An Article Written by Darren for Industry Press Today:
The 1993 film ‘Groundhog Day’ with Bill Murray always made me think. Isn’t it funny how events often keep repeating themselves? Isn’t it even more fascinating how people keep repeating the same actions – somehow believing they are doing something differently?
This week has felt a bit like that film, as Central Banks and Government Bonds have come back around the gloomy merry-go-round – depressing markets once again.
I had no fewer than three separate conversations with clients around the 10th of July. The question was simple – should they quit at a loss and just go into cash?
After all, 5% in the bank over the year (or 0.4% per month) before tax – looked more attractive than a languishing stock market right?
Wrong.
I pointed out in all three cases how markets don’t warn you that they are going to go up – and they very often warn you that they are about to crash – when they subsequently don’t!
Thankfully, all three clients recalled the fact that markets have historically outperformed cash handsomely over the long term – and they held the course.
Over the past couple of weeks since then, we have seen our T&T Level One Model Portfolio grow by over 3% according to U Scan and our T&T Level Three Model Portfolio grow by over 4% on the same basis. Our clients were rewarded.
Why was this?
The thing that is keeping Governments and Central Banks awake at night at the moment is Global Inflation. If your people can’t afford to eat, cover their housing costs and stay warm – you face massive consequences.
So what do you do? The simple answer is that you withdraw anything that might continue to stimulate that inflation. So you don’t allow tax breaks or economic growth incentives. You limit public sector pay rises and you put up interest rates.
So far so good.
The critical challenge you face, however, is that you are not attempting to turn around in a rowing boat – you are attempting to turn a super-tanker. This means that all of your ‘tough medicine’ takes months to have an effect.
I would currently compare the task of Central Bankers (especially in the UK) to that of someone trying to paint their bedroom in the pitch black. Then we turn the lights on and see how they’ve done! Ultimately, they are going to overpaint some areas quite badly.
So why did the markets go up so well from the 10th of July?
Firstly, inflation news out of the US, was excellent. It showed that inflation had continued downward from the realms of 9% per year to just 3% per year. This started a ‘rally’ across pretty much all sectors in the US markets – this has not been the case over the past few years and pretty soon the technical charts started to flash for a ‘bull market’ (positive!) Finally, the UK inflation data also showed that things were improving.
Most importantly within that final piece of news, the UK office for national statistics reported that the price of raw materials had actually fallen by around -2.7% on the year. This was such important news as it starts to demonstrate the thing we have been looking for – ‘Deflation’.
This is critical news, yet it was barely reported. Deflation is a very real threat and would be a direct consequence of Central Bankers ‘overpainting’ in my analogy.
This week has been ‘groundhog day’ all over again, as we saw the US Governments ability to service their debt called into question through a slight ratings downgrade (nothing new here but it worried Bond markets once more) and then the European and UK Central Banks pushed on regardless with interest rate rises.
This has ‘wobbled’ markets and we expect to see our client portfolios temporarily drop slightly in the coming days as a result.
Central Bankers have a very hard job right now and I really feel for them. They have to be seen to ‘do the right thing’ in regards to trying to choke off inflation.
However, I now think there is a real possibility that they have ‘overpainted the bedroom’. In a matter of months, we may see the same Central Bankers heaving on the ‘stimulus’ handle – and cutting rates with abandon to try and create a ‘soft landing’ for their economies.
The good news is that this actually plays right into the hands of our clients.
The minute Central Banks reduce, or even stop putting up rates, we expect a surge in lower risk asset prices. This offers a very exciting opportunity for growth.
You only have to look back over the past few weeks to see how powerful the market rallies can be. We just need to get out of ‘groundhog day’ and start moving forward. It’s simply a matter of time.
I know it is confusing out there right now and this has been a very long period of difficult market conditions. If you have any questions or worries – please don’t hesitate to contact us – we are here for you 100%. My very best wishes as ever.
Darren
