When will the Chinese ever dump their U.S. treasury debts? When will the Asians get tired of funding America’s $800 billion annual current account deficit? The Asians bought US-dollar investments for two reasons; they were safe and secondly, they put them in dollars in order to hold the dollar up. As long as the dollar stayed up, Americans could continue to buy goods from Asian suppliers. But today the dollar is going down anyway and their US dollar investments no longer look so safe. Furthermore, Asians are becoming more confident about their own prospects. Their own financial instruments are becoming more sophisticated. The rate of return on Asian investments is much higher and Asians are much happier to invest in their own economies, their own companies, and their own financial instruments. When will they sell US dollar financial instruments? Soon perhaps. – an abbreviation of a recent Daily Reckoning newsletter.
As I predicted in previous quarterly reviews 2007 has indeed proved to be a rocky ride for investors to date. The US sub-prime market may have started the recent volatility in all types of capital markets but looking at the levels of Dow Jones and FTSE100 today anyone would be excused if they believed that all the problems had ever happened or indeed have gone away. The extensive levels of easy credit that has led to asset inflation may have created problems in the money markets and in the banking system but the only evidence to date is a stricter tightening of credit, highlighted problems at Countrywide, much lower US property prices as inventories are left standing empty and in UK a semi-run on Northern Rock after the biggest ‘guffaw’ that I can say I’ve seen in 31 years by a Chancellor. Despite train-loads of staff arriving every morning at Canary Wharf I am disheartened to see that not a single regulator seems to think it peculiar that the Financial Services Compensation Scheme should be able to safeguard UK investors assets with a mere £4.4m in the kitty. Just how many more guarantees can Mr Darling give before the ship starts taking in water? I continue to suggest to clients and anyone who has the common sense to ask that holding accounts at a demutualised society (A&L, NR and B&B) is a mugs game. Indeed having visited the Tunbridge Wells branch of Nationwide (the biggest mutual) last week I was appalled at the way they handled ex-Portman customer accounts. So I’m not sure that having balances of more than £2,000 at any mutual is wise until someone sees sense to bolster the Compensation Scheme significantly. The critical level is £31,700 and so no more should be held with any one banking institution until the government ensure that the Bank of England and FSA strengthen the area of investor protection. As I’ve pointed out to several clients already if large depositors were effected by a total failure (this was not the case at Northern Rock) then capital balances would be frozen for possibly years (see Barings). For those holding extensive cash balances I continue to recommend UK government gilts, National Savings and Premium Bonds. No balances should exceed the threshold of circa £30,000 anywhere in the system. Stockbroking accounts incidentally are covered 100% under Professional Indemnity policies up to £10m per account here at Redmayne’s so clients can rest easy.
The headline above concerning the US dollar continues to perplex market observers. At some juncture China in particular will change their stance on US Treasuries. The dollar slide will continue and I recommend exposure in precious metals and oil shares certainly for the next 2 years or so. I see little merit in investing in the banking sector at current levels as the practice of accounting off balance sheet makes it impossible to assess bank’s commitments in the derivatives arena. The estimated US$500 trillion derivatives exposure mainly taken by banks worldwide is largely synthetic in nature and I believe that this needs to be reduced. At some stage the banking sector will be attractive but I do believe that much lower p/e‘s are forthcoming. Major investment banks such as Goldman’s, UBS and Citigroup have indicated tough times around the corner and I believe that commercial banks are far too exposed to the credit cycle and property. In UK the discrepancy between the current overpriced value of property, around £3 trillion, versus the level of household debt, around £3.6 trillion, needs to be played out. More bankruptcies and smaller companies failures are likely in the next few years as taxes and bureaucracy have risen to crazy levels against a cheap credit universe. All the ingredients for a dangerous cocktail are in place. For central banks to lower interest rates at this juncture is rather like throwing petrol onto a roaring fire. Commentators like Jim Rogers believe that higher rates are around the corner and I for one don’t disagree as asset prices need curbing. The big unknown is inflation and I think we will hear more about this in the next two quarters.
To summarise then I continue to believe that the next quarter is one to batten down the hatches! My favourite stock picks are BP, Royal Dutch Shell ‘B’, Aviva, United Utilities and Pennon Group, Reuters, Sainsbury, CSR, Redrow, Hochschild Randgold and Peter Hambro, Rio Tinto and I would avoid like the plague Man Group and other hedge funds.
No comments:
Post a Comment