Comment and opinion for retail investors in the UK
I am probably being very cheeky criticising the august members of the Bank of England Monetary Policy Committee, but I am not alone.
Their recent actions strike me as being like an attempt to fight a grizzly bear with your camping cutlery tool set.
In the current situation, which is scary but if handled well might be very temporary, it would be better to either adopt immense confidence or play dead and do nothing.
As it is they are just going to get a bent knife and a more hostile threat.
This morning a coalition of central banks in the most influential countries in financial market terms has announced a huge package of liquidity support and lower interest rates, yet markets have opened with sharp falls.
This is for much the same reason as when I wrote my blog entitled ‘Fed mis-step?’. The dramatic scale of the assistance package prompts market participants to think that the situation is utterly desperate.
On the other hand, at times like this where there is overwhelming systemic risk, fixed income assets start to lose value rather than offer their usual diversification characteristics, because no-one wants to buy anything. That creates a liquidity crisis, which is rather like throwing a tool bag of spanners into the global financial system. So the authorities have to try and avoid that and their actions today are consistent with that threat.
My current assessment, which of course evolves as the world reacts to the potential progress of the virus, is that equity valuations will keep falling until there is evidence that the drastic preventative measures have worked.
That means that share valuations will likely be the most ‘over-sold’ they have been in my lifetime at some point and if the virus recedes, investors with cash will need to act quickly to pick up bargains.
It has to be remembered that it is the potential threat of a massive pandemic that is driving negative sentiment – the actual number of cases is very small relative to population and the number of deaths is minuscule as a proportion of populations – at the moment. So if the illness caused by the virus is more or less contained within the resources available, which will vary from place to place, the eventual relief will be massive.
Of course, this virus may be the start of a long term fundamental change in human activity. Consumerism has become the opium of the people, succeeding religion in Marx’s aphorism and capitalism is now about 70% driven by consumption. If that falls away permanently, a recession would be truly structural and last a long time.
Such major structural changes are in fact normal – think of how the world differs from that of the Victorian era, the interwar years or even the 1960’s. The current cycle of economic restructuring and resource sharing began in the 1980s in my judgement.
One could propose that global financial systems are in the end always regulated by social or human issues and that the returns to capital had been lately pushed to out of proportion levels relative to other stakeholders, like ordinary people and the environment. That is not to propose that there is better way of managing economic resources than capitalism – just that the balance of interests has been due for a correction for a while.
No idea, personally! The phrase ‘dead cat bounce’ can usually be found across the financial pages of assorted media at times like this. I hate the phase because I have a character fault of instantly visualising what words mean without thinking, so it makes me feel rather sad about a cat.
The phrase is getting an airing today because there have been promises from financial institutions, notably the IMF, to pump prime the global economy to avoid a Covid-19 epidemic induced recession. That meant markets jumped up a bit after their heavy losses, so commentators want to know if the issue is fixed (pretty obviously not!) or if this market pick up is just a short term trading behaviour – market players closing short positions, topping up holdings to lower average costs and so on. Or just not being very experienced – there as many duffers amongst investment traders as any other group of humans.
My experience is that one does not get a V shaped recovery from a set back caused by genuine, seriously threating negative events until the worst of the news and the consequent impact is more or less understood. Generally markets will move to well ‘oversold’ values (losses that are more than really justified) first and we are not in that situation yet.
Furthermore, any remedial action needs to be seen as powerful and long term.
I think neither of those two criteria are met: we really don’t know that the virus can be contained and will die out, nor have central banks got much scope to cut interest rates, buy bonds and so on. They have done all that already – the economic antibiotic/anti-viral of choice is not now so effective.
Governments have also spent their ‘rainy day’ reserve money on tax cuts and politician led (ie get me re-elected) spending in many developed economies, not least the USA and UK.
My view is that things will get much worse before they get better, but I never claim to be a prophet (I am too optimistic to be Jeremiah or Cassandra). I am looking at history and assessing probability.
If I am wrong no one will be upset as they see their portfolios revalue back up – me included.
However, if you rush out and buy stocks or funds now and I am right, and I do think history is on my side, you will be disappointed. You would lose out twice – on the devaluation of your holdings and because you have no money or less money to buy much cheaper holdings later.
In summary my personal view is that this is merely a sinking market grabbing a plank that can’t carry its weight and the risk of drowning has not gone away. Time will tell, as ever!
Britain Backs Boris (except is was actually England). More likely Can’t Countenance Corbyn.
It matters not very much why the Tories have their majority for investors, because the key consequence is the probability of getting an actual Brexit is now that much greater. What that means in the long run is for us to ponder.
The Pound has climbed in value, which will devalue those parts of our portfolios in other currencies, as least for a short while. Fortunately there is good news on the US/China trade talks to compensate. European markets also seem pleased with the prospects of clarity on Brexit.
To balance that, the real UK domestic stock market (ie outside of the FTSE 100) has shot up early today, again as I expected, benefiting holding in UK smaller companies funds and probably value funds too.
We now need to think about what happens over the next 12 months. The first step in breaking the deadlock in British politics and what was oppressing the British economy is now past. What comes next could be quite different to what the electorate is expecting. I will put on my thinking hat.
Donald Rumsfeld’s words come to mind when I read reports of the very serious events in Hong Kong. We know what is happening. We know the Chinese are moving towards dealing with it. What we don’t know is how, or when.
One might guess it will be sooner rather than later. As Hong Kong is a very significant actor in the Asia Pacific stock market, that ought to worry us.
One would hope that a heavy handed reaction to clamp down on the rioting, which is more likely than not, would not directly impact on business activity in the region. But another unknown is how the rest of the world would react.
With China being the main driver of global growth and the US already in some ways being at war with China, this is a black cloud we need to keep an eye on.
I have recently been so bold as to try and define the Conservative government strategy on Brexit and their potential to govern in practice. I was right to suggest that a General Election was their principal objective, ideally post Brexit with the public not contemplating remain or second referendum issues, but they failed to achieve the October 31st exit.