Its Not Harry

Comment and opinion for retail investors in the UK

Education

Radio Silence!

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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.

The coming war with China

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The above is the title of a 2015 film by the journalist and author John Pilger.  It concentrates on US military ambitions in the Asia Pacific region.  As a record of the arms industry looking for an enemy, it makes for disturbing viewing.

A different sort of war is already under way.  This is the trade war of tariffs, of course.  This has escalated to the point where the first set of options has run out – there is in effect no more trade left to tax.

I read a comment that the Chinese might soon get fed up with being the only adult in the game.  They do have powerful options as heavy buyers and owners of US Treasuries (US government loan stock). They could stop buying new issues or even dump bulk holdings in the market.

Such actions could have very serious repercussions for the global economy.  Let us hope they don’t get provoked beyond that legendary inscrutability.

It is worth remembering that the US president and his party have to play to please an electorate.  No such inconvenience will worry the Chinese leadership.

Lehman Bros – 10 years on

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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

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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.

Cold Turkey?

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In today’s news about the financial pressure being exerted on Turkey by the Trump administration, two blog posts I have made recently are brought together.

Currency fluctuation is a risk that can impact all portfolios

This is as I explained:  because many emerging economies have large amounts of US dollar denominated debt, the cost of servicing that debt goes up if the dollar appreciates relative to the currency of the debtor nation.  That is one of those ‘rule of thumb’ justifications for selling emerging market and broadly Asian stocks (although not logical for Japan and China, at least).

Tariffs have unpredictable consequences

In this case, tariffs aimed at Turkey (because they are not being nice to Donald, it seems), may lead to default on debts owned mainly by international banks, thus awakening sleeping concerns about the liquidity of the financial system when central bank money printing ends.

Thoughts

Turkey is not a small country and of course was once a significant regional power, so is unlikely to allow itself to be pushed around.  It talks about new alliances with Russia, although allowing for not such ancient history, one would not see the two countries as likely best mates.  But ‘need is must’ sometimes as the saying goes and I am sure President Putin would like more influence South West of the Black Sea.

A worry is that US foreign policy is now so ignorant that Trump sees Turkey as just another Middle Eastern country (because it is Islamic) and therefore a natural enemy of the US.  As I write that is seems bizarre, but I do believe it is possible!

It would be odd if this particular non-sensical action by Trump caused the market sell off that is rather overdue, but it will be a nervous few days.  Investors should keep an eye on events and be prepared to take any buying opportunities.

As a final thought, the Euro has been quoted as depreciating in today’s news as a contagion effect from the  Turkish currency crisis.  But it has hardly moved against Sterling – an indication of how uncertain an option the UK appears to international traders as the Brexit dithering continues.  The Pound looks likely to continue to fall against the US dollar so portfolio exposure to global trading businesses will benefit.

Facebook (and others) – risks now apparent, but should you exit tech?

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Depending on which news media you read, you are pretty much bound to have heard about record falls in the price of Facebook shares, apparently due to a slowdown in the rate of advertising revenue.

Of course, Facebook and for that matter Google, are in trouble with politicians for behaving “without moral leadership” to quote.  This factor seems not to have much impact on the share prices.  If you have any detailed knowledge of the history of the oil industry (the book to read is “The Prize” by Daniel Yergin), it will all look pretty familiar.   I am surprised President Trump has not started tweeting about anti-trust legislation, something that was prompted by the utterly disreputable behaviour of Standard Oil (the largest remnant of which is now Exxon Mobil).  Later this legislation was used to attack IBM, which in my college days was seen to be so large as to be able to outdo many nation states.  I realise many young folk won’t even have heard of IBM!

As I mentioned in a another recent post about share price swings, these are most dramatic where the share price is justified on the basis of expected future  profits growth, with the psychological overlay of the “fear of missing out” (FOMO).  So if profits growth is at risk and investors are sitting on large paper profits, they will dump shares in an instant.  There is a very old cliché in the investment world that a profits warning is always the first of many.   That default idea also exacerbates sell offs.

So, should investors now pull out of tech funds?  I personally will not.  Some fund mangers will see a fall in prices as a buying opportunity because the cultural change (like the adoption of oil as a fuel for motor vehicles as opposed to use in smelly heaters and lights) is genuine, set in and will not be reversed.  There will be winners and losers, new legislation and even systemic shocks to all the share values in the market, but I have no doubt that IT and media linked together are driving forces in business and profit generation for many years to come.