|Dear Friend |
Happy New Year! I was reminded that January is named after the Roman two-faced god, Janus. Janus could look back on the year gone and look forward to the year to come and we do that too.
This week we welcomed Rishi Sunak, the Chancellor of the Exchequer, to Ilfracombe, where he visited Pall to learn of its crucial work in supporting the vaccine effort plus £60million investment creating 200 more jobs,
The markets, blind faith and complacency
There is an interesting developing backdrop (isn’t there always!) both geo-politically but financially too. As the US markets buoyed the New Year handover and with ostensibly ever-increasing values of the bigger stocks, I was reminded that the tech-heavy Nasdaq index saw almost 40% of its components down by over 50% from their highest levels enjoyed in the last year.
That is quite sobering and demonstrates the blind faith in such a small number of big companies to imagine they will continue to hold their pole positions ad infinitum and thus to justify their valuations. The cynic would say the majority of wise people certainly believe that, because that is why their prices are where they are. The contrarian would say ‘that’s what they said about the Tokyo index in 1989’…
General commodity prices last year rose by the most since 1973 and then that was the precursor of rampant inflation (few commodities didn’t rise in 2021 but gold and silver were amongst them).
What is very disturbing is that the politicians and campaigners’ kneejerk zeal to complete climate change policies overnight (rather than having a wise transition plan) are creating significant issues and multiple costs, as well as increasing dramatically the demand for ‘green’ metals, etc to produce the consumables needed for the more efficient changes (eg copper and aluminium). This demand is also conflicting with the same ‘green’ political pressures to stop mining and drilling or to make it nigh impossible, as it is a blight on the landscape (or seascape) and investors have withdrawn the extent of support for the sector for ‘political’ reasons, so costs are escalating as these businesses (if they are still investing at all) must seek less favourable sources of capital.
The comfortable West’s ‘let’s only buy friendly investments’ to salve consciences is simply creating an ‘out of sight, out of mind’ outcome and certainly not tackling the problems, but creating extra ones which are coming around to bite us all in the bottoms.
How much ‘greenflation’ are we prepared to tolerate, let alone recognising that inadvertently ‘ESG investing’ is pushing more of the dirty work to regimes and developing parts of the world which don’t care as much as we do because for them, economic progress for them, their impoverished populaces and just feeding their families are rather more important than the West’s comfortable piety (especially as it is the West which buys the goods these places manufacture cheaply too)?
Yes, it’s also Panto season and details are below for those interested!
Rishi Sunak’s visit
Very pleased to meet Rishi Sunak and to quiz him on one or two topical economic questions. An excellent speech and he answered all questions lucidly and sensibly – well done! (Pictured here with my wife Helen, my son Felix and myself, of course!)
He’s a very trustworthy pair of hands with appropriate real world financial experience too. He understands the issues surrounding holiday lettings’ anomalies and how that affects local housing and also the inflation and energy price issues. Let’s see what actions he takes next!
With a few well known faces in the cast, after an absence due to Covid, Croyde Pantomime is happening again this year and tickets are available for the thespians amongst you! For ease, these are also available online now as well! It should be fun for everyone, young and old and tickets are far too cheap of course… it’s Aladdin this year with great performances promised from young and old (and then the amateurs like us of course…) Belly dancers too… a sight for sore eyes (or a sore sight more like!) well that must be a treat in store.
Will Aladdin have his head removed? Come and support the whole Team’s fantastic efforts to be able to bring you a production; be assured of appropriate precautions and consequently, tickets are going fast so don’t delay! Get your tickets from www.croydeplayers.co.uk
In Japan in 1989, it was said that if residential property prices were reflective then the value of the Imperial Palace in Tokyo would be equivalent to all the homes in California. We know what happened next and house prices there remain not far from half those peaks, some 32 years later.
It is sobering to know that as a percentage of GDP (so economic output), UK home prices in 1989 were at 300% of GDP and Japan’s almost 400%. With an average home price of £268,000, the UK Ratio now is over the highest level which Japan reached in 1989. In the US, the figure is only 200%.
The portents are gathering and no-one can predict clearly what will prick this bubble but the signs are glowing red and it is when not if, sadly, so please be careful.
This is not intended to be contentious but is simply common sense fact. We have been and are being too zealous, too soon, with our green policies. No, I am not denying the absolute need for change but you cannot change things overnight, however fluffily or politically expedient that seems.
We have been somewhat stupid not to continue to invest in gas, coal and oil extraction and storage as part of the necessary and planned transition to replacing these carbon fuels (as well as clean carbon capture). We are now more vulnerable than we have been for a long time with our last atomic power production now switched off.
What should we do now? Remove the green taxes on consumers – why? Because the industries themselves are already paying considerable penalties and taxes for their sector, so they are being penalised for their wares as well as encouraged to invest yet more in alternatives but we don’t need both disincentives. This will help the consumer immediately.
Also yes, now we are free of the EU, we can remove VAT on fuel into our homes. And yes, we must increase our protection for the next several years by investing in significant gas capacity and fill these reserves when the price is cheap. Our infrastructures took centuries to create and cannot be transformed overnight, as some irrational protestors seem to think is possible. What such action will also do is trim inflation at the same time, a win-win.
Behavioural bias numbers four and five affecting your financial/investment decisions
Do you recognise biases in yourself? If so then you are on the way to sensible life judgements and investing. Not only that, but not recognising these traits will lead you to some awful judgements or inaction – we have seen it time and time again, sadly. You are more open to superstition and not fact and more prone to scams and pure gambling when the odds are against you – they always are. We are here to help you realise these psychological traits are not good for prudent investing! Here’s the next in the series!
‘Bandwagoning Bias’ is when you struggle to avoid simply following the crowd. Sometimes yes, it’s right to follow everyone else, but when it is not and it is sheer foolishness to act like lemmings and end up plummeting over the cliff (and actually they don’t but that’s another story…).
We’re contrarian, value investors – that means independently-minded and not ‘opposite’ just because, but it needs steely resolve to be prepared to go against the eternal optimists or the rabid pessimists sometimes and a great deal of patience too – sometimes. Again, it’s about recognising the differences and not being sucked-up with everyone else in the misplaced hype – or pessimism.
‘Recency Bias’ gives us confidence in the recent past and its performance and that can be very dangerous as it creates complacency. The biggest risks we all face are the awful, big things which go wrong because we stopped thinking that they ever would (again). House prices can’t fall can they… I’ve had this investment for so long and it’s only ever gone upwards… so we end-up placing far too much store on information and recent history too, which supports our ‘prejudices’ and ignores the little boy crying wolf perhaps.
‘Recent’ news also attracts much greater value yet actually history can show that that is misplaced, as the ‘news’ may be a minor thing – positive and negative. Shrewd investors may be wise to trade opposite to the market’s reaction at the time, not sell on ‘bad news’ or buy on ‘good news’.
I have also said too that sometimes, when a sensible investment/sector/etc goes wrong, sometimes the best thing to do after reviewing ‘why’ and the research into it originally is to repeat the same ‘mistake’ – especially as the majority could be dumping that ‘thing’ and steering clear of the stock/sector/asset/etc and thus wholly undervaluing it based on the reality of that news.
Hedge funds and holiday stocks
Readers will know my view on aggressive ‘shorts’ where speculators borrow shares and on-sell them, in the hope that this will help depress the price of the shares even more so they can buy them back at lower levels to replace the loaned stock.
Several big hedge funds took significant positions in a number of airline stocks but when Omicron was found to be less significant than feared, the share prices rallied significantly catching these players in a ‘short squeeze’, so they have been forced to pay ever-increasing prices to buy-in stock to replace what they borrowed. British Airways’ parent IAG, Wizz Air and easyJet were three of the UK favourites for their attacks. They’ve lost millions as their bearish speculation has failed. I don’t feel sorry for them…
|Risk Warning |
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|My best wishes|
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers