|The candidates are being whittled-down. Different promises are being made and it is clear they can do ‘something’ on short-term economics too. They don’t seem to realise however that doling out cash benefits doesn’t cut the headline inflation rate as does cutting the taxes on the commodities we buy (which then cuts future inflationary cost increases to individuals, businesses and the State). |
If VAT and all duties on energy were cut savagely (affordable – as the Chancellor has been collecting loads more tax under the high prices) then inflation drops overnight too and pressures on pay and benefits abate as well. The poor benefit the most as they spend a greater proportion of their income than the rich.
A look at markets and currency
So, worrying about economic slowdowns on the Continent as a consequence of shutting-off Russian gas supplies, the Euro hits parity with the Dollar, the lowest for 20 years. Who would have believed it? The ludicrous strength in the US Dollar (the second currency of last resort after gold) and which only a few years ago ’everyone’ was writing-off as not being significant anymore, is hurting Sterling and the Yen likewise. Will it endure? No. So, selling Dollars and buying these other currencies is probably very wise. The cheapest are Yen and Sterling. Of course the foolishness can continue well beyond sensible equilibrium levels, so be warned.
Still, at home our economy rebounded last month with 0.5% growth, confounding all the sceptics predicting ‘recession’… but the market and Sterling fell. HMRC also reported the largest intake in tax for 20 years at £718billion in 2021 (up 25% on 2020) so whatever you read, don’t call me a cynic but people are earning loads, making business profits and spending till there’s no tomorrow, as otherwise the tax take wouldn’t be as high. In order, the biggest taxes are Income Tax, VAT and National Insurance. Things are changing but wouldn’t it be helpful if we saw more of the real facts rather than the emotive stuff? Indeed, including home values, but apparently one in four pensioners is very rich now too: One in four British pensioners is now a millionaire
In fact, the Euro is doing so badly that it is up for sale altogether. Yes, you can bid for the iconic 50 tonne sign in Frankfurt which stood outside what was once the ECB. The owners are finding its maintenance costs are too high… For sale: Frankfurt’s iconic euro sculpture
How does the Dollar affect us? Many commodities are priced in dollars so that increases inflation as we consume vast quantities – from energy to base metals and bullion and foods. Of course, that helps if you produce these things as you are paid even more in your local currency – make hay whilst the sun shines temporarily. If you have US denominated assets (including shares) maybe you should trim these (not unwise as US shares are too dear anyway and even after the last six months’ drops). Indeed, expect US bids for UK companies – they are cheaper now for them on both counts. Investment-wise, the UK benefits short-term in that the FTSE100 is dominated by multinationals (including commodity businesses) which gain their profits from overseas (up to 70% of earnings) and as the Dollar is up, this means profits and thus dividends can be higher as a result.
When will it change? When the Ukrainian situation is behind us and energy security stabilised (and food security with it). These factors will also reduce inflation and provide a clearer backdrop to counter inflation from spiralling, exacerbated by unrealistic public sector pay demands. Meantime, Tesla has been beaten as the biggest EV car seller now by a Chinese firm backed by Warren Buffet… Mr Musk now faces a lawsuit to complete the purchase of Twitter where he brazenly ignored all rules and protocols about company and market law initially, let alone now trying to walk away.
Private equity funds
There are quite a few quoted funds now and they haven’t had the best of times recently. However, one of our biggest has just announced its latest net asset value for the end of June and it was up on the May figure but surprise, surprise, the share price is down. This Fund buys mainly other funds so the spread of risk is immense, it is well-proven and large too. However, last Thursday for £1 we could buy £1.74’s worth of underlying assets and yes, this is really a fund where they could throw in the towel and give everyone their money back too. We’re buying more even though it has cheapened since we started buying significantly again, because the old adage of more people wanting their money out (being fearful of tomorrow) and not enough investors like us will see the share price keep slipping – till it stops. It’s not alone either and this is what sensible term investing is all about.
Indeed, later that day after a little price slippage on negligible sales, another of ours has seen the difference widen to mean that for £1 we could buy £1.64’s worth of underlying assets in that too. Can someone lend us a few billion and I’ll buy the lot…
The S&P500 (the World’s largest stock market and thus dominating most ‘other’ investors’ passives, portfolios, pensions and ISAs), had its second worst ever first six months of the year (the worse being 1932). So ‘we’ are doing well against that even if no loss ever is always preferred. ‘Safe’ government bonds (which we avoided totally) haven’t done well either as interest rates have risen. Bank of America says that these ultra-safe government bonds have had their worst year since 1865.
All that said, there is some exceptional value in shares appearing now, some in investments we own and much where we don’t; I never expected Shell, for example, to come-off by some 20% though we top-sliced holdings when higher. It still represents great value and with chunky dividends as dependable income too.
Sabre Insurance, which we don’t own, has dropped by 50% as it announced ‘inflation and competition are affecting its prospects’ (car insurance). Yes, it is still making a profit and if it retains its dividend (that’s 8%pa) but the shares are way-down on past levels and have dragged other insurers down with it. These are the sorts of things just worth reviewing, to buy and tuck away (not specifically this one but you understand the gist). Then there is a stock like Rio Tinto on a dividend yield of 12% now – guess which company will be producing most of the copper, aluminium and iron ore for the green revolution towards climate change? The investing public hasn’t caught-on yet.
One of our defensive loan funds has announced two earlier repayments these last few days and the amounts received were for more than the written-down values in the books, so that’s good. I believe there will be more surprises to the upside on this and we own lots now. One of our other wind-up Trusts has just declared another dividend at 10p (8.5%) as it returns more cash to shareholders. BT is holding-up well too but all these are window-dressing against across-the-board pessimism and few new investors buying panicking sellers’ stock. However, I am prepared to say ‘it’s a great time to buy value and a dependable income now’. Big gains may not happen overnight and there could be further slippage before something ‘changes’, as it will. However, anyone waiting for the ‘change’ will miss the best opportunities.
A most unusual occurrence last week too – Mitie is doing a share-buy-back but it can’t find shares to buy… no-one much wants to sell out at these levels. The price should rise to reflect that but it hasn’t, though the buying-in underpins present levels. However, it reminds us that when the general sentiment changes, there will be significant gains in many stocks as only tiny buying interest will have very disproportionate effects, as happened in November 2020 when the vaccinations started. Don’t be on the wrong side of the fence.
Oil prices have really tumbled from the top too – Brent down a quarter from the very recent high, so that will filter through to the pumps very soon. There will be some event(s) which turn positive and that could be Ukraine or inflation (commodity-led). However, the record keeps playing but some other things like house prices crashing are almost so inevitable and long overdue so will that lead to other reverberations in the economy and builders suddenly finding work at an abrupt end… (8x average incomes nationally and 13.2x in London are wholly unsustainable… but they have been for ages already).
Indeed, most commodities have fallen heavily from over-priced peaks and in the same way these were lead indicators to me of the present inflationary spike, they will also lead to big drops in inflation (contrary to what the ‘Government’ and Bank of England are signalling. Why don’t they look themselves?). We sold all our wheat, agricultural products and coffee and added cheap livestock and cocoa instead – that looks very well-timed now. The former is down from a fifth to a third. Frustratingly we held our Silver and that has drifted 20% from its May peak on inflationary concerns however so beware of what can happen to ‘safe’ things even like bullion, let alone houses!
If you want to read the horrifying effects of the fervour with which far too many (especially young people) have addicted themselves to this amazing marketing scam, read this article:- ‘They couldn’t even scream any more. They were just sobbing’: the amateur investors ruined by the crypto crash
We have seen many people similarly convinced this is the solution to all their financial dreams and hating us when we tell them it is a giant Ponzi scheme – as if we have insulted their birth right or challenged the logic which made them believe the decision to buy the stuff was a great and rational one. However, I must be becoming old now as I have seen many such bubbles – usually based on tangible assets (meaning there’s something real behind them) as opposed to this where there is ‘not even thin air’. However, it can be speculative dot.com shares, excessive ‘gambling’ with currencies, spread-betting or financial instruments or yes, even residential property where people convince themselves they ‘can never lose and never go wrong’ and the more they make, the more confident they become and the bigger the risks they take (but they don’t see them as risks). And what about the poor people of El Salvador where the president speculated on crypto currency and declared it as their national currency…
I have responded to the invitation to participate in the Treasury Committee’s enquiry into Crypto-currency. The zealots won’t like what I have said but that doesn’t prevent the comments needing to be said. The day after my submission, a crypto-currency lender files for bankruptcy – Celsius Networks, so no more withdrawals from that. It lists its ‘estimated assets and liabilities at between $1billion and $10billion on a consolidated basis’. As if this ‘thing’ doesn’t need regulation! Does it not even know? This is also shortly after the FBI announces one of its top 10 global criminals is the Bulgarian-born ‘Cryptoqueen’ Ruja Ignatova who oddly enough disappeared with ‘Onecoin’ savers’ money. There’s now real money there – a $100,000 FBI reward! The 42-year-old is thought to have had cosmetic surgery to hide her appearance but the bodyguards may give the game away…
Please remember, these things are unreal and unregulated. There are millions of different financial things you can buy which are regulated. If you are not sure what you should do to look after your money, use a regulated UK independent financial adviser you can trust and one which also then gives you extra protection against bad advice too.
Environmental, social and governance mania drove too many fund management companies and investors to all buy the same limited (but giant) stuff, dominated by ‘tech’ which curiously doesn’t seem to have the same degree of worry about ‘suitability’ as say a fossil fuel company. Remember, this is nothing to do with investors’ desire to ‘do some good’ but really the miss-selling of products for big fat profit, to an unsuspecting but well-intentioned investment marketplace which perceives it is ‘doing some good’ whereas really it is not and it is simply deselecting certain holdings (and at the same time the participants are still enjoying the use of the fossil fuels and so on and maybe even working-for or drawing pensions from ‘them’ (is it any different…). Large cap ESG funds perform worse than non-sustainable counterparts
Since the start of the year, big funds full of this ‘stuff’ have fallen an average of 13% versus those with lower ESG ratings which only fell 4% apparently, according to Bowmore Wealth Group. You have been warned (by me on many occasions) and that is that it is simply a present ‘trend’ and over-sold at that. If you are full of the ‘wrong sort of stuff’ you are likely to continue under-performing (losing more?) than mainstream strategies from which you can allocate some of your better results to your pet causes instead perhaps. This is nothing to do with ‘saving the planet’ either but that’s another story!
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