: (see lots more @j0nathandavis on Twitter)

 

Equities

"Dumb money" continues to buy shares as "Smart money" selling soars.

 

The above two charts show the S&P 500 index (yellow top chart) - flat for nearly a year and a half - and flows out of or into equities.

Institutional money has been selling like billy-o practically all 2015.  Even Hedge Funds - not noted for correctly moving with markets - are selling... a little.

Private investors and their financial advisers have been buying.

Why would Institutional Managers be selling?  To us it's obvious.

More to the point, why have private client portfolio managers continued buying at high prices?  Because they do not care if you make or lose money.  They care about their careers more than your retirement.  They are buying, with your money, at highs.  Think about that.

The Wealth Manager who tells you what you need to hear cares about you.

The Wealth Manager who tells you what you want to hear cares about his bonus, his job and his career: in that order.

 

China: Hong Kong equity index breaks 35 year old support line. This could influence broad markets in the West.

If Hong Kong is now trending down, so could Western markets.

US Dow Jones Index annual chart shows a candle formation which normally is bearish.  See how 2015 started around this level, fell materially, has been a little higher and has ended the year slightly DOWN on where it started.  This activity is normally not bullish.

Now, I'll move onto economics.

The Chicago PMI ("Purchasing Managers' Index") is an indicator of the economic health of the US manufacturing sector.  The PMI index is based on five major indicators:

  • New orders
  • Stock levels
  • Production
  • Supplier deliveries and
  • The employment environment.

The index is closely followed by markets' participants and is updated monthly.

Today, the index level was reported as 42.9.  The index has never been this low outside of Recession.

2016 Recession anyone?

The chart shows the Chicago PMI index over the last 47 years.  The red columns show the periods of US Recession (Western slowdown/Recession).

The US economy, and therefore that of the West, is between fragile and falling over a cliff.  In various ways, it has been so for a year or two.  You'd never know listening to / watching / reading the mainstream media.

The next chart comes from  The Federal Reserve of the US:

It shows that, over the last 20 years, when Retail and Food (R&F) Sales slow, soon after so does employment.  (Hardly sensational analysis.)

However, we should note that R&F Sales are flat year-on-year.  Unemployment is likely to rise in the US.  Soar, possibly, if R&F sales fall year-on-year.

The grey columns at 2001/02 and 2008/09 show when the US last had Recessions.  Recession in 2016 anyone?

 

2015 has seen huge Merger and Acquisition activity.  Why do companies merge?  Often to reduce costs aka job losses and exported to lower cost countries like China, Eastern Europe and India.

Currently, US Social Security claims are low, by historical standards.  Also, historically, they tend to bottom around here.  Rising job claims are normally associated with Recessions.  'They' can't slash interest rates in the next Recession.  What might that do to the economy, longer term, and to investing?  Invest in general shares?  Not for us in 2015 or as we head into 2016.  Buy Government Bonds!

 

Moving to the housing market...:

As we're looking at The Big Picture:

According to the Land Registry for England and Wales, sales of homes are at extreme lows.

Between February 1995 and December 1999, the average monthly volume of sales was around 85,000.
In the lending mania of January 2000 to December 2008 the average volume of sales was around 93,500.

Since the "Great Recession" of 2008, with the lowest borrowing interest rates in history, from January 2009 to September 2015 the average number of monthly sales has been merely around 60,800.  Sales numbers are back to levels seen in the housing crash / Economic Recession of the early 1990s.
 

This is seen clearly in this next chart of annual sales volumes.  In fact, sales are back to 1970s levels and are at the lowest for some 40 years... with a significantly higher population and a mania about house prices.  So, if homes aren't selling much what does that say for prices?  Well, markets, be they stocks, bonds, gold, whatever, tend to follow a simple rule: as prices rise volumes drop off... until prices reverse.  Then as prices fall supply soars as everyone tries to get out.  That exacerbates prices falls. 

That of course has not happened yet in UK (and all over the world) property.  We would not at all be surprised to see it happen. 

So 'rents are soaring'?

 

With the lowest interest rates in human history, English rents have been largely static, for years, everywhere outside of the South East.  Why oh why did people Buy To Let outside the SE, in the last several years?  Or trade up?  It's beyond me.  Greed without thinking.

Then add on the huge Buy-To-Let tax changes coming in in 3 months AND a likely sharp economic slowdown (and possible Recession) it seems to me house prices EVERYWHERE will be hit going forward.  And that includes rents.

I don't get the idea of investing in assets which have soared over decades, have done little for the last decade (outside of London), and have relied on boosts which may no longer be there.  Buy low, sell high.  Not the other way around.

The boosts have been falling interest rates, rising lending and rising divorce rates.

The only positive for house prices I see now is a rising population.  The problem is, if prices fall sustainably (not even by a large amount) it seems to me owners will flock to sell.  This will reduce prices further, irrespective of the population.

 

 

I could go on an on but that's enough for this time.

 

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