Enjoy the ‘boom’ time – while it lasts….

Tuesday 24th October 2017

Enjoy the ‘boom’ time – while it lasts….

Stock markets are booming – worldwide….

Last week, in the United States, the Dow Jones Industrial Average punched through the 23,000 ceiling for the first time….

The S&P 500 set another all-time high record on Friday – the 49th time this year that’s happened.

The NASDAQ also climbed to a new high-water mark….

  • No market left behind….

The German DAX hit a new high earlier this month. The French CAC 40 rides close to its all-time-peak….

Even the Japanese stock market – that many thought dead – is showing signs of life….

Last week the NIKKEI 250 recorded its longest winning-streak since the 1960s (14-straight days of rising values) and on Thursday registered its highest-close since 1996….

Foe the first time in a generation, the NIKKEI 250 is on a roll….

  • This golden period in British economic history….

The British market continues to ride high too….

Earlier this month the FTSE 100 recorded an all-time high close of 7556.24….

The FTSE 250 also hit new highs. So too the FTSE 350….

If you do nothing all day but sit in a darkened room watching the markets, you might believe Britain is neck-deep in a boom….

To buy the market today, you will pay more than at any other time in history….

Businesses must be doing well. To be worth so much more than they once were, they must be producing more profit than ever before….

The climate for business must be excellent. Productivity levels must be blasting off the scale….

And the benefits of this golden period in Britain’s economic history must be filtering down through the ranks….

We must all be feeling the warm glow of this success story – in our hearts and our pockets….

  • Rags and tatters….

But wait a moment ….

What are we to make then of the stories we read in the newspapers and watch on the TV?

Stories that tell of a Britain in rags and tatters rather than some kingly robe?

Brexit negotiations are going nowhere. British businesses have no idea what the future holds. Nor do politicians tasked with securing Britain’s exit deal from Europe….

The latest IPA Bellwether report says UK firms have frozen Q3 marketing spends because of the uncertainty….

That won’t help the British productivity level – which has fallen behind other major-nation economies. Nor growth – which is in the doldrums and set to remain so.

Meanwhile, UK retail sales growth is at its lowest level in 4-years. Money is tight on the High Street – a sign that British consumers are feeling the effects of a toxic combination of stagnant wages, rising prices and increasing debt liabilities….

The Financial Conduct Authority says that over 4-million people are having difficulties paying monthly bills….

Joanna Elson, chief executive of Money Advice Trust, goes further:

‘27% of UK adults [are] just ‘surviving’ and at risk of falling into difficulty if their circumstances change….’

If what Britain is experiencing right now is a boom, it has some very strange characteristics.

  • Funny characteristics for a boom….

Of course, I’m being facetious. Britain isn’t in a boom.

Current stock market valuations are not a reflection of stellar corporate performance or a fertile business environment. Instead, they reflect a decade of loose monetary policy.

Money printing and government bond-buying pushed bond yields down to historic lows –  forcing capital into the stock market in search of a return.

With interest rates at almost zero, credit has been cheap. In the absence of a return on bank deposits – mountains of borrowed money also found its way into a stock market where rising values produced easy profits….

The highest stock market valuations in history are a result of cheap credit and money-printing (quantitative easing) – not increased corporate earnings or improved corporate performance….

Stock prices have risen on the momentum produced by a flood of new money into the market….

It is certainly a ‘bull’. Some might refer to it as a ‘boom’. But ‘bubble’ might turn out to be the more accurate depiction….

  • Inflationary pressure continues to grow….

Of course, that will be neither here nor there to investors who have had skin in the game. Profit is profit – whatever soil its roots have grown in.

And many investors will already be sitting pretty – having had plenty of time over the last decade to get in and out of the market with a profit….

But how long can this game of smoke and mirrors go on?

Inflation rose to its highest level for 5-years in September. Consumer prices were 3% higher than was the case 12-months ago.

That figure is a full percentage point above the Bank of England’s (BoE) long-term 2% target.

Wages are not keeping pace with inflation….

Households are feeling increasingly squeezed by the rising cost of living and broader economic growth is slowing because of that….

The likelihood of the BoE raising interest rates to head-off a further build-up of inflationary pressure is increasing by the day….

And any such rise would signal the beginning of the end of the climate that has produced the ‘boom’ we see in current stock valuations….

  • Maybe not yet….

The British Chamber of Commerce said last week that it would be ‘extraordinary’ for the Bank of England to consider raising interest rates at a time when Britain’s economy shows little sign of improving on lack-luster growth….

The EY Item Club, an influential group of economists, has warned the BoE’s monetary policy committee that it should keep interest rates on hold until late 2018 to avoid weakening the UK’s ‘fragile economic outlook’.

Silvana Tenreyro, a new member of the monetary policy committee, has said she is not ready to vote to raise the Bank’s record low interest rates….

Deputy Governor Dave Ramsden has said that he does not believe a rate hike is likely to be needed ‘in the coming months’….

Another Deputy Governor, Jon Cunliffe, said last Thursday that it was not clear that interest rates needed to rise soon….

A lot of influential voices are arguing for things to stay just as they are – just as they have been….

And those voice may well win the argument. At least for a little while longer….

Stock market players can maybe stand easy for the moment. But the end game is approaching….

  • Wait and see – or act now?

Perhaps comments made last Thursday by ratings agency Moody’s best sum up the conundrum facing the BoE….

‘As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes….’

British consumers look set to take a hit one way or the other. If inflation continues to grow or if interest rates are raised to combat it, British consumers will feel a negative effect….

Some top officials at the Bank of England must be praying that, given just a little more time, the inflation figure will right itself and start falling back toward the 2% target – removing the need to increase interest rates for the first time in a decade….

But, with the wafer-thin interest rate playing a prominent role in producing inflationary pressures, the risk is that things will continue as they are – with prices continuing to rise….

The BoE may well continue with its ‘wait-and-see’ policy. But, failing a miracle, the time for action – and a rise in the interest rate – will come. And sooner rather than later.

At that point, a stock market which has grown fat on loose monetary policy, will begin to shed some of that excess weight….

Best to be out of the market before that time comes….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths