Economic conventional wisdom mandates that if money is made super cheap (negative real yields) over a protracted period then consumption will escalate rapidly, economies boom and inflation ignites big time
The headline to this article is not a critique of the Channel 4 news anchor, he of the garish ties, but rather a reference from Game of Thrones.
Jon Snow (Fit Kit Harrington) is attempting to understand the complex and age old plight of the people beyond the wall, Ygritte (a beautiful Wildling who he falls in love with against all the rules of the Blackwatch) tells him he doesn’t.
This doesn’t prevent him from seeking a solution to their situation and as of the final episode of the last series it appears to have caused his demise.
Knowing, is knowing we don’t!
In a blog from last year I recounted a story from a hugely successful fund manager, that he only expected to succeed with investments about 65% of the time, about a third therefore would be failures.
This seemed a poor performance to me initially but having thought about the logic further and having invested myself actively in markets over the last 7 years I now understand more.
Going back to 2008 when the Western financial construct started to wobble like a Weeble and actually could have fallen down, then looking at where we stand today it’s striking that no one could have foreseen how it would all play out.
Interest Rates
Economic conventional wisdom mandates that if money is made super cheap (negative real yields) over a protracted period then consumption will escalate rapidly, economies boom and inflation ignites big time.
Well, we’ve had the cheap money for 7 years and it hasn’t caused any of the above as yet.
There are lots of theories as to why and we’ve touched on these in previous blogs but the point here is what was expected hasn’t happened and if you’d invested on this faulty (but historically sound) assumption you’d have been dead wrong.
Russia
The assumption would have been that having spent the best part of the last twenty years establishing that they were a reformed character who could be trusted they would not then decide to invade satellite states and go back to Cold War ways, wrong, they have.
Saudi Arabia
It would have been counter intuitive to believe that the Saudis would be willing to blow up the oil price (hugely costly for themselves) to choke off the rising threat of the U.S. fracking producers. Wrong, they did.
Japan
Who would have believed that an economy and social structure so conservative yet so compromised by long term demographics and massive state debts would enact after quarter of a century of inaction and asset atrophy the most radical economic shake up imaginable?
Well they did and their stock market has rocked higher as a result.
Tech Bubble 2
Only a few years after the epic take down of the Internet stock bubble in 2000 which saw tech company market caps absolutely minced, investors nursing mega losses and looking absolutely moronic for buying into the mania, we have a full on do over.
Uber, a reworking of a taxi company has a theoretical market cap of around $40 billion and it’s unclear if it’s profitable yet.
Facebook is valued at $240 billion which is double the higher of any stock in the FTSE 100, (Shell) and around the same as Walt Disney.
I’m not saying that this time isn’t indeed different, Facebook may indeed be a great business with massive earnings potential but its P/E ratio sits around 90 times earnings which is nosebleed high.
And Finally Greece
You get yourself in a complete mess by massive overconsumption, your economy implodes, you get bailed out by the economic community you belong to, you enact mandated reforms that start to produce promising results.
At this point as an investor you think, ok, this is promising, asset prices in Greece are still very low, they’ve seen the light, let’s put some money to work.
But no…
They elect a bunch of chancers who then roll back most if not all the reforms, tell the population they are being gruesomely exploited by an evil empire and promise to somehow magically contrive to stay in the empire whilst welching on all previous undertakings.
Conclusion
The apparent illogicality of the actions of groups is in part why I now understand investing to be damn tough. The best practitioners may only get it right a little over half the time but it’s that difference which makes all the difference, for most of us in actuality it’s really a coin toss.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.