Its Not Harry

Comment and opinion for retail investors in the UK

Education

Monday Mashup – gold: hold or fold?

by Leave a Comment

The price of gold bullion has declined steadily in US dollar terms for some months since its peak last Summer. A decline in the value of the dollar relative to Sterling will have added an extra loss for investors reading this post, and that includes me!

Readers who own gold bullion may therefore be asking the question in the title.

Why own gold and what about Bitcoin?

I own gold bullion because some 9 months or so back, I wanted to have an asset that was not correlated with global equities and would retain value if the pandemic got totally out of control. Fixed income and physical property investments did not look like offering much value then (and they still don’t) and there was obvious demand for gold.

Gold is a commodity and generally commodities (which include cryptocurrencies like Bitcoin) don’t pay an income and won’t be worth more because an enterprise does well. The price is directly and only determined by supply and demand.

Because high value minerals like gold and high complexity assets like Bitcoin are hard to mine and bring to the market (for completely different reasons of course), the supply side is known to be limited. So in making an investment bet on such assets, one is always taking a view on the demand side of the equation.

Money ‘rotates’ around asset classes over time

What’s changed?

This is the key to working out the completely opposite path of returns for gold and Bitcoin over the last few months. We have less demand for gold (more on that later) and more demand for Bitcoin.

The latter has a new champion with a big fan base in the form of Tesla’s Elon Musk, who has invested shareholders’ cash into Bitcoin in a big way.

The other reasons for Bitcoin demand rising I can only guess, but I would suggest it is possibly our old friend ‘herd mentality’, plus a bit more of a reported positive attitude from blue chip investment houses, although not reserve banks!

The reduction in demand for gold can be attributed to several factors. The main one is that the pandemic risk is thought to be much reduced, so avoiding national ‘fiat’ currencies is less important. Another is that interest rates on US treasuries are slowly rising, implying a market expectation of inflation and/or a slowing of US government money printing in the mid-term – surely inevitable.

Although gold is an excellent inflation proof asset in the long run, it has no income yield. When risk free (as is the convention) assets like US treasuries also have no yield and could lose capital value on a rate rise, gold looks attractive.

When interest yields pick up, the short term investor would rather have the income now than the inflation proofing later, so money rotates away from gold to lower risk (now improved) yield assets.

If such investors exected a sharp rise in interest rates, they would hesitate to buy the fixed income assets, because of the anticipated capital loss, so the markets are telling us that they only expect gentle rate rises over a long period. There is some debate about that, but the collective psychology of the market is always right for the time being!

So, what to do?

One could take the view that gold is a useful core portfolio asset, offering security and diversity and over the long term is both a volatility damper because of the low or even inverse correlation with global equities, and it will serve as an inflation hedge. In that case, it makes sense to keep a modest asset weighting.

Should you invest in crypto currencies instead?

I am not qualified to add to the view of regulators and cental bankers who suggest that although these new assets are very similar in character to precious metals, the way they are traded is probably not unlike the trading of the shiny stuff back in the 19th century at the ‘gold rush’ sites. Some people made fortunes, some went on to control large parts of the market and most people were financially wiped out. In other words, retail investors ought to stay away for now.

Another point of view would be that the vaccine programmes are going well, Covid-19 infections are coming down, there will be no real double dip recession and instead a consumer boom will drive up prices and in time interest rates. That proposition would imply that owning equities, even though they are currently expensive in many markets, or even well selected property assets, is a better tactical (ie short term) option and both fixed income and conventional commodities are not likely to make money.

If you are of the latter more optimistic frame of mind, you ought to think about controlling volatility in other ways within an equity portfolio. Investing in infrastructure is something that comes to mind, given that we expect high levels of government spending, or adding heavier weightings to healthcare funds, perhaps? I am not sure I know the full answer at the moment.

I did it my way?

As for me…..

You might expect me to tell you what I will be doing.

The answer is that I will not add to my physical gold holdings and as I have cash to put into the markets when I see opportunities, the relative weighting will go down.

Aside from that, I personally see no case for selling out, but my circumstances and portfolio will not be the same as yours, dear reader, so if you own gold, you need to make your own mind up!

I hope these comments help.

Monday mashup – too much cash in the system?

by 2 Comments

I was prompted to read the explanation offered by NS&I (National Savings) on their web site after being alerted to it by my co-attorney who was trying to deal with a savings certificate maturity for my elderly father. In essence it says they are too busy to cope because everyone wants to put money with them.

I personally have long ago given up looking for the best interest rate on my deposit money, but I don’t have that much outside of my pension fund and trading portfolios. Some of my readers will have large sums on deposit and want to see some return on it. Would you be dealing with NS&I when their ISA savings rate (which seems to be their main promotion) is 0.1%?

I realise, of course, that most people will treat the 1% tax free return on the Premium Bond prize fund as enough to take a punt. The limits for Premium Bond investment are now generous enough to soak up quite a large chunk of reserves. I suspect it is sale of these bonds and the potentially accident prone (from an administration point of view) decision to switch prize payment to direct bank credits only that is behind NS&Is recruitment of an extra 260 staff.

With even august and secure institutions like Nationwide Building Society offering 0.5% (according to my quick scan of Moneyfacts) on their triple access account, then there would seem to be no reason to put money with NS&I other than in Premium Bonds. Or is there?

It can take a while to hunt down the best deposit accounts and check out how secure the bank is.

I suspect the large number of people who currently have much more money to hold on deposit than the FSCS protection of GBP85000 may get very tired of dividing their money up between multiple institutions.

I notice that many of the best interest rates on offer as shown on Moneyfacts are from some pretty new or specialist banks. One would need to know something about their security before making large deposits with them, I suggest.

One I checked out just because I knew of it from some years back – as a lender. That was Hampshire Trust plc. It appears to be totally sound as a business but it does specialise in development finance lending. Its reserves are well in excess of the statutory minima and it has a good chunk of liquidity on call with other banks. Having said that, in my personal judgement, a severe and sustained collapse of the property market might leave this bank with serious problems. You may take a different view after reading the company’s accounts.

My suspicion is that with interest rates being low and being likely to stay low, some people are valuing security and the certain ability to get their money back as more important than the odd fraction of a percent on the interest rate.

If you have the time and can do the research, and don’t mind dividing your money into GBP85k pockets, assuming you have more than that, you will get rewarded with a few quid in interest (after tax on larger sums, of course).

But I reckon that NS&I is sucking in plenty of funds from the public to help with the governments record borrowing, and in the main it is borrowing from citizens at virtually no cost. NS&I is the only absolutely secure home for a surfeit of cash.

Monday mashup – the (US) researchers view of 2021

by Leave a Comment

I commented in a member only blog post last week that I was little taken aback by the apparent optimism of Morningstar research professionals who presented a view of the US economy’s prospects for 2021. In fairness, they used plenty of supporting data, although of course, no-one has future data! Analysts will be using trend patterns and other statistical methods as well as economic and market theory to extrapolate the future.

Things are looking brighter – or are they?

Here are some extracts from their QI Market Outlook documents that I thought might be of interest. You may raise an eyebrow at one of two predictions!

  • US GDP will rebound by 4.7% in 2021.
  • Vaccine distribution (in the USA) will roll out in the first half of 2021 and be widely distributed by the third quarter.
  • Interest rates (again USA) will stay lower for longer with federal funds rates at 0% until 2024, but longer term rates may drift up this year – a relevant point for fixed income funds with long duration.
  • The huge amounts of corporate debt issued in the USA will slow down as the pandemic ends.

Morningstar’s market valuation standard has the US Equity market 8% over-value, driven by the mega-caps like Apple and Tesla. Tesla and Netflix are unsurprisingly reported to be hugely over-valued (around 150%). Value shares are on the other hand looking to be under-priced, especially at the smaller cap end of the market.

It is anticipated that 2021 will set new records in private equity fund raising.

SPACs (see my separate comments on these funding vehicles in the Watching Brief for January) have raised a large amount of capital which can be geared up to fund plenty of acquisitions (at high prices?).

Oil and energy stocks are the most ‘still’ sold off with the sector down more than 20% over 2020. The analysts expect the global glut of oil to get soaked up and the sector (in the USA) to recover.

All the above suggests a ‘back to normal’ US stock market with reasons to buy into oil and energy companies. That is something you may have noticed in the top 10 holdings of UK recovery and opportunity funds.

The pessimists’ camp – much reported in the UK news media that I see – takes the view that there are many red flags and other behavioural indicators that a market meltdown is more than likely, so making subtle calls on asset classes, stock sectors and so in is a bit irrelevant. This point of view ‘feels’ right to me, but that may be a result of my UK (and thus Brexit influenced) point of view.

Personally, I am 60% or more in the pessimists camp, but less so than I was 6 months ago. I suggest that no-one can know for sure what will happen in 2021 so a carefully balanced mix of good value assets, with diversification across the main classes and prudent use of cash reserves remains appropriate in the near term. If the optimists are right, there will be time to get more money to work in the right assets later in the year.

One theme that is rather more relevant to European than US stocks is ESG. The sustainability theme will be the most important for some years now, in my judgement. So if you want to buy funds, look for value, small cap and sustainability! Europe may well be a better place to start than North America or Asia Pacific. Not quite a needle in a haystack, but a challenge.

Monday mashup – what to say?

by Leave a Comment

I was of course tempted to put Christmas greeting is the heading and I do of course hope all my readers will have a healthy, peaceful and reflective break.

Some presents may not be getting delivered as planned this year

However, most of you will like me have families and would have been looking forward to seeing children, nieces and nephews, grand children and other family members, and that may not be possible now. The international news this morning is especially gloomy about the Covid-19 situation in the UK with some news media extracting (arguably out of context) the health minister’s phrasing that the situation is ‘out of control’.

Actually Covid infection rates are much worse where I live and the situation is being controlled (hopefully – not much evidence so far) by really tight quarantine measures. They may have been left to the last minute in the UK, but my guess is that the stricter measures are the right action and will need to last a while. At least vaccination programmes are getting under way

In terms of prospects for economies and the long term future of certain types of business, we have serious cause for concern. That is compounded by the approach of January 1st because whatever terms the UK will be applying to trade and other forms of necessary collaboration with mainland Europe after that, there will be more friction.

The news is rarely positive but at the moment it is almost apocalyptic some days

The processes of trade are used to spinning at high speed, like a well oiled machine that never switches off. Any engineer will tell you that even a small increase in friction, or a loss of lubricants, will cause overheating, unpredictable performance and even breakdown of sophisticated machinery.

But, as we know, investment markets and the economy are only connected in a complex and indirect manner, like the weather and the price of your morning coffee.

There are plenty of purely financial reasons for betting on stock markets continuing to rise – accommodative central banks, the rise of SPACs, digital money trends and much more. This I will address in more detail in my comments next month.

So, what to expect? The Spanish Inquisition? But nobody expects the Spanish Inquisition :-). (non-Monty Python fans please indulge my whim!).

My point is that markets are overvalued in many sectors and regions by a large margin on conventional measures, but nonetheless one can still make money riding the momentum.

Such unusual times require a thoughtful and intelligent approach to investing. I hope that in 2021 I can help you follow such a course!

Monday mashup – ‘It’s the economy, stupid’ – except it isn’t

by Leave a Comment

Economics – the art of educated guesses

The quote in the heading is a well known slogan from Bill Clinton’s campaign strategist James Carville, with the addition of the word ‘it’s’ to what he actually wrote as one of 3 key messages on an office door sign for fellow campaign workers.

I usually recall this quote when reading or hearing economists expounding on the prospects for financial markets by sourcing data and theory from their world. I am a general sceptic of economists, loving the quotation that ‘economists are people who will tell you tomorrow why what they predicted yesterday did NOT happen today’!

I have seen more wrong economic predictions than bad weather forecasts.

I studied some basic economics in my youth and whilst micro economics is a good way of explain aspects to human behaviour, macro economics is more like weather forecasting: immense computer resources are devoted to predicting what will happen in the future, and then a butterfly flaps its wings somewhere in Latin America and it all turns out to be wrong (a premise put forward in an explanation of chaos maths which I once read).

Even ignoring my economist-ism, it is widely understood and very easy to prove that in the near term, investment markets do not in any consistent way perform in line with economies. In some ways, equity and bond markets act as predictors – for example, adjusting in anticipation of prosperous times. At other times, they anticipate recessions, but more often than not a recession has to be proved to be both set in and long term before a raging bull market will correct.

At this very moment, we have august bodies of economists predicting recessions of catastrophic proportions in many global economies, central bankers looking into very empty tool bags and yet many stock markets are at records highs

So is economics useful to investors?

Yes – but not as a basis for deciding what to buy and sell in the short term. We have to remember that the main driver of market prices is supply and demand (some micro economics there) with a good mixing in of human behavioural biases.

Some times and to a greater or lesser extent, macro economic trends that are well set in (like anti-cyclones with the weather) will have an obvious impact on the profitability of companies. If investors can see a major change (eg the reaction to global warming) as being certain to change the way some things will be done (in this case, the slow demise of petrol and diesel cars), they will make investment decisions to try and own shares in those businesses that will profit from such a change.

Note that they will often be wrong, as investors in Clive Sinclair’s C5 must recall, even though he was exactly right in seeing a future for vehicles driven by a big electric motor.

My observation is that the decisions to follow economic trends are driven not by dry data or economists’ modelling, but by an understanding of a well developed story that every one knows. Investors, even the most specialist and experienced are only ordinary human beings like we are and it is a sure thing they have no better knowledge of the future than we do. I appreciate that is a generalisation and some of us, and some specialists, will be a bit more insightful than others.

Big fund managers do employ strategists (a sort of specialist economist). That is like the rulers of old employing soothsayers and magicians. Today they may use computers as opposed to examining the entrails of a sacrificial goat, but I doubt that their success in making predictions is any better.

Economists as social scientists do help us understand how the world works to distribute money and resources and we benefit from that understanding when applying different techniques, mostly to do with the concept of value and risk, when selecting our investments.

Finally, it is only fair to say that some people we know to have been influential economists were, after some practice, great investors – most famously John Maynard Keynes. But some footballers are great golfers, so one has to be careful not to assume a correlation!