A tale of two stories….

Tuesday 18th July 2017

A tale of two stories….

For 9-years the Bank of England has been hammering savers whilst at the same time rewarding market speculators….

Abnormally low ‘emergency’ interest rates have held across the entire period (well below the long-term average of 5%) and have served to discourage savers from placing money on deposit – forcing them into speculative and potentially-risky markets if they wanted a chance of earning a return on their money….

Low interest rates have also reduced the cost of carrying and servicing debt – fostering the illusion that debt is affordable and obscuring the risks associated with it….

The central bank’s massive injections of cash into the system – otherwise known as money-printing or quantitative easing – made credit plentiful and fueled an orgy of corporate stock buybacks, mergers and acquisitions, buy-outs and all the rest of it….

Asset prices have risen across the board. Nowhere is this more evident than in the stock market which has scaled heights never previously seen.

The value of FTSE 100 stocks has more than doubled since 2009. FTSE 250 stocks have more than tripled. Both indexes continue to ride high.

Take the market as your primary gauge and you might be forgiven for believing that Britain is enjoying something of a boomtime. Speculators have certainly had plenty of opportunity to make hay.

Meantime, out here in the real world a very different story is developing….

  • A different story at street-level….

Inflation is up and household finances are under the biggest squeeze in five years according to the Office of National Statistics….

Barclaycard report year-on-year consumer spending has slipped to a 15-month low. John Lewis, Britain’s largest department store, reports a fall in demand for ‘big ticket’ items. Consumers are drawing their horns in….

Wages remain stagnant and consumer credit rose 10% in the year to April. The household debt-to-income ratio now rides at 140% – perilously close to the historic high. Households are borrowing money to make ends meet.

But that gravy train might be close to hitting the buffers. Banks are coming under pressure from a nervous Bank of England which sees rising consumer borrowing as a ‘pocket of risk’ that could trigger a crash. More cautious messages are emerging from retail banks. They expect to pull back on consumer lending in the months ahead….

A good thing too given survey results released last week. Defaults on credit cards are rising at the fastest rate since 2009….

Businesses feel the breeze and their confidence is waning. Deloitte’s quarterly CFO survey says directors are more worried about Britain’s economic prospects than at any point in the last two and a half years. The British Chamber of Commerce reports that investment intentions of businesses within the service sector have slipped.

Households and consumers are struggling. Businesses recognize that they’re going to feel the effects further down the road….

The markets say boomtime. But down at street-level the narrative is one of growing despondency and increasing woe….

  • Saturday night & Sunday morning….

Right now, there is a gulf of difference between what the market sees (and prices in) and what the larger part of the real world is experiencing.

Sooner or later the market and the real-time, real-world situation must draw closer together….

The squeeze on household spending, levels of consumer indebtedness, flat-lining growth and a general climate of gathering gloom suggests that it is the market that must readjust its reading of things….

For 9-years the markets have partied like there’s no tomorrow and very little left of today. It’s been a non-stop frenzy of heavy-drinking and exuberant dancing to loud music that has served to drown-out the sound of the neighbors banging on the walls.

It’s been the longest Saturday night in living memory. Everybody’s had a fantastic time. Nobody at the party wants the night to end. But end it must. End it will.

For every Saturday night, there is a Sunday morning. At some point the bottle will run dry, the music must stop, and the cold light of day must be acknowledged. The hangover – painful as it may be – cannot be avoided….

  • Jitters in Threadneedle Street….

The party might run for a little while yet….

It is rising interest rates that will signal to the guests when the party is over. And, just recently, it looked very much like interest rates might be heading in that direction….

At the last meeting of the Bank of England’s rate-setting Monetary Policy Committee, three of the nine sitting members voted for a rate rise. Another indicated that he might be ready to switch sides. Even Mark Carney was making hawkish noises. It appeared a tipping point might have been reached….

But the jitters have set in again over the last week or so….

The Bank of England’s Deputy Governor, and close ally of Mark Carney, said last week that the Bank of England should resist increasing interest rates until the general direction of the economy becomes clearer….

Ben Broadbent said: ‘In my opinion, it is a bit tricky at the moment to make a decision [to raise rates]. I am not ready to do it yet….’

That’s not official policy. But the Bank of England advocates ‘forward guidance’ in its dealings with the media and Broadbent’s sentiments do represent a clear signal as to prevailing thinking within the inner sanctum….

Mr. Carney and his cohorts are clearly worried about the process of normalizing interest rates. They are concerned that that economy – as it stands – might not be able to stomach such medicine and that a rising rate of interest might tip us back into crisis and recession….

  • I’m not hanging about….

It looks like it’s going to be a wait-and-see job….

Some commentators say it could be a year or more before the BoE commits to normalizing the price of credit and directing interest rates back towards historic norms….

Meantime, the party in the stock markets will carry on full swing – with cheap credit fueling more speculation and that continued activity pumping additional hot air into an already over-inflated bubble of high prices….

Sooner or later the market must adjust. A correction is due. An out-and-out devastating crash is not inevitable. But it is a strong possibility.

Naming the day is a job for a better man than me – or a clairvoyant. All I can tell you is that it lies on the road ahead and I’m not hanging around waiting for it to happen before I act.

The big gains in the stock markets have already been made across the last 9-years. There may indeed be more to come. But sticking around to get those last-gasp gains comes with a lot of developing risk attached. Risk I’m not prepared to take.

I’m already in cash and planning to get some gold into my portfolio….

  • Seeking safety in gold….

There are various ways to gain exposure to gold….

You could buy stock in gold mining companies, for example. Or you could invest in an Exchange Traded Fund (ETF) that tracks the price of gold – enabling you to buy and sell shares in the ETF just as you would with stocks in any listed fund or company.

But what interests me about gold is that it is a protective asset class. Investing in gold is one of the easiset ways to protect your wealth from catastrophic losses in turbulent times of trouble and turmoil.

Gold is the ultimate safe-haven asset. It can rise while everything else is falling. At the very least it can hold its value when cash and stocks, for example, are on the decline.

With that in mind I’m inclined to buy and hold actual physical gold….

I’m still in the process of looking at this. I’m doing a lot of work in the background to figure out how best to buy gold and how best and to hold it and store it securely.

I believe it’s worth the effort. Gold is by no means risk-free. It can be volatile. But if the financial system takes a kicking or inflation gets out of control or a desperate government implements capital controls, I’ll be glad I took the time to get some physical gold into my portfolio.

More on this on the road ahead. In the meantime, enjoy the party….

That’s how it looks from here….

I’ll be back in your inbox with something interesting on Friday….

All the best,

Dave Gibson

Money Truths