The window is closing on equities.
I know quite a few people who are still in the Stock Market – if not up to their necks, then certainly for a lot of money. They smile knowingly and say, “Do you know a better place to have made money in 2010?” The answer is, “Yes – gold”, which is where I’ve been. But nevertheless, they do have a point: had I held less cash – and added Stocks to my portfolio – last year would’ve been even better than it was for my SIPP.
I’ll be out of the stock market (to take the FTSE as an example) until it reaches 3000. There are a number of reasons for this, chiefly that the 6000 level bears no relationship to the reality on the ground – and more and more these days, the Bourses are being run for a few crooks using high-speed liquidity pool trading to evade capture. But what really worries me is the number of honest people in there purely on the basis of relative return.
Using this criterion for, say, having a deposit account rather than government bonds is fair enough…if interest rates are rising and Sovereign stability is ubiquitous. Relativism is not – and never has been – a good reason to be in the stock market. Bourse investment is about either knowing what you’re doing – or hiring somebody who does.
If, at the moment, a key thing propping up the stock market is the lack of returns elsewhere, then watch out. As China uses rates as a brake, our rates will have to follow. Get that rate up to 5 or 6%, and conservative stock investors will pull out in favour of greater security. And as America has chosen to carry on bashing its Federal credit card, bond rates must rise too. In the EU, that is a cast-iron certainty: and once Greece finally caves in (and more PIIGS are found out) the money will switch into Asia and gold; with bonds unsafe and retail banks still desperate for funds, T-Bills and rates will produce yet bigger yields.
What will accelerate the bourse panic when it finally happens is the smart (often crooked) money shipping out the second the time is right. Once that goes, the dive will be spectacular.
So given these assertions – and like anything to do with investment, peculiar events plus eccentric government intervention could change the outcome dramatically – what might be the sequence of events that leads to a halving of the FTSE index? Bear with me while I lay one out in summary:
Chinese slowdown continues – rates rise further – US recovery too timid – flight from eurozone bonds – EU/UK rates rise – China continues diversification away from T-Bills – Bond yields skyrocket – crooked money exits Bourses – rate rises make UK and US look more unsafe – UK deficit remains and debt grows – EU default/bailout shocks – eurobonds deserted – desperate banks up rates again – as exports drop, China clamps down further on imports – German exports collapse – bourse confidence falls as sophisticated money exits – confidence crisis in US worsened by election year – EU bank debts become due – ECB has to step in again – citizen unrest across EU – banks so desperate for inflow, increase rates again – UK makes noises about inability to fund further QE and bank bailouts – Germany leaves EU but bails out worthwhile members – bonds and T-Bills now at record levels – French output plummets – with nothing else to trust, everything – cash, stock investments, bank deposits, commodity investments, bonds – deserted in favour of Chinese Yuan, gold, Swiss franc and Asian assets – to prick asset bubble, Asia clamps down completely on lending – China starts using cash mountain to buy Europe – White House frozen in headlights, UK Coalition collapsing – Dow in freefall – FTSE hits 3000. (To be continued).
The obvious end-effect of this vortex would be a world of nations gathering behind trade barriers, and a shrinkage in global trade of hitherto unknown proportions. And in this doom-scenario, remember that we haven’t even included Russia (bankrupted by falling energy demand), Australia (bankrupted by falling raw materials demand) or Brazil (printing money with abandon as its economic miracle evaporates.)
At or soon after this point, hyperinflation would be endemic in almost every country, military takeovers would be rife, international tensions strained to breaking point, and middle-class wealth vapourised. So frankly, whether the FTSE is at 3000 or 56 by then becomes somewhat academic. My point is this: I can’t give advice and this isn’t advice (he wrote carefully) but ask yourselves these questions:
1. Zero rates aren’t working, and China is raising rates. Would you, as the US Fed Treaurer, Trichet or Mervyn King, have to follow suit sooner or later? (Yes)
2. Confidence in the safety of most Sovereign debt is shot. Wouldn’t you as a bond investor insist on higher yields? (Yes)
3. Could you, as a retail bank conglomerate CEO, do your fiduciary duty and NOT raise rates? (No)
4. Given the bankers and multinationals care only about profits and shareholders, will they plough money into the economy – or be guided by Corporate Finance Directors in looking for better returns and more safety? (The latter)
5. If in the light of better, safer options elsewhere, do you have the confidence to stay in the stock market – with recovery looking limp – once the smart money makes an exit? (No)
If you agree with two or more of those answers, it may well be time to rethink your position in relation to equities. The choice is yours.