The above is a paraphrase of a translated quote from the Chinese leader talking about US sanctions. The message is beautifully simple and reflects the confidence of modern China. But what can we take from it as investors?
Markets
November 2018 (m)
Markets get real
The sharp sell off in global stock markets is no surprise to me. I have been pessimistic for some time and especially so in recent weeks. My October Watching Brief anticipated the problems that would come from rising US interest rates and better returns from medium dated US treasury stocks. Morningstar published a video yesterday saying almost exactly what I wrote at the start of he week. There is some consensus that the sell off is for genuine logical reasons, an actual change in the underlying facts, not just the need for a ‘correction’ to bank profits and so on.
October is often a month when markets get jittery and I have said to many clients when I was an adviser that I always see October and January as the two most risky months for investors. 
So, is this just volatility that can be safely sat out? It depends of course on your investment time horizon and cash flow needs. As I explain in articles elsewhere on the site, all investment planning objectives need to be assessed in terms of the need for cash flows. So, if you have not prepared for a sell off and you are going to need cash in the near term, your adviser ought to telling you to get on with selling investments that are rich with decent gains as soon as possible. If you have an adviser, give them a ring now. If you are running your own portfolio, it is time to assess the risks carefully.
Of course, I don’t believe that you should sell your whole portfolio in the hope of buying back into markets at a lower price. That sort of ‘timing’ speculation only ever works if you get lucky. Not even the best investment managers in the world can consistently sell near the top of markets and buy at the bottom. But if you do raise some cash now and don’t need to extract it for spending later, you will have some liquidity to pick up any bargains that come along if there is a real rout.
The market pendulum always swings too far at the end of the cycle, both up and down. So a swing down into a bear market will be overdone, at some future date. Then we can all look to new money making opportunities – there are not many to be found at the moment.
Radio Silence!
There have been no new posts on the site for a couple of weeks because I have been on holiday! I was in the UK, France and Italy and could claim I was doing important on location research on Brexit, the potential troubles with the Euro and so on. But mainly I was enjoying the food and drink (at least on the South of the Channel)!
I did in fact get some anecdotal evidence of what people in France and Italy worry about in terms of economics and politics and that is definitely not Brexit.
The October news and comment will be published very shortly when I will address the current investment climate and the prospects for investors.
Lehman Bros – 10 years on
September 15th 2018 will mark the 10 year anniversary of the event that history will record as triggering the financial crisis that was followed by global reactions that would have been seen as impossible in earlier times. Most developed economies moved their central bank rates to be net negative (in real terms) and central banks became the largest buyers of fixed income securities that have ever been seen, adding trillions to their balance sheets and effectively the same amount of new liquidity to the money markets. Money printing is not really the best shorthand, but that is what the average person easily understands as being the process.
It is perhaps disappointing to politicians and especially the top central bankers that they are not thanked much for acting to prevent a recession like that of the 1930s. However, the consequences of these actions have not yet fully worked their way through. Some have been good for many people – asset prices have risen as would be expected when there is loads more cash sloshing around. But because austerity was an accompanying part of the economic package in many major economies, there have been negative consequences for those who have no assets, or whose main asset is their human capital – their ability to sell their labour. Wages have not risen much because of contemporary changes in technology, society and the relative power of the socialist vs capitalist elements in politics.
It is in fact a rather unfortunate irony of the post financial crisis world that the solutions adopted to sort out the mess directly caused by irresponsible financial engineering – the invention of extra fictitious assets for those who already had plenty of assets – is in fact an application of more short term financial engineering. This is like giving the drunk guy another bottle of vodka because you feel sorry for him.
It is also much the same as the high interest rate lender offering a consolidation loan to the person who has got in a mess and can’t pay their credit card and bank loan instalments, knowing that they will struggle with the monthly cost but that there are valuable assets to be had if they default. The world remains relatively Dickensian.
The respected fund manger Edward Bonham-Carter (c0-founder and formerly managing director at Jupiter) recently made the point (in a piece about this 10 year anniversary) that global indebtedness is now at astronomic levels. In some emerging markets the stress of such debt is being thrown into sharper focus by the rising value of the dollar and less than stable politics (Argentina and Turkey). But debt in much larger economies is gigantic in comparison.
Most of the warning signs that preceded the last stock market collapse are now flashing, some quite urgently. As always the market won’t correct itself by slowing down gently and having a long pause, even if a proportion of participants know when to start taking defensive measures. It occurred to me once that maturity is knowing which drink is the last one you can have before you lose control and get ridiculously drunk with all the negative consequences. Most global stock markets have had that last ‘sensible’ drink. Some more drinking will no doubt raise a further temporary feeling of joy without consequences, but the hangover will be nasty.
Conflicting expert opinion
Yes, this is one of those times when I get as close as I ever do to those folk who issue Tweets they either wish they had thought more about, or which everyone else wishes they had thought more about. I don’t use Twitter, because I am by nature an exponent of the long way round with words, except when it comes to music lyrics.
I am going to rant a bit, but in a hopefully educational way.
Today Morningstar sent me an investor bulletin. In it they point out the useful and interesting fact that dividends grew very healthily last year in all the major global markets. Any investment professional knows that the cardinal driver of share prices is dividend growth, so that suggests share prices at what otherwise seem to be rather high levels based on macro economic and historic data might well be justified.
On the same page, they say US shares are overvalued and that it is a good idea to sell overvalued shares. In that article they go on to say that they are NOT recommending selling US shares. They also say (correctly) that you should never sell shares on the basis of news headlines. In their view tariffs won’t impact the US market as the US has a high domestic focus and is not too much impacted by international trade, so ignore that news. Might one ask why the US President is imposing tariffs in the first place if that is true?
A rational line of advice might be this: current shares prices are high because we have seen (past tense) excellent dividend growth. In a world where tariffs will have some impact on local costs (absolutely without doubt) and there is full employment and pressure on wages in many producer countries and also rising interest rates, profits will grow less, dividends will grow less or even get cut and share prices will indeed look expensive.
I am relatively pessimistic, which as I am naturally an optimist, means that for me I am very concerned about current share price valuations in many places. But there will be buying opportunities, something Morningstar does point out to give them credit. As I have been saying for some months now, holding cash patiently is a good tactic.