As some loyal Badger blog readers will know I am the proud, harassed and sometimes bemused father of three gorgeous girls.
The youngest (known affectionately as “The Tiny Terrorist”) is revising for her GCSE’s and consequently feeling a certain amount of stress!
The outcome of this stress has been some interesting behaviour; it occurred to me whilst listening and reading about Cyprus that there were some similarities between the two situations.
Both are being told that they must do things they don’t want to do, both when told reacted initially by belligerently refusing, but both have had it explained that the entity telling them is bigger, holds the purse strings and has the wherewithal to make life miserable if they don’t do what’s needed.
As of Sunday night Cyprus accepted their impotence and the terms of the EU deal, I fear the Tiny Terrorist has fight left aplenty. (I just read this to her and she was outraged that she was being compared to Cyprus, I agreed and said a more accurate comparison would be North Korea, as I sit here now I am reminded of Bob Geldof’s summation of parenting, “it’s not if you mess it up, it’s just by how much!”)
On a more general economic note the first three months of 2013 have been terrific for most markets and the more adventurous portfolios are up by double digits in this period.
This rate of return will not in all likelihood persist, the markets have been emboldened by the continuing QE in the US (where there are apparently real signs of the longed for green shoots of new growth and jobs) but this wave of relief will have to be supported by Company profits growth on-going and these are already historically high.
Europe is still struggling by comparison and as we have written before this was the predictable consequence of their decision to “lie and deny ” as opposed to the US accepting that there was a tonne of garbage clogging up the system and allowing it to burn.
In simple terms the US ripped off the sticking plaster in one go, thus suffering the considerable initial pain of a cratering housing market and having its Financial sector rushed to A&E. The quid pro quo is that America is now rebuilding and growth is returning whilst Europe is still slowly, painfully removing the plaster tiny bit by tiny bit (but that’s the European way and what two World Wars in 30 years does to the collective willingness to be economically bold and risk consequential social unrest).
The “elephant in the room” question which markets (assuming no new shocks) will fixate over in the coming year(s) is the return to normalised interest rates and the withdrawal of both the QE stimulus (central banks introducing liquidity) and the draining of this excess liquidity from the system.
Make no mistake we are in unchartered territory and anyone who says they know how it will play out really doesn’t.
Concerning QE there are those who believe the agenda is to create inflation to lessen Sovereign debts in real terms (monetization) and this is certainly a possibility.
There are those who say that what is being done is the logical application of the study and understanding of past crises and how their effects could have been mitigated; that the huge liquidity injections of central banks have actually not increased money supply but rather kept it stable as banks and individual households have deleveraged their balance sheets. They argue that the amount of money in the system is not the most important variant, that velocity is the key component and as that picks up funds can be removed without negative consequences.
We are proud to say we have no clue yet what will come to pass and suggest distrust of anyone who says they do (unless their name is Doris!)
The final point relates in part to what has been written above concerning the future path of interest rates.
Readers will know that the blog regularly returns to key themes and there is no theme more key to future portfolio performance than interest rates.
We know that as things stand now the rate of interest has been forced artificially low to help offset the economic weakness in Western economies. As with QE this is not sustainable long-term (not least because it unfairly disadvantages cash savers and pensions in payment via drawdown), the performance over the last decade of funds investing for fixed income (gilts and Bonds) has been very strong. We know this is going to reverse, just like a car which drives right up to a wall it has no choice but to regress because it can’t go any further, interest rates are zero, they are at the wall.
As interest rates rise the capital value of fixed income holdings will fall, the unprecedented inflow of funds to the fixed income space over the last three/five years has meant the purchase of huge amounts of debt at historically rock bottom yields, all will not end well for those who stay invested long term in this market.
George and Nic will be forwarding quarterly portfolio performance statistics to you in early April and as the figures are good and you will be pleased, we will be answering the phones should you have any queries.
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.