“3 Wheels on My Wagon” -performed by The New Christy Minstrels December 1971
For the last 6 weeks or so I’ve heard it mentioned occasionally on Bloomberg/Sky News/ITN/Channels 4 & 5/CNN and the BBC that the wheels have fallen off and a total capitulation of equities and bonds may be on the cards. For some reason throughout I’ve been humming an old song from my schooldays and after a quick glance at it on YouTube it brought a fresh smile to my face. It’s the story of some prospectors caught by Cherokee Indians in the mid-west; their wagon kept “rollin’ along” and so long as it did with Cherokees firing arrows at them they kept “singing a Happy Song”. Eventually, as happened to many prospectors, the wagon wheels all came off and in the finale they sang in harmony with the Indians….”I’m singing a Happy Song”. Of course in real life it never ends like that and if you do see the analogy between the Cherokees and the mortgage lenders, bankers and ghastly outfits like Ocean Finance then please have a thought for those who cannot fend off the arrows or stop their wheels from coming off. The attitude in capital markets in the last 20 years has been that wheels (read “loans/overdrafts/mortgages/other monstrous devices”) can be fixed and it will be all right later but then as people are finding there is an end-game. It’s called repossession, IVA, bankruptcy or a trip to the pawn shop.
Much has been spoken about asset deflation/depreciation and I experienced it first hand last month myself. My 3 year VW Passat Estate was hit by a 4wd in a sussex lane. Around £2,500 damage (just a few wings) to a car that I discovered had dropped from over £16,000 when I bought it in 2005 to around £5,000 today. Who needs high fuel costs when car depreciation is this vicious? Our cousins throughout EU rent cars from Avis and Hertz saving on insurance, maintenance and depreciation and I am considering car rental as the way forward hereon. Elsewhere, house prices continue to slump slowly and commentators keep repeating their alarming forecasts about when prices will rise. What none of these experts appear to have fathomed is that the boom was born out of a lie, namely a housing shortage and fuelled by governments intent on cementing this lie by artificially keeping rates low. Now that inflation is here the central bankers have nowhere to go. Rising inflation and flirting stagnation equals stagflation so I think rates are likely to rise as LIBOR (London Inter Bank Offering Rate) seems to be showing us. It comes back to the fact that when an asset, in this case a brick, is dramatically over-priced it eventually comes back down to reality which is a long long way from here (another 50% collapse in retail property prices ex-Central London could be possible). Recently I’ve heard comparisons between the dot-com boom/implosion and the sharp rise in oil prices but I don’t agree with the analogy except it could be argued that the rise in dot-com stocks (some of you may remember Medi@Invest that rose from 3p to 98p and back to a penny!) is similar technically to the rise we’ve seen in oil. Dot-com was a synthetic concept where valuations were ignored and really it was just an over-exuberant extension of a long-term technology boom that went wrong sending zero earnings companies into the stratosphere. To date none of the oil stocks have even remotely performed in line with oil and the price has only nearly doubled after ever-increasing demand. Much has been blamed on speculators but the real issue is that oil demand has overtaken the world’s ability to deliver, refine and sell on this oil downstream effectively. I think $200pbo ++ is on the cards. And it is this pricing drive in oil, soft commodities (grain, rice, most food stuffs) and general commodities kicked into gear by South America, Africa, Middle-East, Asia, Far East and the FSU that worries the west and world capital markets. Some money men like Jim Rogers have embraced these new markets and opportunities whereas most people just fear them.
So what’s the answer?
Well, as many of you know since 2000 I have advocated overweight positions in commodities, oil and gas, precious metals, softs (although there are few equity ways to play this) but more recently have recommended selling out of raw commodities and reducing exposure in the other sectors. A rotational spin back into financials will occur in the next 6 months I believe and I suspect that the Beijing Olympics will open investors eyes to the problems prevalent in China. In fact their stock market has already slumped around 50% from the highs and I think the best way to play the growth game in these areas going forward is through overseas banks like HSBC and Standard Chartered. But not yet!!! It is marginally too early. Another bank failure is pretty likely and a host of a other failures to boot before the worm turns. In 1974 the market rallied very fast at the end of its final capitulation and so having cash on the sidelines in the next few months ready for reinvestment into banks, precious metals, oils, international conglomerates and the occasional housebuilder involved in the London Olympic bid could reap spectacular profits. Some of the stocks that I have sold recently could be re-examined when this happens. They are British Airways, Aviva, Prudential, Taylor Wimpey, etc. Furthermore, a few investment trust investments in emerging markets is great way to stem the inflation we are likely to experience here as governments try to stimulate manufacturing and the almost aimless service industries that are so weighed down by regulation. I continue to recommend Templeton Emerging and suggest also JP Morgan Fleming Indian Investment Trust and Black Rock Latin America, both on further weakness. In addition the following can be looked at; BP, Royal Dutch Shell ‘B’, Thomson Reuters, Randgold, Anglo American, BT Group, Imperial Energy, Fresnillo, Hochschild, and the interesting Blavod Extreme on any pullbacks.
To summarise this second quarter has seen FTSE100 decline 3.87%% although it fails to summarise the real decline as usual failed constituents have been replaced and daily volatility has at times been quite severe. The likelihood of gold recovering from below $900pto appears likely as inflation/stagflation looms and $1,200pto for gold this year is still on the cards. But if I had to make a near certain prediction then I think the short-term profit-taking seen in oil will submit to the bulls who could speculate oil to $150pbo and onwards to $200pbo later this year. Tensions in Middle East (Iran mainly) and between Russia and West continue so the next 6 months could well be even more lively with some great long-term investment and trading opportunities presenting themselves. One positive outcome towards the latter part of this quarter has been the relative stability of the US$ but as John Paulson, the Hedge guru, suggested only last week, the credit crunch maybe only 1/3rd of the way completed. Despite the difficulties in the banks and housebuilders there hasn’t been any noticeable failures amongst hedge funds, private equity groups or large corporations which is a bit surprising.
The recent comments surrounding banking protection have been highlighted and in my view the new intended threshold of £50,000 should NOT be trusted until a more full-proof mechanism is in place should another Northern Rock materialise. I continue to recommend that clients consider UK government fixed interest (gilts) for large capital sums but am happy to comment when required. Some of the attractive rates available at banks and societies should be spread around as previously suggested.
Have a good summer!
