One of the many amazing things about Steve Jobs was his ability to see the future (to fly at 40,000 feet in perspective terms) but to also bear down on the detail and to implement with fanatical attention to detail.
Most of us (mere mortals) can do one or the other to an extent but only the truly gifted and extraordinary have all the skills, he will be missed and is already a legend.
I thought it would be interesting to finish the year (and what a year!) by looking at some of the big picture trends going into 2012 and beyond to give some thought to the direction(s) we are travelling and the forces for change that are prevalent.
Europe is in trouble, the over promises of the post war welfare states are finally having to be addressed.
It has been known for over a decade that state pensions, free healthcare etc were unaffordable going forward but any attempt by politicians to address the issues was the signing of their own death warrant. It’s had to get too critical before it could be reconstructed and we are now there.
Going forward Europe will still be a great place to live, it will be ok (Germany and its satellites probably more than ok) and it will struggle through the upheaval and social unrest of the next few years.
What is undoubtedly true however is that Europe is the retiree of the global economy, it is old, tired, hobbled and lacking the energy and dynamism of the East (and to an extent the US).
There will be much talk of regaining competitive advantage, of new dynamism etc and there will be notable creative successes from intellectual companies but the pendulum has swung and Europe is no longer a progressive force in the new world order.
The US is slowly recovering, it is a more dynamic economy, it works harder than Europe and it is willing to allow far greater creative destruction than Europe.
The 20th Century was the century of America, it is now suffering the problems of middle age (renewal of infrastructure, a growing retired population, increased social welfare etc) it has a massive budget deficit, it can no longer afford the cost of being the world’s policeman (military spending is being slashed) it is an empire in retreat. It faces the challenge of China as a Super Power and its focus will be East in the future, not West.
The US is not finished, it has world beating technology companies, a population that works long hours, unlike Europe it does not have the collective belief that everyone is entitled and it will be a force, just not “the” force.
China, India et al are where the action will be.
In very rough terms half the world’s population is becoming first world citizens with all the new consumption that this entails.
The East is not hobbled by Sovereign debts and entitlement promises, their problems are managing the migrations from the Countryside to the cities, inflation, social unrest due to new desire of populations to “live the dream”, the general management of change (both politically and economically).
The opportunities for Western business to sell products and services to a completely new world are enormous and the drivers for growth are tremendous but it is new and with newness comes uncertainty, missteps, mistakes, new problems, fundamentally the dynamism of global trade is going to be strong, there will be huge winners and a number of these will be US and European companies.
These will be low for years in the West, it is unfair that those who borrowed benefit and those that saved and paid off debt are penalised but that is the truth of it.
Debt will be cheap and in time eroded by inflation, if you have savings in cash equivalents (Building Societies etc) you have been losing 3% plus per annum in real terms and at best going forward cash will be a breakeven strategy.
In Commercial property yields are decent (5% plus) but in an austere world where profit is made as much by cutting costs as increasing sales is it likely that big, expensive, prestige offices and retail space will be selling at premium prices (Outside of the world cities such as London)? Probably not.
For domestic property the hope is that we don’t get falling prices, the best result is stagnant prices with inflation eating away at the overvaluations so that property becomes reasonably priced again in historic terms.
This is not to say that one day we won’t get another property bubble, we will, but it won’t be soon.
If one looks at the drivers for property price appreciation they would be:
- Falling interest rates
- Strong employment
- A growing public sector expenditure
- Plentiful credit in loose terms
All of the above don’t apply now and won’t apply for some time into the future.
We currently have near to 5% inflation; the target (so they say!) is 2%.
We have high inflation for lots of reasons but chief among them are:
- Raw material costs have risen (oil etc)
- A weakened currency which makes the goods we import more expensive
- Tax has risen (VAT)
When you have a tonne of debt which you can’t repay the easiest way out is to inflate it away (i.e. if you owe £100,000 and inflation over 10 years is 50% compound half the real value of the debt is monetised away).
Is this tempting, “you bet”, will they do it? Who knows, but probably, it would require politicians with long term perspectives and the highest discipline not to, so on that basis it’s a definite.
It is likely over the next 12 months that inflation will fall (the figures are year on year so lower currency, tax rises and higher raw material costs will fall out of the calculations).
It is important that unlike Japan, Europe and the US do not allow deflation as this kills but it is hard to see them erring on the side of caution as Japan did, with inflation they will risk “to hot” before “to cold”.
There are few certainties in the world (death and taxes being the perennial exceptions) but we are certainly running out of stuff.
Oil is the obvious commodity that is most depleted but with the demand from the new economies for commodities to build their new infrastructure, cities and industries the rate at which stuff is going to be consumed is not going to slow down very much for any length of time (there will be peaks and troughs but the trajectory of consumption is going to be upwards on average).
A commodity that appears to be amongst the most under pressure is food. Diets are changing in the East and there is no more land being manufactured.
Governments know that they will be replaced if people are hungry so this is always going to be a top priority.
We see value in most commodities over the medium term but particular value in fertilizers, agricultural machinery and obviously the soft commodities themselves (however these will be volatile as they are affected by weather).
It is hard to see the currencies of the West not falling in value against those of the East (Renminbi etc)
The US Dollar is still the world’s reserve currency and whilst the Chinese currency is artificially managed this will probably stay the case.
However it is sensible to diversify investments to have exposure to the currencies of the East, although this will in part be achieved by investing into Western multinational companies who will earn significant profits in a number of Eastern currencies.
We are probably screwed ultimately as the only driver for global action is when the implications of inaction are more scary and unattractive than changing behaviours and giving up stuff we like, by which time it will likely be too late.
So enjoy it while you can!
I am actually quite optimistic, the problems of the West are finally being addressed (it’s painful now but like Global Warming, to continue to ignore problems is only to have bigger ones down the road.)
The East will be the engine to drive demand which will enable the great Western companies who execute to thrive.
Europe will muddle through, the US will do battle with its new unifying opponent (once Russia then Osama Bin Laden now and for the future China) which it will attempt to beat (it won’t but the best strategy is to try).
Equity markets are more rationally priced now we have come from the bloated valuations of 2000 (company P/E ratios of 40 plus) to the levels today of single digits (for great companies such as Microsoft).
Just consider this.
In 2000 everyone was excited and confident. The market after 12 years is in excess of 30% lower (a lost decade).
In 2012 everyone is depressed and anxious. (Companies are upto 2/3rds cheaper)
The market over the next 12 years ………
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.