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The Big Picture

Posted by jdavis on October 30, 2015

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

Look at September's to see what I showed then.  See if anything much has changed.


The media is always telling us of how high house prices are and 'Look how they've soared' etc.  Actually, according to various surveys, national prices are up c 5% over the last year.  This with the lowest borrowing rates in history and the Buy To Let tax changes to come in in a few months.  Oh, and on top, sharply lower growth in 2016, if not outright Recession.  Well, you know my expectations for house prices (don't get me started!).

I thought it might be mildly interesting to see the biggest 10 house price FALLERS in the country:

And to add the change in rents over the last 6 years:

This is interesting as general inflation has been c 19% over that period.  Thus rent rises, almost everywhere, have failed to keep up with inflation.  So much for massive rental demand.  And of course London - the fabled golden city where you have to sell your grandmother to live - has barely risen higher than inflation.

With all the stated headwinds coming.  Makes you think.  Perhaps these will also make you think:

Changes to BTL taxation

or this What's been and is happening in housing

or this Disinflation affecting asset prices.


Enough of the housing market and the outlook, the next HUUUUGE news in the World came out of China just this week.

After 35 years, China will soon end its One Child Policy.  The workers will now be allowed to have two.  This will have enormous implications for future Chinese economic activity.  Importantly, it will be hugely positive for Chinese retailing and internet companies.  And this will develop for the next decade or two.

It may or may not affect global economic growth much as China moves from construction and manufacturing to services.

But it has major implications for investing.  MAJOR!


Shorter term, however, Global Growth is being downgraded again and again.  In the UK, it was announced this week that GDP growth fell to an annualised 2.0%.  Sounds OK?  Not if the population is growing fast, as it is, and not when recently the big commentators and official bodies expected over 3% growth this year.  Next year, as I have said, is likely to see sharply slower growth and maybe outright Recession.

Similarly, yesterday, US growth was reduced to just 1.5% annual.  Only earlier this year, they were trumpeting 3.9%.  This points to Recession next year.

Incidentally, The Federal Reserve has never raised interest rates with growth below 2%.  Never.

As I said on Sky in 2011 - "If they raise rates we're toast and if they don't it's because we're toast."  There have been no raises now for nigh on 10 YEARS.  Each monthly decision is a coin toss.  However, rates will rise sustainably when Hell freezes over and not before!

Thus, the Central Banks are terrified of the data they are seeing.  And rightly so.  (Problematically, Zero rates and QE are NOT the answers.  They are the problems.  But that's not for going into here.)  As the West has had low growth for several years, we may already be in Depression - defined as low or no growth for an extended period.  They won't be able to slash rates if we move to Recession in 2016/17...

Some charts:

Workers' pay has fallen behind the cost of living over a period of 30 YEARS.  Consumption has been funded by debt for a generation. 

"If something cannot go on forever, it will stop." Herb Stein


So, the UK imports over $130 BILLION of goods and services MORE than we export.  The US economy is 5 times that of the UK but even their Current Account Deficit is lower than ours, on a like for like basis.  The UK has the WORST Current Account Deficit in the Developed World.  Add to our huge borrowings, the other Deficit, we have the largest Twin Deficits in the World.  The Pound Sterling won't hold its (little bit of) strength for much longer.  Imports, such as oil, are going to become more expensive.  UK is growing strongly?  Not for long it isn't.


What about Global trade?

According to this, we're already in Recession.  Somehow the statisticians can't see this.

According to the Federal Reserve, manufacturers' orders (non defence and non aircraft) are falling by around 6% year on year.  This is Recessionary folks.

Are you investing assuming all is honkydory?

What about corporate profitability?

Falling corporate profits often presage a Recession and a stock market crash.  Not always.  But I wouldn't bet against it if I were you...

Are you investing assuming all is honkydory?  Why?  Look at what is actually happening.  This is not conjecture or opinion.


Then we have the inflation/deflation issue.

This is a magnificent representation of deflation by technology:

(NB.  I don't define 10%+ inflation as hyperinflation.)  There you have the actual generational move from high inflation to actual deflation.  And this trend is likely to continue.

And this shows the Government borrowing rates over a similar time period:

Everywhere has the same Zero Interest Rate Policy.  Expect negative rates.  This is Depressionary folks.  Not Expansionary.

Still investing as if we have inflation and will have?  Why?

Now, if you loaned money to a government over the next 2 years, what rate of interest would you expect?

These are the actual rates:

That's right.  11 countries have been "paying" NEGATIVE rates recently to borrow over 2 years.  If this isn't Deflation I don't know what is.

And, on top, the US recently agreed to borrow at 0.0% over 3 months.  Well, you would, wouldn't you?  This is the first time in US history.  Even lower than during the 1930s. 


The global economy is likely at the end of the cycle.  As are share prices.  What should you do about it?  Speak to your current portfolio manager.  Then to us, if the answer is not to your satisfaction.


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