1 Oct 2010, 11:35am
economy
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  • Best September for 71 years for the Dow – but is it real?

    The Torygraph reports that the US stock market had its best September for 71 years. We haven’t been doing so badly round here, either. Everything is hunky-dory, the good guys won and the bad guys lost.

    Doesn’t feel that way, though. The trouble is that everything is going up. I don’t know what is being used to qualify inflation in Britain but it’s wrong for my experience. I wanted to by a PL259 radio plug recently. It was over £2; that’s a shocking price for what is essentially a passive component, indeed electronic parts in general seem to have increased very notably over tha last year. Everything imported into the UK seems to be creeping up, and not just by 5% a year, either.

    The problem is we needed a lot of money to pay off the screw-up with the banks. So we printed it. The results are showing up in all sorts of places. I am trying to save money and give it to my future self, which is not what the Government wants me to do. Well they can stick it, though obviously I have to eat the hit of their active discouragement.

    I don’t trust the currency as a store of value. So I buy shares, ETFs, physical stuff I expect to need over the next few years as long as it doesn’t decay/is subject to rapid technical obsolescence. I use it to build a business I expect to get an income from after I stop working.

    Anything, as long as it isn’t increasingly worthless UK currency. I’m not the only one, and this wall of money going into assets is pushing up stock prices, probably way beyond what should be supported by fundamentals.

    Gold ETF - top line, against FTSE100

    Gold ETF - top line, against FTSE100

    The problem is that our reference point is being debased. What value is it that the stock market is going up when the units it is cited in is going down. What we need is an independent arbiter of value. I’ve disingenously used gold for that, and though gold does act as an independent standard it would need to be smoothed price-wise over several years, and we don’t yet have the future data to do that :) Perhaps some broad basket of commodities would be better, anything expect financial instruments, for if we are trying to gauge the quality of a financial instrument that is acting as a store of value then we need to measure it against something, like stuff, that can’t be produced on demand at the flick of a mouse.

    My ISA is telling me that it is over 8% up. It is bulling me, because the value of what I can buy with its liquidated value is at least 5% less this year than last, and the inflation I am experiencing feels like more that 5% – I may not buy that many gewgaws but I do buy gas, electricity, some petrol and all of these look to be going up.

    That ISA is still better than my Cash ISA at 3.2%, I am resigned to seeing the stored part of my capital slowly dying. The only reason it is increasing overall is that I am shovelling more in by saving than is being destroyed by the likes of Mervyn King and his bunch of merry Quantitative Easers. If I had jumped to this earlier I would have piled into the Swissie as soon as the last lot of QE was announced, but unfortunately I didn’t get in quick enough. There’s still some case to be made to do it to head off the next lot of QE but Switzerland is a small country even though finance is big there, and it appears the whole world is after a safe haven so it could explode at some point. So I haven’t got the balls. Shame about the Euro, I could be sorely tempted by Deutschmarks if they still existed, but I don’t want to carry the load of the prodigal PIGS :)

    How many Swissies to the Pound

    How many Swissies to the Pound

    I’m not as handy as RetirementInvestmentToday with munging data, but to me if you spin the CHF graph on its head it doesn’t look so dissimilar to the gold picture, and seems to be telling us the same story. Our money is dying, and most of the rise in the stock market is not because our companies are back on their feet and raking it in but because the FTSE points are getting smaller with the £ so their number has to rise to compensate.

    There is a school of thought that Britain is quietly booming now. The stock market rise would seem to support that. I am not convinced, however – the apparent increase in the FTSE (and the Dow, since the US has been carrying on in the same way) is very largely an artifact of the deliberate devaluation of the currency. All boats ride higher when the tide goes out, but they’re not going anywhere fast.

    Looking to the future, I will look to a combination of ETFs in resource rich economies like Canada and Australia with some emerging market ETFs, though I don’t trust some emerging market governments either. Brazil has served me ok, but this sort of sabre-rattling could shaft that good and proper. I want as little exposure to Mervyn King and his destructive policies as I can get. They are fantastic for Britain’s indebted homeowners and credit card debtors. I didn’t have all the foreign holidays, huge houses and overextended lifestyles that they had while pumping up that debt, so I don’t see why I should want to be part of bailing them out now. Just in case Britain is really booming again, however, I will add to my UK IT portfolio.  I want income from UK investments and ETFs don’t really work well for me here. Diversification works for me, because I’m not a talented seer like Warren Buffett :)

    I’ve noticed this rise in small component/item prices myself, although at the same time the electronics firms are still trying their hardest to keep the prices of assembled goods (such as an entire computer) low despite fluctuating exchange rates and inflation.

    if its not hitting their profits they are achieving this at the expense of making companies leaner, working staff harder, and reducing customer service.

    this is yet another example of the “madness of market forces”..

    we’ve both discussed the dumbing down previously so I also expect supply and demand means that a 1930s era connector that has to be manually hardwired to the cable isn’t the most popular item in stock, compared to something like a USB memory stick or a pack of batteries..

    A number of my young friends openly admitted to me they were too lazy to buy a roll of loudspeaker cable and attach the Neutrik connectors on to this, (despite the cost savings in doing so) and were looking for ready-made cables..

    As for the wider markets, I think another factor is the culture we have imported from the USA of excessive optimism and a culture of denial of any sort of bad news, especially if it makes people reduce their consumption too quickly….

    1 Oct 2010, 8:04pm
    by George


    The stock market in the US is stronger because companies have lower overhead (employees laid off) and have bought back more of their stock. Actual sales and profits have been stagnant, but better than 2008 (excepting the energy sector).

    Australia… yes, I’ve been playing that game, too. Aussie$ is nearly on par with the US$, just like when the great recession began. Been really fun riding that wave for the second time. The great recession was kind of like hitting the replay button.

    Guys, it was the worst recession for 50 years. What does everyone expect, that one day it stops and everything is fantastic?

    There’s a dire phase. Then a bounce back where if you extrapolate to the moon it looks like it could be custard all around for Christmas. Then things look poor because you can’t do that, loads of people haven’t got jobs, and it’s three decades since Western economies could turn on a dime and rehire a load of manual labourers to bash metal when the economy turns.

    Then there’s a phase when the jobs really start coming. This is probably about 3-6 months away still, and I wouldn’t wait for it because people will start fearing interest rates rising, which is never great for stocks.

    I’m really glad ermine linked to my booming article. I remember how bonkers I felt writing it, because it was so against consensus. But look what has happened since – three quarters of +ve growth and more to come most likely.

    I admit ‘booming’ was over-egging it (I thought if you’re going to look weird, wear a funny hat) but doing anything but blogging that we were all doomed Captain Mannering felt wildly willful.

    That said (and it is odd how this blog of Ermine’s is one of my very favourites, despite our fundamental lack of agreement about some issues! :) ) I’m pleased to say we both fear inflation.

    The final reason I’ve been happy to sit in shares is even if things had taken a turn for the terrible this year (as opposed to the newspaper headlines taking a turn for the terrible) then at least I’d have been able to buy more cheap shares with income, whereas having your wealth wiped out by inflation is a tragedy.

    You have raised the thorny but fascinating issue of what is the source of economic value. I am not sure there is or could be a single reference point. Gold, of course, has always been popular, but as you imply, getting in at the wrong time could be very costly. Likewise commodities which often have a distorting inventory cycle.

    I am inclined to think that, while not without its own problems, the tradition of Ricardo and Marx is the best indicator of value. Ultimately, everything we do costs us time and effort, from hunter-gathering, to farming, to mining, to trading, to assembly lines, to software coding. Natural resources play a part, but value springs mostly from human labour.

    Years ago I used to crimp RJ45 connectors onto twisted pair cables rather than buy them ready made. I wouldn’t do that now: my time is too precious. It’s called progress, I think.

    Entities that are chiefly concerned with organising and applying human labour (i.e. companies) are, in the end I think, the things that are mostly closely coupled with real economies. Hence my long term preference for equities.

    But, of course, it’s not quite that simple. In a world where countries have varying fortunes, currency exchange also plays a role. I haven’t got that one figured out yet to my complete satisfaction. -SG

    Hi ermine

    Nobody has ever told me that I am “munging data” before. It’s a great day because I have just learnt a new word :-)

    I’m correcting all my analysis for “official” inflation data from the respective countries. I’m not using gold because history has shown that gold while being a store of value can get very over or undervalued along the way. I don’t know what my own personal “real” inflation is and I’m sure everyone has a different personal inflation so for now it’s the best I can do.

    With governments of the world in an apparent race to devalue their currencies the most through QE and other activities some might say correcting for money supply could be the better option. I’m not convinced of that either though.

    @alex parts prices are strange these days, I’ve got close to buying some piece of Chinese junk specifically to scavenge parts from on the grounds it’s cheaper. Still feels bad :)

    @George You’re right that companies have been dropping overheads, but cost-cutting can only go so far. I do feel some of the rise is that even if their worth was flatlining, the price would have to rise somewhat to compensate for the debased $, particularly US companies with a significant ex-US revenue

    @Monevator I love the picture of the single bull surrounded by bears ;) Your Britian in booming again article does however outline/acknowedge some of my fears in its last sentence :)

    We’re richer now than we expected to be 12 months ago, but we’ll be poorer in five years than you might imagine.

    I am working at the moment and expect not to be in 5 years time. I’d prefer that were the other way round….

    @SG I still crimp those suckers! Though it means you only need a 6mm hole rather than a 1.5cm one in the wall. I agree that it is human labour that adds valyue/transforms societies in the long run. However, there is the small matter of the boost we’ve had in the last 150 years from fossil fuels, and whether that can be expected to carry on/scale to meet the desires of a burgeoning human population.

    @RIT I’m showing a geek background here, this was how in my research days we used to describe running data through some fearsomely complex mathematical filter to try and extract interesting information.

    I have a particularly anomalous personal inflation rate because I have no housing rlated costs (bar maintenance and council tax) and little food related costs as DGF grows a lot of it so I am particularly exposed to the costs of energy. And the inflation rate I am seeing feels like a lot more than 5%!

    You site warmed me up to the issues of needing to continually derate stock market indices for inflation. I’d used the 3% a year rule of thumb that had been the norm in the good years, but more rigour is probably needed in the choppy waters ahead!

    [...] warning bells. But the value of stuff that the £ buys is dropping rapidly, be it measured in radio plugs or loaves of [...]

     

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