|Downside volatility continues and the biggest and previously brightest names are the most afflicted. Apple has fallen and now overtaken again by Saudi Arabia’s Aramco Oil as the biggest global company (and its profits surged over 80% in the last quarter).|
Perhaps Apple and its owners are being reminded of Sir Isaac Newton’s gravity lessons. The problem is that as these entities have been so swollen in terms of the ‘value’ all their shares represented, as they fall, even the odd 10% represents hundreds of billions of savers’ dollars.
If Tesco drops 10% (in itself far less likely as the stock is a true value play at these levels and just over 40% of its heady heights seen when it was the go-go growth stock of its day in 2007), that is ‘only’ £2billion. Apple has already dropped by half a trillion dollars and it hasn’t been one of the biggest losers in the Tech space either. Apple’s dividend at these levels is a mere 0.6% whereas boring ol’ Tesco, should pay 3.5% income the next year. Guess which one I prefer still (and with a takeover possibility in there for nothing too).
In his annual address, shrewd 91-year-old sage of Omaha, Warren Buffett, has noted the markets for many had become a casino for gamblers rather than prudent investing. The ‘system’ loves all the activity from this betting, as it makes money when they trade. He suggests the large US companies have become poker chips for speculation. He relates to the excitement from pulling the handle on a slot machine over and over again rather than investing with a sensible time perspective ahead and for the long-term benefits.
It explains the addictive zeal so many (especially the younger) feel for crypto currency’ but as with betting, the ‘highs’ only endure as long as you win and not when the pain hits and you are reminded that in the end the betting house is always a winner. Remember too, investing is not gambling speculation but sensible risk-taking by recognising risk exists in everything and then managing it, as it is the oxygen for innovation and it is how we grow and prosper in our lives, economies and societies. And about summing it up but crypto advertisements have been found to be breaching the rules incessantly –
Crypto ads breach UK guidelines over 44 times for ‘misleading advertising’
Well, as no-one else seems to be able to do so, I shall make some predictions. Energy cost are the prime factor affecting inflation. They will plummet once the present uncertainties settle, cutting inflation. The world’s been adversely affected too by a stronger dollar since last June – up 12% against Sterling. Most commodities are priced in Dollars.
The Government could scrap VAT and green taxes on energy overnight (introduced as a price constraint on use – well that’s present!). Add to that the jump in core foodstuffs because of Ukraine and there you have it. However, these commodities will plummet in price too once new supplies are grown and available. There is a problem which central banks need to address. Other factors are causing inflation – increasing costs – eg taxes and green initiatives which create cost pressures which must be passed-on. We could end-up starving and freezing our most vulnerable citizens but they will be fine because they will feel very environmentally friendly. Why is this a problem? Because we are doing the transition far more quickly than the system can cope and the alternatives are not ready.
What else? Increases in the Minimum Wage demand price increases in goods and as the State is the biggest employer, then taxes have to rise to pay the bigger cost. More benevolent governments then inadvertently reduce the numbers of people available to work as the benefit system discourages that over personal circumstances. That increases the cost of employment and up go prices again. On top of that, a laissez-faire approach to things like unregulated lettings through Airbnb and other agencies, second homes, rent-a-room schemes used for holiday lets, inadequate consumer protection and the absence of State support for private landlords against miscreant tenants (who are all treated as pariahs) all ratchet-up rents and the inevitable cut in availability of homes, the atrocious, protracted planning process (with inept local authorities) for new homes and so it goes on and on. Add in the explosion in money issue which will come home to roost too…
What must happen is a short, sharp reaction to deter everyone else increasing prices and then the inevitable spiral of ever-upward price increases reacting to others’ reactions is very, very hard to break – and already we read that UK consumer confidence has fallen to the lowest levels since 1974.
The price of wheat
Yes, you will have seen the price of most commodities rocketing as a consequence of the Ukraine situation. We had started buying wheat some years ago, after it had fallen 77% from its high in 2012. It sits presently at 43% below the 2012 level so the inflation predictions need to keep that in mind. Right or wrong, we have now sold all our wheat after having made a rather embarrassingly good profit. We sold in stages, selling some at the March peak. It might carry-on increasing but already it is up 142% from that 2019 level. No, we didn’t buy it all then of course (sadly!).
Why else are we selling? To raise money for other things which are as cheap as wheat was at its lows. However, there are fewer commodities we can acquire as they are almost all up with events but these create a different form of diversification for us. We have added another soft commodity which is almost half its 2014 high and another which is almost half its 2011 high (and which has gone sideways since 2017) instead.
If central banks and all the leading economists had bothered to check how commodity prices were already recovering from the lows, they would have known inflation shocks were on the way… We have also sold our remaining holding of coffee which also has done us proud and ‘Agricultural Products’ likewise.
Achieving a good return is not all about holding ‘good’ investments but it is avoiding the ‘bad’. You will also inevitably have some ‘bad’ ones and over the decades, we have found that some of the best results have come from the ‘bad’ returning to more normal conditions, whereas there is a line of thought that says ‘run your winners and cut your losers’. Maybe because ‘most’ do that, that is why there are so many bargains from assets which have fallen far more than they should have done…
Sometimes (often?) you can only tell that an action was good with hindsight – eg buying the above agricultural products – did you see anyone pushing those a few years ago? No, but I was looking, watching, waiting… Then, early this year, in tranches we sold a long-standing holding, a Japanese Investment Trust that had been very good for us and ostensibly would continue to be so, but we took a view that it was too tech-orientated so the lot went, quite a wrench for us after so many years. Since, it has dropped over a third. We’ve still been caught by a Japanese ‘Value’ stock which has fallen by a similar sum (but we don’t have much of that at all). That shouldn’t have happened but it did but thank goodness for diversity!
Just think, some of our money made available found its way into ‘agricultural products’ before the recent spike but that was just circumstance! Remember too that our biggest holding is only just over 2% of our total funds we manage and that protects us against excessive risk. However, as we did with the agricultural products above, often we ‘run’ an over-weight which means that as something rises exponentially, we don’t just sell it but monitor and may hold an excessive position for some time. Does your manager do these sorts of things – indeed, if you self-manage, do you take decisions like these?
So remember, these things are not regulated. That means there are no enforceable rules or protections and as I have said many times, there is still ‘nothing’ behind them if things go wrong. However, ‘crypto currency’ has been perhaps the most successful marketing exercise of all time, a pyramid scheme reliant only really upon collective human emotion and enthusiasm which demand greater confidence in the concept ‘tomorrow’ to propel the price of these things ever upwards. Yes, they can have a purpose (sometimes too often shady and illicit ones – hence the ‘appeal’ to certain inappropriate quarters).
However, there is nothing ‘now’ or in the future that cannot be provided by the good ol’ Dollar, Euro, Sterling, Yen, etc but guess what – these are real and backed by governments which have tax-raising powers to bail them out of trouble, even if on the never-never. And do we know what’s even worse? Of investors up to 45, an alarming number has also borrowed money to buy Crypto currency, their first ever ‘investment’ foray – how sad. If that happens to be the below, it’s all gone and you still have the debt to repay and service – please don’t.
So there has been another rout and so many of the promoted promises of ‘currency’, ‘stable’, ‘inflation hedge’ or whatever have been crumbling, tearing-off the billions with it. Binance’s founder Changpeng Zhao (you may have seen a film about his ‘successes’ and how he was ‘going to convert’ Thailand into the crypto centre of the world). His fortune was estimated to be $96billion on January 9 and it is now suggested that is $4.5billion – I just hope it’s not all in cryptocurrency…
Terra’s Luna, a ‘stable coin’ backed by a US Dollar for every one, collapsed, wiping-off $55billion in one week. Where have all those ‘dollars’ gone… As for ‘stable’, that horse had bolted long before confidence drained away. Please don’t be duped and avoid them all, Bitcoin included. It is not an ‘investment’ it is not an ‘asset’. There is nothing there at the end of the day and nothing you need in speculation or investment terms that cannot be provided by regulated alternatives which have existed for a very long time.
I am pleased to report that despite a continued tightening in the market, we have sailed-through our Professional Indemnity insurance renewal again. This is a regulatory obligation and covers us against any unanticipated negligence which may arise (we hope not!) and for which compensation could be payable. We have not had any claims for a rather long while and hope that will continue to be the case but there is almost an inevitability that something will happen at some point and that means clients have the cover – as well as the Regulator satisfied we have the insurance too.
We are also one of the few firms still offering comprehensive pension review services including final salary transfer guidance and this is one of the highest potential liability fields.
This is why the premium this year, with tax, has punched way past six figures (so up 55% in two years) and it will continue hereafter at high levels as it only covers the actual year of insurance, so action taken today which may create a negligence point in five years has to be covered ‘then’ and isn’t covered ‘now’. Of course, we have to acknowledge too that the other reason for a high premium is that the Business continues to be very successful for all its clients and hence the increased premia to match the Business itself. Thank you to all our clients in that regard!
Of course on top of that is the FSCS compensation scheme and for that, the innocent, continuing firms have to pay a levy to cover the millions in compensation which the FSCS pays out for the miscreant firms which have done bad things and disappeared. It seems inequitable (and still, not enough is done to pursue the fraudsters who have enjoyed the results of their crimes) but the compensation scheme is a good and necessary thing as that way you know you are covered should something horrible and untoward/unexpected go wrong that the firm itself cannot cover.
Finally, there is the Regulator, the FCA. Do recognise not all firms are regulated to do the same things and most are limited in what they can do. We are rather more wide-ranging (and staunchly independent and not ‘restricted’ as most advisers are – a form of salesmen for a single or limited range of products/companies) and the burden alongside that is onerous too and of course there is also the cost! In the end, sadly those costs have to be shouldered by those who are protected – you, the client, though we always do our best to be as economic as we possibly can for everyone and our charging structure, especially for what we offer and do, is one of the most competitive out there!
Interestingly a US fund-manager backed by some billionaires is going all-out against the ‘polarised’ view being promoted by many of the largest firms. As I type, HSBC has suspended its head of ESG for some inappropriate comments on the Bank’s policies…Strive Asset Management is stating that it wants companies “to deliver high-quality products that improve our lives, not controversial political ideologies that divide us.” Even BlackRock, one of the biggest managers in the World, is also taking a less extreme stance with environmental issues now as well.
It is true, sadly that firms and individuals are now profiting big-time from selling what is a misguided view – misguided not in terms of the views you may have, but that what they are selling to you with your good intentions does not fulfil what you think it might and it is sheer profit-motivated manipulation (hardly ethical eh!).
I listened to a Radio 4 programme on May 10 hosted by Mr Ernie Rae and it made me seethe – it was not only confusing banks on-lending your cash to businesses with investing in shares, but giving platforms to those peddling their compromised stances and in my view demonstrating both their naivety and also their ignorance, as well as being allowed to ‘get away’ with ‘nice-sounding’ sales’ pitches for their causes without any substantiation or indeed regulatory sign-off. Investing in Costa Rican ethical forestry through unregulated schemes is not a suitable investment and not a substitute for mainstream holdings. Please don’t be deceived. There is often a charlatan behind the smiles and glossy pretty pictures and one who is simply looking to extract as much as they possibly can from your money.
And in the latest entertainment… Tesla, one of the world’s leading developers of solar panels and electric vehicles has just been ejected from the S&P ESG Index… despite dubious tech giants still being in there! Welcome to the piety!
The humble bumble bee
We were pleased to bee able to support a local project for the Bumblebee Conservation Trust recently which is doing sterling work on world-renowned Braunton Burrows – read all about it here – North Devonians urged to help the humble bumble bee
Uranium – an investment opportunity?
Not making any statement, but I thought readers may appreciate this information on fossil fuels too – good or bad? In addition to the power density advantage of uranium, nuclear power ranks among the cleanest ways of producing electricity, as measured by greenhouse gas emissions.
The U.S. Environmental Production Agency estimates 35% of global greenhouse gas output derives from electricity, heating 25% and other energy sources 10%. So nuclear lowers global emissions if we also ensure it increases its share of electricity generation along with wind, solar and hydropower.
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