Dear Fellow Investor,
If you're of the same sort of nervous disposition as me, you're probably feeling decidedly queasy at the moment. As we enter into the dreaded summer doldrums and the final deadline for the end of the latest orgy of QE (Quantitative Easing) rapidly bears down on us, it's hard not to feel a sense of increasing trepidation each time we log into our portfolios and cast a wary eye over their wildly fluctuating valuations.
It's pretty hard to argue against the fact that all the extra money printing that governments have indulged in over the 3 years since the Lehman Brothers collapse has given stock and commodity markets, and hence our portfolios, an enormous boost. The question is, of course, as the effects of the US Federal Reserve's QE2 begin to fade, where do we go from here?
Well the news flow so far isn't encouraging as last week the markets were hit with a double dose of uncertainty. On the one hand, many investors were hoping that Chairman of the Federal Reserve, Ben Bernanke, would finally admit that a 3rd, and perhaps more substantial injection of printed cash was needed to get Western economies out of intensive care and, as a consequence, provide a tonic for investors' portfolios. No such luck! Despite some murmurs that policy would remain "accommodative", Bernanke didn't breathe a word about QE3.
At the same time, events across the pond in Europe gave investors further palpitations: would the Greek drama turn into a tragedy for their investments? Who'll blink first in the battle of the Greek bailout - the Eurocrats in Brussels or the Greek parliament? And will the Greek citizens decide the issue on the streets of Athens regardless of whatever deal the politicians manage to cobble together?
We're all in this together:
Let's be in no doubt here: if Greece goes down, we all go down, with all the implications that has for asset prices everywhere, including bonds, stocks, commodities - and yes, even cash in the bank. After all, who's going to bail out your bank if your government's bankrupt?
Debt markets today are scarily interconnected. French and German private banks are on the hook to Greece for around 80 billion euros. What's more, any default by Greece would instantly encourage Ireland and Portugal to follow suit and leave their creditors swinging in the wind. When you realise that British banks' exposure to Ireland alone totals £120 billion, then perhaps you begin to appreciate the magnitude of the problem. Just today, the head of the Luxembourg Central Bank admitted that if the Greek's defaulted on their debt, the result would be "chaos".
So where does all this leave us poor beleaguered investors? Rather than hang on in hope of better times ahead, shouldn't we all just cash in everything now, stuff the proceeds under the mattress and don the hard hats?
Don't Panic!
Not so fast! Yes, undoubtedly the heat will be on this summer and there's no question we'll be in for a couple of months of great uncertainty. If you're heavily exposed to the markets, then trimming your holdings down to a level that helps you sleep at night wouldn't be a bad idea. However, let's not forget the advice of one of Wall Street's most successful investors, Warren Buffet, who tells us to be greedy when others are fearful. History shows that, at times like these, when sentiment is poor, it's generally not a great idea to sell off all your investments. The time to sell is when your taxi driver is busy telling you about his latest can't lose tech or banking share. In my view, based on current sentiment, we're nowhere near a top in the markets and may not have much further to fall.
So what could be the spark to turn things around? Well, just consider the following facts: there currently aren't enough foreign buyers for US Treasury bonds. If not enough buyers turn up at the auctions, then the US will have to raise interest rates to attract enough capital to fund its deficits. If interest rates go up, America's housing crash gets even worse and its government debt levels go soaring, thus creating a vicious circle. There's the potential here for a depression greater than the 1930s. Can you see Bernanke, who is a self-professed student of the Great Depression, standing aside to allow that to happen again? And in the run-up to an election year in the US? Not a chance, I'd say.
The only way the Federal Reserve can forestall such an outcome is to launch yet another round of quantitative easing, or QE3. If no one will buy US Treasury bonds, the fed will have to - it just can't countenance those interest rates rising and will do anything it can to keep them artificially low. In my opinion, Bernanke's current prevarication is just a feint to test market reaction, or possibly a deliberate ruse designed to depress asset prices in the short term and thus allow his banker buddies to pick up a few bargains.
As for the Europeans - as we've already seen, they can't allow Greece to default, not officially anyway. If they did, it wouldn't just be the Eurocrats' cushy careers at stake - necks are literally on the line here if it all falls apart. Short term the politicos in Brussels may be able to extend and pretend by pushing a few more short-term loans down Greek throats, but long term they face the same dilemma as the US - either they allow a mass default on the debt throughout the Eurozone and create a deflationary collapse, or they print their way out of it, thus leading us down the road to hyperinflation and, as a side-effect, producing the cash injections necessary to buoy up markets for the next year or two.
Keep calm and carry on:
So undoubtedly, as long-term investors (just like Warren Buffet) we're in for some nerve-wracking times over the next few months, but the way to deal with the situation is to batten down the hatches, keep our nerve and hold some cash in reserve - not to sell out at the first whiff of panic. That way we'll be able to bridge the gap between where we are now - apparently on the threshold of an imminent deflationary crash - and where we'll be in a few months time - waking up to news of the next inevitable round of money printing and in a marvellous position to snap up some fantastic bargains! Think I'm being a tad complacent here? Think again. Only the other day, our very own Bank of England admitted that further money printing was on its agenda. Members of the Bank's Monetary Policy Committee admitted that "further asset purchases might become warranted". In other words, the die is already cast ...
So for now, just get down to the beach or the golf course and enjoy what will hopefully be a long hot summer (once it gets started over here in the UK that is). As for your investments, better to keep a cool head - and mind the gap!
Until the next time, Happy investing
John Mac, The Handsoninvestor
If you're of the same sort of nervous disposition as me, you're probably feeling decidedly queasy at the moment. As we enter into the dreaded summer doldrums and the final deadline for the end of the latest orgy of QE (Quantitative Easing) rapidly bears down on us, it's hard not to feel a sense of increasing trepidation each time we log into our portfolios and cast a wary eye over their wildly fluctuating valuations.
It's pretty hard to argue against the fact that all the extra money printing that governments have indulged in over the 3 years since the Lehman Brothers collapse has given stock and commodity markets, and hence our portfolios, an enormous boost. The question is, of course, as the effects of the US Federal Reserve's QE2 begin to fade, where do we go from here?
Well the news flow so far isn't encouraging as last week the markets were hit with a double dose of uncertainty. On the one hand, many investors were hoping that Chairman of the Federal Reserve, Ben Bernanke, would finally admit that a 3rd, and perhaps more substantial injection of printed cash was needed to get Western economies out of intensive care and, as a consequence, provide a tonic for investors' portfolios. No such luck! Despite some murmurs that policy would remain "accommodative", Bernanke didn't breathe a word about QE3.
At the same time, events across the pond in Europe gave investors further palpitations: would the Greek drama turn into a tragedy for their investments? Who'll blink first in the battle of the Greek bailout - the Eurocrats in Brussels or the Greek parliament? And will the Greek citizens decide the issue on the streets of Athens regardless of whatever deal the politicians manage to cobble together?
We're all in this together:
Let's be in no doubt here: if Greece goes down, we all go down, with all the implications that has for asset prices everywhere, including bonds, stocks, commodities - and yes, even cash in the bank. After all, who's going to bail out your bank if your government's bankrupt?
Debt markets today are scarily interconnected. French and German private banks are on the hook to Greece for around 80 billion euros. What's more, any default by Greece would instantly encourage Ireland and Portugal to follow suit and leave their creditors swinging in the wind. When you realise that British banks' exposure to Ireland alone totals £120 billion, then perhaps you begin to appreciate the magnitude of the problem. Just today, the head of the Luxembourg Central Bank admitted that if the Greek's defaulted on their debt, the result would be "chaos".
So where does all this leave us poor beleaguered investors? Rather than hang on in hope of better times ahead, shouldn't we all just cash in everything now, stuff the proceeds under the mattress and don the hard hats?
Don't Panic!
Not so fast! Yes, undoubtedly the heat will be on this summer and there's no question we'll be in for a couple of months of great uncertainty. If you're heavily exposed to the markets, then trimming your holdings down to a level that helps you sleep at night wouldn't be a bad idea. However, let's not forget the advice of one of Wall Street's most successful investors, Warren Buffet, who tells us to be greedy when others are fearful. History shows that, at times like these, when sentiment is poor, it's generally not a great idea to sell off all your investments. The time to sell is when your taxi driver is busy telling you about his latest can't lose tech or banking share. In my view, based on current sentiment, we're nowhere near a top in the markets and may not have much further to fall.
So what could be the spark to turn things around? Well, just consider the following facts: there currently aren't enough foreign buyers for US Treasury bonds. If not enough buyers turn up at the auctions, then the US will have to raise interest rates to attract enough capital to fund its deficits. If interest rates go up, America's housing crash gets even worse and its government debt levels go soaring, thus creating a vicious circle. There's the potential here for a depression greater than the 1930s. Can you see Bernanke, who is a self-professed student of the Great Depression, standing aside to allow that to happen again? And in the run-up to an election year in the US? Not a chance, I'd say.
The only way the Federal Reserve can forestall such an outcome is to launch yet another round of quantitative easing, or QE3. If no one will buy US Treasury bonds, the fed will have to - it just can't countenance those interest rates rising and will do anything it can to keep them artificially low. In my opinion, Bernanke's current prevarication is just a feint to test market reaction, or possibly a deliberate ruse designed to depress asset prices in the short term and thus allow his banker buddies to pick up a few bargains.
As for the Europeans - as we've already seen, they can't allow Greece to default, not officially anyway. If they did, it wouldn't just be the Eurocrats' cushy careers at stake - necks are literally on the line here if it all falls apart. Short term the politicos in Brussels may be able to extend and pretend by pushing a few more short-term loans down Greek throats, but long term they face the same dilemma as the US - either they allow a mass default on the debt throughout the Eurozone and create a deflationary collapse, or they print their way out of it, thus leading us down the road to hyperinflation and, as a side-effect, producing the cash injections necessary to buoy up markets for the next year or two.
Keep calm and carry on:
So undoubtedly, as long-term investors (just like Warren Buffet) we're in for some nerve-wracking times over the next few months, but the way to deal with the situation is to batten down the hatches, keep our nerve and hold some cash in reserve - not to sell out at the first whiff of panic. That way we'll be able to bridge the gap between where we are now - apparently on the threshold of an imminent deflationary crash - and where we'll be in a few months time - waking up to news of the next inevitable round of money printing and in a marvellous position to snap up some fantastic bargains! Think I'm being a tad complacent here? Think again. Only the other day, our very own Bank of England admitted that further money printing was on its agenda. Members of the Bank's Monetary Policy Committee admitted that "further asset purchases might become warranted". In other words, the die is already cast ...
So for now, just get down to the beach or the golf course and enjoy what will hopefully be a long hot summer (once it gets started over here in the UK that is). As for your investments, better to keep a cool head - and mind the gap!
Until the next time, Happy investing
John Mac, The Handsoninvestor
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