How it looks from here….

Tuesday 20th September 2016

In this issue of Money Truths….

  • Snapshot….
  • The nightmare has not materialized….
  • Nobody knows….
  • Mixed signals….

Snapshot….

Stocks in the UK and in America continue to increase in value or look very expensive depending on whether you’re holding them or thinking about buying them….

The FTSE 100, the FTSE 250, the Dow Jones and the S&P 500 are all at or close to their 10-year-highs.

In the round, it’s not a great time to be buying stocks. It’s probably a much better time to be selling them.

Gold is at altitude too – as high as it’s been since 2013 and not a million miles away from the 20-year high point it hit back in 2011.

Meanwhile the pound, which dropped off one cliff back in 2008 and then another following the referendum in June, continues to struggle against the dollar and the euro. In August the average value of the pound against a basket of currencies was the 4th lowest figure recorded since 1980….

The pound’s relative weakness will have consequences which are yet to play out. Imports will cost more. Consumer purchasing power will be squeezed. But on the upside, exporters are as competitive and as bullish as they’ve been in a long while. It is an ill wind that blows nobody no good….

The weak pound could result in inflation rates that go beyond the government’s target of 2% annually. City figures are beginning to make those kinds of noises….

Last week Consultancy Capital Economics said: ‘We think Consumer Prices Index inflation should break through the 2 per cent target in mid-2017 and near 3 per cent by the end of that year.’

In a newsletter to investors, Crispin Odey, founder of Odey Asset Management, said:‘The balance of payments could show a 10% current accounts deficit…. Inflation could easily be 4%….’

Should inflation take hold then low interest rates would come under pressure – bad news for borrowers but better news for savers.

Whatever happens, there are always winners and losers….

The nightmare has not materialized….

The post-Brexit vision of Armageddon peddled in some quarters has not materialized – at least not yet.

British data is broadly favorable heading into the autumn. Retail sales are up. The service sector last month enjoyed a sharp rebound. The manufacturing and construction sectors have also enjoyed similar recoveries since June. Prices in the housing market are stable….

Britain hasn’t fallen to pieces in the way pro-European lobby predicted – despite plenty of politicians, corporate leaders, pundits and publications doing whatever they can to talk Britain and the economy down at every opportunity….

They reckon sticking with our European partners is best for Britain….

But the prognosis is far from rosy on the continent. The Eurozone economy has expanded at its slowest pace in 18 months. It is losing momentum rather than gaining it.

A drop in activity in the German services sector – to its lowest level in three years – is what lies behind the gloomy figures. And that drop in activity stems from a mix of falling confidence and reduced demand for German exports.

Confidence has been hit by the migrant crisis in Germany and Britain’s vote to leave Europe. Exports have been hit by falling demand in China and a slump in oil prices.

But let’s not get carried away. It is far too early to make any bold or firm conclusions about the exact effects of Brexit on Britain, what will happen in Europe and what effect each developing scenario will have on the other….

Nobody knows….

Here at Money Truths we take a realistic approach to the financial world. We know that we don’t know for sure what is going on or what is going to happen. And we are pretty much certain that nobody else does either….

Not the politicians. Not the pointy-heads. Not the planners. Not the pundits. Not the talking heads or the commentators.

At best all these experts are engaged in guesswork. Some of it is informed, some of it not so – but all of it is guesswork all the same. Nobody knows. Not for sure.

Our own modest attempts to figure things out and join the dots only serve to convince us that we are, to a large extent, wasting our time.

The harder we look, the more we see. The more we see, the more the data and the information conflicts. The more conflicting information we see the more confused we get. It seems the harder we try, the less we actually know….

I do know one thing for sure, however. Uncertainty will be an ever-present companion on the road ahead and I see plenty of it looming on the horizon.

It is still uncertain if or when the British government will actually trigger Article 50 and begin formal negotiations to exit Europe….

And we are unsure how smooth the run-up to that announcement is going to be. Pro-Europe politicians are still bleating about the ‘need’ for a second referendum.

Liberal leader Tim Farron was at it over the weekend. He’s been slapped down for now. But his comments serve notice that the debate is not considered over in some quarters.

Who knows where such dissent and continued division might lead and what effect it will confer on the economy in the months ahead….

There is plenty of uncertainty to look forward to on the European mainland too…. Italy is set to hold a referendum on its government’s economic reforms. General elections are due in France and Germany next year.

In the US the electorate will be choosing between a democrat standing as a republican (Trump) and a republican standing as a democrat (Clinton).

Neither is short of things to say and promises to make. The hard part is figuring out if a word of any of it can be believed. It’s not a particularly edifying spectacle. Whoever gets the keys to the White House, America will be a poorer place for it….

I don’t know who will win the US presidency. I don’t know if or when Britain will exit Europe. I don’t know who will win in Italy, France or Germany.

And I certainly don’t know how any of these scenarios will impact the British or global economy.

All I can tell you for sure is this: none of it will go to script and anybody brave or foolish enough to make predictions is destined to see them go awry.

Mixed signals….

Speaking of confusion and uncertainty, how are we to know which expert to listen to at any given point in time?

Just last month chief economist at the Bank of England, Andy Haldane, was widely quoted in the press saying that property is a better investment for retirement than a pension.

Over the weekend the head of the Financial Conduct Authority, Andrew Bailey, said savers should not focus on property investment to help them in their retirement.

Given the job titles, the 6-figure salaries and all the benefits and incentives that go with them, you’d expect both of these man to know what they are talking about.

But both can’t be right. Who should we listen to? Who is dealing in fact? And which of them is caught in a fiction or a fantasy?

The bottom line is that both are expressing opinions. Not facts. Neither knows for sure whether or not he is right. Time will be the judge of that. For now both men are merely speculating. The fact is there isn’t a hard fact on view.

What do I think? I’m not an investment advisor. But I do know that nothing is certain. Past performance is no guarantee of future results.

The average house price in Britain has never been higher. It’s been on the up and up since 1996. But no tree grows to the sky. The future is uncertain. Just because house prices have been going up non-stop for two decades, that is no guarantee that the trend will continue indefinitely.

A diversified approach to pension planning strikes me as more sensible – and certainly less of a gamble – than relying on the continued upward mobility of a single asset class.

And I’d advise anybody to build a business as part of their pension planning strategy. Investment is largely passive – you invest, sit back and wait for the results to happen. Business is active. You get to make the results happen. It is never too late to get started and you can move ahead at greater speed.

A mix of passive and active production of pension income is good diversity too….

That’s how it looks from here….

I’ll be back on Friday.

All the best,

dave-gibson

Dave Gibson

Money Truths