A thoroughly put together series of articles about construction of portfolios, concluding with an example portfolio, has been added to the members section of the site, as well as various other articles.
The end of Abenomics? (m)
Ebb and Flow
I have the pleasure of looking over the River Neris from the terrace along one edge of my house. The restful and usually peaceful view often assists my thinking. As anyone familiar with the great works of literature or even the main religions of the world will know, there are not many tales that don’t at some stage involve a river. Two of the great rivers of the world get a mention in the very first chapters of the Bible, the very pen name of Mark Twain is derived from the language of the river and there are more examples of books th
at feature rivers heavily than I could possibly list. See how many you can think of!
I mention this because a large powerful ever flowing river is a good analogy for global stock markets. Most of the time it flows along with the level varying not much from day to day topped up by occasional rain and supporting the activities of all sort of dependent beings from fishermen and ducks to factories and hydroelectric schemes. But at times the level changes more than usual and I have noted this happens in two main ways, which is the same for stock markets.
A less common but very noticeable event is a sudden increase or drop of several meters in the water level. This is prompted by a single event or series of closely linked events – exceptional rainstorms or a call to release water rapidly through the dam of the downstream hydro electrical system, for example. Generally such a rise or drop is reversed very quickly. The 1987 stock market crash, or the correction in Summer 2015 would be analogous events.
More commonly there is a seasonal change in the long term weather pattern and the river rises gradually to eventually reach a flood level or declines until near drought conditions prevail. In both the flood and drought outcomes the consequences are serious, but are only appreciated right at the end of the long process. On a day to day basis, the changes are not very noticeable and not even consistently in the same direction.
This is how it is with markets most of the time. A very sharp correction can often be reversed almost immediately. Long slow declines or periods of steady appreciation can seem almost endless and indeed the ‘inflection’ point when an underlying change in the long term background conditions is rarely detectable until after the event. However, large amounts of money are made and lost by investors who are in reality not even paying much attention.
In my view we have passed the inflection point for the long rising market that started in 2008. The conditions have changed – liquidity (a very appropriate word) is now flowing less freely and will be further constrained and the overall volume of wealth in the system is already shrinking. Investors need to understand that and expect not to make money from rising river levels, as suggested by the famous saying “a rising tide floats all boats”, but from seeking out protected pools and rivulets fed from long nourished underground springs. That requires rather more effort in exploring and researching. Doing nothing will likely see wealth declining over a period of several years.
What you should have bought on January 1st 2018
Hindsight is the only perfect vision, it is said. The publishers of the FT Trustnet web site have recently put together some charts showing how various regions and asset classes have performed in terms of value changes so far this year. It is not a pretty picture.
The only way you could have made good value from high level asset allocation decisions would have been
Investment Manager Charges
NotHarry has written about costs elsewhere and the subject will always be part of a discussion about what investments to buy. The regulator, the FCA, has just completed some work on fund manager transparency (or more realistically, the smoke and mirrors employed). Such work is written up in ways that the public at large are unlikely to find interesting but the comments of Gina Miller’s True and Fair campaign (see Links) are out there in the media now and they suggest that not much progress is being made.
A quick look at their website is recommended to all my readers – here is an easy link:
Unpredictable consequences – trade restrictions
Stock markets have fallen today as the US/China trade war escalates. I already wrote a short piece about that subject ahead of the latest round of stone throwing, here.
We can’t say what the results will be for any given class of investments, but we do have a recent real example to analyse. The EU banned all sorts of exports to Russia (an extreme sort of infinite tariff) to protest about Russian interference in Ukraine. We can see some of the effects of that now after 3 years. I will just look at an example.
In the UK, you might pay a couple of quid for a kilo of apples sourced from around the world (I checked with Sainsburys Online). Here I pay about 40p for Grade 1 Polish apples of the same sorts of variety. Now food prices in Lithuania are not typically 20% of what they are in the UK. The reason apples are almost being given away is that Russia was a huge market for fruit from Central and Easter Europe. That fruit is now coming into local markets and there is excess supply.
Lucky me – I like apples. But what about Russia – the target of the sanctions? I guess, with some media coverage supporting me, that prices for some foods went up in Russia because of the sanctions. But that means Russian growers can increase sales at higher margins and possibly even plant more orchards. Russia is a gigantic country with an enterprise culture (where it is not dissolved in vodka). So the simple analysis of the consequences of interfering with the trade process is this:
- Some products get redirected to different markets, creating surpluses and so prices fall.
- Some suppliers have no profit margin and go bust, so capacity in the supplier market eventually reduces
- Prices rise in the tariffed market, so that encourages increased local supply (witness the wine industry in South Africa during the anti Apartheid sanctions period). The sanctioned/tariffed economy slowly becomes more independent (if it is a a well resourced large country), or the population fall into poverty (if it a weak undeveloped country)
- Global trades shrinks.
This is an economic analysis and no political impacts are under consideration. Elected politicians create risks for investors because their time horizons are short in economic terms (to the next election) and they are not even interested in the long term consequences of what they do (in the main – there are honourable exceptions).
In the case of the USA and China playing tit for tat tariffs, we are looking at two huge economies with plenty of internal resources. So, they can probably tolerate the consequences and reshape. Maybe the US will modernise its manufacturing base, but Americans will pay more for their goods. Those of us who are neither in China nor the US can expect cheaper goods coming our way – the EU (+Britain) is a great place to go selling the stuff the US does not want from China and vice -versa. I predict, tongue in cheek, more soya and pork from McDonalds and Huawei phones at half the price of Apple!