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David Kempton: I’ve sold all of my government bonds

Experienced investor David Kempton is certain investors will ditch bonds to buy shares and has shifted his money into investment trusts.

 
David Kempton: I’ve sold all of my government bonds

Only occasionally does any investor get a real conviction, such as I have now, that equities will go up, bonds will go down. Obviously some bumps along the way, but really, in my view, only the timing is in doubt. 

Last week I was addressing a group of very savvy West Country investors on the ‘state of the world’ and was surprised by my bullish tones being countered by different views on the UK market.

Our High Street struggles desperately, the housing market is very patchy, Sterling depreciates against even the euro and a weak government stumbles at every turn, even now giving us the dreaded triple dip.

Endless quantitative easing puts money into the wrong hands to be spent on imported goods, hence our balance of payments figures are the worst for 20 years and the man in the street still has no money to spend on the High Street, restaurants or pubs. The weak data, and now uncertainty caused by a drawn out referendum, will probably lose our AAA sovereign debt status.

The FTSE is not the UK

With such apparent gloom, it is important to realise that an investment in UK markets should be judged quite apart from all these issues for two reasons. First, markets reflect values 12 to 18 months ahead.  You wouldn’t value a company on historic P/Es (price to earnings ratio) but on projected future growth; markets do the same.

Secondly, an investment in the FTSE 100 is probably 80% international exposure and even the FTSE 250 trends to overseas markets for home manufactured goods. 

I continually meet people who say they want to live here since their family and friends are here, but they want their money elsewhere.  A general FTSE investment will achieve just that, yet still bring jobs to indigenous corporates.

Reasons to remain bullish

In the US, the housing start figures, the great driver of sentiment, are significantly better than they have been for four years, the ‘Beige Book’ showed growth picked up in December in all regions, car sales are 50% ahead of ’08 and as they go into the fifth year from the financial crisis, there is renewed feeling of enthusiasm in an environment with good demographics, a culture which encourages entrepreneurs in an irrepressible youth, a furious printing of money, irrespective of debt implications. 

Then there’s fracking, which will bring an enormous boost to jobs with gas already a quarter the European price.

Like Europe, they can’t raise interest rates (yet) since it would kill the property market, which would kill the banks.

China’s recent economic data have exceeded expectations and equity markets have already risen very strongly this year.  Whilst spending 50% of GNP (probably highest ever in the world) on infrastructure, there remains bad social issues and inflation is starting to restrict exports. 

Japan is enjoying the honeymoon period under the newly elected Shinzo Abe and shares have performed very strongly as the ‘planned’ devaluation of the yen continues, but further out the country’s industries are struggling to compete with improved quality products from emerging nations.

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66 comments so far. Why not have your say?

Geoff Downs

Jan 31, 2013 at 08:53

The last time I looked Japan's debt ratio to GDP it was something like 220%. A good reason to be optimistic. LOL

The US ratio was 102%, and of course poor economic figures yesterday. If you go onto US financial websites there are many ordinary citizens who question the validity of the so called recovery.

In the UK we have debt getting worse and people calling for increased spending.

Of course then we have QE, the real driver of equity markets, as seen recently in Japan.

I have no issue with people who take risk and make money, or are prepared to take losses. Having said that it is surely logical for retail investors to take great care, especially those in the higher age group.

Markets may be rising, but for many there will be the belief that the fundamentals are not the reason and in that sense there is considerable risk ahead.

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Keith Cobby

Jan 31, 2013 at 09:31

An interesting article - thank you. I am long-only in investment trusts/investment companies and some of my holdings overlap with yours. I am fully invested in equities on the basis that you may make money and lose money, with bonds/deposits you are guaranteed to lose money over the long term.

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Alwaysright

Jan 31, 2013 at 15:53

Keith

Fully invested in equities? How old are you? That is a lot of risk if you are retired or close to it.

You will make money out of long only equities but always bear in mind that you will also lose money. Only problem is:a 25% fall needs 33% rise to recover and you could end up out of pocket for 10 years plus. (FTSE100 30th December 1999: 6930 !!)

Whilst I agree that gilts and corporate bonds are a fools game at the moment, it is prudent to sit on a decent cash pile. You can get 2.5% net of BRT which is close enough to inflation to be acceptable.

I have moved all of my bond and gilt holdings into cash: 40% of my portfolio.

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Anonymous 1 needed this 'off the record'

Jan 31, 2013 at 16:04

Excuse my simple mindedness this is more a question than a statement but

if people start pulling out of government bonds en masse into stocks and shares here and america wont the government(s) have to raise interest rates and stop QE to stop the bond market collapsing?

Wouldn't this then have a downward effect on stocks & shares too ?

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Alwaysright

Jan 31, 2013 at 16:20

Anonymous 1

Absolutely not. A collapse in bond markets would allow governments to step up QE which would suit their long term (unadmitted) goal of stoking up a bit of inflation in order to inflate away debt. High bond prices have limited both the scope and effect of QE.

Call me cynical if you like .............

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Geoff Downs

Jan 31, 2013 at 16:39

Alwaysright,

QE has been about several things, one of which was to get banks lending and in turn consumers borrowing.

For several reasons banks are more reluctant to lend and indebted consumers don't wish to borrow more, but in fact pay down debt.

This has been the major reason for the limited effect of QE.

Without expanded bank lending it is hard to see either growth or inflation. In fact Government bonds are signalling deflation.

People say bonds are in a bubble, but that can't be right. For a bubble to exist there has to be an overwhelming view that you should only invest in them. The opposite is the case, with virtually everyone saying get out of bonds.

Anyway whatever is the reality, good luck with your investments.

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Anonymous 1 needed this 'off the record'

Jan 31, 2013 at 16:43

Alwaysright

So you believe "to infinity and beyond" for QE?

Does this mean theoretically the Bank of england could end up owning most/all the gilts?

What do you believe the limits to this are?

Surely they need others to buy into the market too?

If this is the case why wouldn't the others want either high prices and/or high yields or to exit the gilt market?

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M B

Jan 31, 2013 at 16:48

All very interesting posts especially wise words of caution for those retired or nearly so!

Not sure where one can receive 2.5% net on cash deposits though?

Regards and keep em coming!!

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Keith Cobby

Jan 31, 2013 at 16:52

I have invested through the market 'crash' of 1987, the 'dot.com' bubble and the recent financial meltdown. I will always be a long-only equity investor because I do not trust my trading/market timing abilities. I only invest in companies which produce dividends and roll them up (the snowball principle) until drawing them on retirement. Clearly you need to be invested where the economic vibrancy and demographics are most supportive. Consequently, I am mostly in Asia-Pacific and Global Emerging Markets trusts/companies.

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Keith Cobby

Jan 31, 2013 at 17:06

Just one further comment on investment strategy. I am a great believer in dripping money into the market monthly to benefit from pound-cost averaging as it is not possible to time the market. Caution should be exercised when investing lump-sums particularly when P/E ratios are very high for example at the time of the millennium.

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Alwaysright

Jan 31, 2013 at 17:27

Anonymous 1

Yes, I do believe that "infinity and beyond" is a possibility. As long as the central banks restrict QE to the narrow field of gilt purchase, they will be locked into an ever rising spiral of more QE having less and less effect so needing more QE etc etc Of course, if they were to actually print money to build hospitals, schools and other infrastructure projects, the effects on the economy would be both more direct and more immediate. However, the conventional wisdom is that "printing money" is inflationary and QE (printing money by another name) is not inflationary so therefore acceptable.

Don't blame me, I'm not a central banker.

On the other point; will the banks end up owning all the gilts? In theory, yes but in practice, no. pension funds have no choice but to buy and there will always be retail investors looking for a safe haven (Return of capital rather than return on capital)

At the moment, I can get a return on cash that is better than the return on gilts with no risk of capital depreciation. So long as I keep under £85,000 in any one institution it is as near risk free as you can get.

For a retail investor, cash is king for the non equity exposure right now.

Keith,

I wasn't meaning to be rude. I am in my late 50's and, like you, have always had exposure to long only equities. In '87, as a relatively young investor, I had 20% of my portfolio in corporate bonds. This allowed me to buy equities aggressively post crash whilst hanging on to my existing equity portfolio. It worked well.

In 2007/8 I got a bit stuffed by the banks and, although I had about 30% fixed interest, I lacked the courage to buy into banks at the bottom. Instead, I bunged about half my fixed interest holdings into a FTSE tracker in November 2008 and the other half in February 2009. I took some profits in 2010 in order to establish my fixed interest position at about 40%. Last year, I dumped all fixed interest holdings and am now 40% in cash and, overall, 22.5% up on my pre credit crunch valuation with dividends and interest re-invested.

Not great but good enough for me.

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Keith Cobby

Jan 31, 2013 at 17:52

Alwaysright

No offence taken. I am a bit younger than you. I think the important thing is to 'know thyself' and this usually comes from your mistakes rather than successes. Interesting article and discussion.

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an elder one

Jan 31, 2013 at 17:58

I read the various commentary with regard to the bonds versus equities and will the market rise or fall dichotomies and can draw no clear conclusions from any of it; but then I am but a simple retail investor, yet much of the commentary comes from people apparently in the business.

Personally, after a small dabble years ago, I never touch bonds, only equities mainly in essential commodities and products and services that the peoples of the world will always need. I hold long and stay pretty well fully invested; reinvest divis, keep my eyes open, and profitted an average 5-6% per annum (not great, but enough) over the last 20 years despite making and losing a lot through my own stupidity during the dot com madness.

Am in my eighties, paid off the mortgage years ago, have a post vintage thoroughbred sports car worth circa £150,000 and other things; and live within my pensions; so why should I need the fiddle of investing in bonds.

It take all sorts!

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David West

Jan 31, 2013 at 18:10

With vast amounts of data available and no shortage of "expert opinion" together with the views of individuals on various blogs etc. it seems to me that common sense takes a back seat. I have been investing in shares since 1984 but I certainly would not consider myself an expert. However, during that time there have been a few market collapses/corrections but at the end of the day buying shares in well run companies with good cash flow and solid earnings together with reasonable market share in their own fields has proved to be a good thing to do. There are so many different ways at looking at things and a lot of market noise and short termism but at the end of the day investing in tangible assets creates income and wealth. Forget chopping and changing every five minutes due to market and herd sentiment. Don't try to shoot the lights out with what you invest in - it very rarely works - and above all don't be too greedy. In my own personal experience there is no necessity to buy when other people are fearful or to sell when they are greedy, but merely to just keep plodding along with a little bit of common sense applied.

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Lee Appleton

Jan 31, 2013 at 18:33

As an aside, I keep hearing that Fracked Gas is ¼ the price of European Gas. Here’s a novel notion to reduce heating poverty, freeze US gas and ship it here, it has to be as close a Abu Dhabi and no Pirates.

Just a minute I forgot the EU gas suppliers are locked into expensive Gas futures so we in the Eurpoe are all Fracked!

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Peter Lihou

Jan 31, 2013 at 19:13

Aged 62 and no expert but it seems to me some of the above commentaries are overly optimistic and should be treated with caution. Equities may be regarded as suitable for the long game in my view, but people should be wary of the current, short term recovery. If they are looking for a return from, or at least not a depreciation of their investment in under 3 - 5 years, the evidence for any medium to long term trend remains extremely weak.

Over the past 5 years, investments in equities have been unimpressive to say the least. The two principle reasons were the US led recession sparked by over lending on property and the debt crisis in Europe. Together, these caused a collapse in confidence and growth on a global scale. The impact of the decline in European demand affected China far more than most people expected. If the US takes longer to build up steam, China may also remain muted for sometime.

Whilst measures have been attempted to resolve bad lending, and these may bear some fruit, we still have no certainty about the total effectiveness or the time-scale. The financial services transaction tax may provide long term security in those countries where it's adopted, but doubtless the costs will find their way back to investors.

The much bigger problem is Europe. Other than bolster the cash flow of ailing economies by pouring in more debt, nothing sensible has been done to improve the long term viability of these nations. Austerity measures, where they have managed to implement them, have reduced national expense, but done nothing to secure growth. In fact, the opposite is true, reduced government spending results in higher unemployment, lower confidence and consequently lower tax returns/income.

The valuation of some currencies adopting the Euro was too high and the demands for fiscal control/union smack too much of political control and will therefore be unlikely to be accepted. Then there is the uncertainty over Britain's membership and the impact of both the uncertainty and the outcome.

It also seems to me there is a systemic problem with the whole concept of continuous economic growth, that must be addressed in the long term. Resources, unlike greed, are finite.

We are still on a bumpy road and the destination is becoming less, not more clear. I will be sticking with safety for now.

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Geoff Downs

Jan 31, 2013 at 19:23

Peter,

Very well said, really good summing up of the situation.

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an elder one

Jan 31, 2013 at 21:09

Growth is a matter of necessity, human aspiration and the wit of man, not financial fiddly diddly or current protocols; in time these must and do change and new discoveries have a positive impact; during the changes there are inevitably ups and downs. So if the human race is not to die out, any time soon, the world economies will recover and inevitable growth will steady and augment.

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Martina

Jan 31, 2013 at 21:11

Hello Peter, may I take this opportunity in endorsing Geoff’s comments by highlighting your excellent summary. In the short time that I've been visiting this website forum I've been continually impressed by many posts which to my naive mind seem to emanate from a certain amount of expertise and understanding. Me, I'm a very amateur investor from a military background who only invests in funds, but I use the comments alongside articles in weekly and monthly financial publications to enhance my understanding of the current climate.

May I be permitted to pick up on a comment in your closing sentence with regards to 'safety for now’? Just wondering where you may consider that to be at this time? I only enquire because I've a fair chunk of my Fidelity ISA portfolio within a strategic bond fund with M & G and a high yielder with Kames and am slightly spooked by the current perception to move out of bonds and Gilts. If that's the perceived wisdom then where might be considered a safe haven? I guess cash is the obvious choice.

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an elder one

Jan 31, 2013 at 21:12

I try to avoid fashion in all its guises and stick to the essentials in trade.

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an elder one

Jan 31, 2013 at 21:18

One day of course Mother Earth will become overpopulated; long after I am gone. Let's make sure the young are well educated then, to find the solutions.

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Micawber

Jan 31, 2013 at 22:01

I agree that growth is likely to be subdued and patchy, particularly in the UK & Europe, for a number of years. However what we are seeing at the moment is a reduction in the fear of general collapse which has pumped up bonds and gold; and a rebalancing of investments held in bonds vs equities. The arguments all point in the same direction (as the author says): dividends from cash-generating international companies with much of their earnings in the few growth areas.

"Reality checks" like the dip this week in the stock markets are a good thing if not too pronounced as they will help even out, buffer and make more manageable the rather large rebalancing from bonds to equities. Also, if bond prices fall, yields will get higher and we might come smoothly to a more balanced equilibrium (hah! - I know that chaos is more likely, but maybe this time...)

In the longer term, I very much agree with Peter that " there is a systemic problem with the whole concept of continuous economic growth, that must be addressed in the long term. Resources, unlike greed, are finite."

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Peter Lihou

Jan 31, 2013 at 23:45

Martina, I'm not being coy, but I'm not qualified to advise on what might be considered safe and my own analysis might be completely wrong, however, I'm very appreciative of your, and Geoff's comments. Thank you.

I can say what I have considered prudent in my own circumstances, and that I was less risk averse when I was younger and had more time to recover from my mistakes.

I have a modest but diverse portfolio including around 20% in low - medium risk equity funds and 40% in UK & US Bonds (mainly KB Elite Sterling Inc GB, a Morningstar 4 star rated fund that has outperformed the sector & category since 2007), the remainder is split between the EEA Traded Life Policy Scheme (steady 8% return), the maximum allowance in Premium Bonds, and cash.

A couple of years ago I cashed in equities and ISAs to purchase Solar panels for the maximum feed in tariffs (before they reduced) and to convert an outbuilding into a holiday cottage in Cornwall. These were both good decisions.

Depending upon your tax structure, ISAs may be right, but for me the returns weren't impressive enough for the tax advantages to count for much especially when costs were considered.

Clearly the point you moved into Bonds and Guilts will be a key consideration, but if the equity rally fails, they won't be a bad place to be.

Unfortunately, there are to many variables to be sure what is safe but I look at the lack of resolution in Europe and to a certain extent the shored up fiscal cliff in the US, and I can't help thinking these have to be remedied before optimism can return.

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Mario via mobile

Feb 01, 2013 at 08:10

David, what's your view on palm oil producers? I bought REA Holdings at £5 per share. I believe you have a play on this and other palm oil producers.

Thanks.

Mario

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Hmmmmm

Feb 01, 2013 at 10:22

Re Peter's comments:

1) Er, yes, maybe true, but if it were not for these worries the FTSE would be at around 10K (ie 2000 peak plus inflation) and investing then would be unwise.

2) Markets seem to lead recovery by 18 months or so. Ie. before it is obvious on the street. Whether this is due to companies seeing better times first, or due to a positive feedback loop of the increasing shareprice allowing companies to invest/expand leading to a recovery, I am uncertain.

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Geoff Downs

Feb 01, 2013 at 10:38

Hmmmmm,

Look we are living in unprecedented times. The intervention by the Fed and World Banks is on a scale not seen before, other than in Japan in the nineties. QE is clearly responsible for this lift in markets from the drop in 2008.

You talk of companies seeing better times. We have Western countries with huge debt, which in most cases is getting worse. We have indebted consumers and banks more reluctant to lend.

I for one would be interested in your views on how you think all this is pointing to better times?

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William Phillips

Feb 01, 2013 at 13:30

Merchants Trust and British Assets are odd places for an in-the-know investor to park his cash. Shires Income is questionable, if less so, for the same reason

They overpay dividends in money terms, and their real worth has been going downhill for years. Their net asset value trends are bad as well. Don't be gulled by headline yields of 5-6%, you get what you pay for. Prefer an IT whose dividend's purchasing power rises steadily alongside its NAV.

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an elder one

Feb 01, 2013 at 14:11

From my portfolio heavy in mining including gold, could the market be anticipating infrastructure projects - must have - for growth (iron ore), house building (copper) and gold (currency hedge), etc.

just a thought; I'm no expert, but wonder.

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an elder one

Feb 01, 2013 at 14:16

At the moment FTSE 100 up .78% my portfolio up .89%

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an elder one

Feb 01, 2013 at 15:02

This looks like a debate of optimists v pessimests; it'll never be settled till reality arrives. Things have to get better, thus they will; the only way deficits will be mended is by increased business endeavour, even if short term we go further into debt; eventually productivity will catch up. We just need to get up off our backsides!

A commonsense thought from the simple minded!

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an elder one

Feb 01, 2013 at 15:05

sorry pessimists, not pessimests; a mental aberration!

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an elder one

Feb 01, 2013 at 15:14

Or perhaps a debate twix ego and alter ego; accompanied by the wringing of hands.

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matt martin

Feb 01, 2013 at 15:19

Peter - Like Geoff and Martina, I'd like to thank you for the lucidity of your posts.

I have roughly 50% of my pension funds in Bonds which was a defensive measure when the Euro-zone looked at real risk of break-up, but I now think is too high given the current market sentiment and yield growth.

The challenge is where to put them. Outside of the pensions, I have too high a proportion in cash where I am certainly not getting better than 2.7% net. As far as equities are concerned, your analysis is spot-on: the underlying problems of the mature economies of the West have not fully been fixed and this is causing the growth engines of China and other emerging markets to sputter.

What I would take issue is with the concept that continuous economic growth is unsustainable. The ultimate driver of economic growth is technological advance, which allows for the sum total of output to be produced with fewer inputs – through greater productivity of labour, raw materials and capital. I don't believe we are anywhere close to exhausting the opportunities for growth that technology brings.

However, I do not see the current FTSE revival as sustainable – like Geoff I don't think valuations (on the whole) are driven by fundamentals, and in particular I do not think that a reversion to sustained growth in UK/European indices is inevitable. Japan is the exemplar of the kind of economic stagnation economies may experience as a result of poor government & regulatory responses to a financial crisis. They have endured 2 decades of stagnation – and the key governments of the Eurozone seem to be using the Japan playbook.

I believe that we are in for a period of structural re-adjustment: capital, intellectual property and talent moving to the emerging economies and to the US which, despite its over-indebtedness, is otherwise in shape for another period of respectable growth.

So at 58 my focus for UK investments is safety and any (smallish) amounts I speculate with will be sprinkled around the US and emerging markets, particularly China.

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Geoff Downs

Feb 01, 2013 at 15:31

Matt,

Terrific post. If we are over cautious and lose out in the short term, so be it.

There is a history of retail investors getting in the markets, at the top, or near to the top.

Logic and instinct tell me this is too good to be true.

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an elder one

Feb 01, 2013 at 16:44

So, if we are to have less or no growth, how will the world population be constrained without its concomitant ageing and the problems that brings; we work till we drop?

Technology which is the application of science, promotes all manner of invention beyond increased productivity through automation. It also enhances life style and personal wellbeing and the demands by individuals for the same; a process that has been with us since before the stone age.

This is getting altogether too philosophical. Finance is essentially about the short term set in the very dynamic environment of all the instincts of man's tribal nature. With very few exceptions, I'd not be buying equities at present either; we are in a moment of over exuberance I think and things will soon subside; but I don't see a need to sell off equities, except in obvious cases of questionable valuations.

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an elder one

Feb 01, 2013 at 17:03

Momentarily, the FTSE100 up 1.12% my portfolio up 1.51%; this is getting a bit silly!

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Anonymous 1 needed this 'off the record'

Feb 01, 2013 at 20:38

The VOLATILITYS&P500 (^VIX) index made a new lower - low in a 5 year time frame. This seems to happen just before a spike up in the index (i.e. a panic).

see http://finance.yahoo.com/q/bc?s=^VIX&t=5y&l=on&z=l&q=l&c=

for yourselves.

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Peter Lihou

Feb 02, 2013 at 02:03

I agree that my point about economic growth being unsustainable is probably too philosophical for this forum. However, I care a great deal about our stewardship of this planet and what we are passing on to our grandchildren and future generations.

Hoping that science and technology will solve the problems of finite resources, a growing population and global warming, is not a strategy I can subscribe to. These may be long term issues but without visionary leadership now, a tipping point may be soon be reached that results in a legacy that is irreversible and hostile for future generations.

Of course, I welcome and anticipate technological advances that alleviate the situation but to simply hope for the best is, I believe, short sighted and selfish. Although we, in the developed western economies don't suffer, much of the world already strains from quest for growth.

My view is that in the short term, certain parts of the world require higher levels of growth to improve upon their current well being, others, like the USA and Western Europe need less. A re-engineered economic system that is sustainable through low, or even zero growth should be the medium to long term goal. It may even happen on its own. Yes, that also means eventually the world will require a stable population or control. That doesn't mean advancement stops, on the contrary, it means greater innovation. But basic science tells us that we cannot continue to extract the planet's resources and grow the population indefinitely. The only question is when, not if, you start thinking about it.

Off the soapbox, and off to bed. Sorry about the rant!

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an elder one

Feb 02, 2013 at 12:14

Peter you are worried about the future for man and the other beasts of the earth, so am I as are so many other people, but can only hope that with our wits we shall evolve the solution; its certainly not to be resolved here and now.

Yes, a major part of the global community is playing catch-up with the so-called West, dictating conditions that we in the West can do little to control. Hopefully when they have caught up (and probably overtaken us) we can all get together and begin to find a solution.

I wonder what this so-called re-engineered economic system so much talked about, is, but I thought there to be only two such, viz, Capitalism and Communism, that is free enterprise for the individual versus state control of all means; a system twixt the two perhaps, a hybrid, but we are already there to some extent and making a mess of it; perhaps that's your point.

In some respect the long term future looks a dire prospect, for which possible solutions expressed now would have everyone up in arms; perhaps they will!

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Anonymous 1 needed this 'off the record'

Feb 02, 2013 at 12:38

Within the current parameters/paradigm the future looks very bleak. I suspect we are at this time testing the very boundaries of capitalism / society / politics.

Seems to me any system that requires exponential growth for the many (who are regulated) to pay the few (who aren't regulated) and drawing from a finite resource (i.e. the earth) will eventually hit the skids - its inevitable.

I personally believe that a truly free market is the answer and that means no regulations or bailouts for anyone - not even the chosen few.

What kills most ideas dead in the water? barriers to entry.

I'm convinced we would have extremely clean, cheap energy by now if vested interests weren't in the way.

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Geoff Downs

Feb 02, 2013 at 12:52

Anonymous 1,

Good points. No bailouts is especially relevant after the banking fiasco.

Your last sentence is also extremely valid.

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Peter Lihou

Feb 02, 2013 at 14:45

"Can only hope", an elder one?

That might be described as a fatalistic 'Neville Chamberlin' sort of approach. We may not have the answer but we have other options.

Mankind has only wandered this planet for a minuscule number of years in the great scheme of things, and our political and economic organisation is still in it's infancy. We aren't restricted by a capitalist/communist dichotomy.

The free market is wonderful if you don't care about others who are worse off, as you, or your loved ones, may one day find yourselves, through no fault of your own. Humans are generally too caring for this philosophy in the raw. However, a nanny State that disincentives people to get off their arses is also unacceptable to most.

Continuous economic growth is not only unsustainable in the long term, it would also result in the kind of planet nobody wants to live in. That is unless you don't mind every inch of countryside becoming developed with housing, industry, roads and the rest of the infrastructure. And you don't mind having to wear a mask to go out because of the pollution (already happening in some parts) or protective clothing because of damage to the atmosphere.

I'm not suggesting we have a suitable replacement system waiting in the wings, but I don't think we'll find one unless we start looking. This is what I mean by visionary leadership. Rather than banging on about returning to the holy grail of rampant growth, it seems to me we should get our cleverest minds to start to research and design an alternative system, one that works for us and the planet. It may take a very long time and it may be extremely difficult to implement, we won't know unless we start; but one thing we do know, the current and past economic models have, and continue to, fail us. It's laughable when you hear current politicians describing the business case for their borrowing and investment. Everything is pinned on the assumption of a return to growth. It's alluded Japan for 20 years and it may allude us, what contingency will then be in place for a bankrupt economy? I was always taught that a business plan should look at best and worse case scenarios, aim for the best, prepare for the worst, and work to a plan that can flex up or down according to reality on the ground.

Low growth may not be an option, as with Japan, or it may be something to which we aspire. I think the reasons for the latter are compelling, but either way it would be prudent to work to a plan that still delivers if this turns out to be the case. I'm not talking about the so called austerity measures of the current encumbants or the opposition either, these are window dressings to allow them to implement their political ideologies.

Personally, I very much agree with Anonymous 1 about the availability of options for clean, cheap energy and these become even more compelling if we plan for a low growth economy.

I know it's a cliche but I really don't want future generations to look back at us and say, "Why the hell didn't they do something whilst there was still time?"

Starting the process would, at least, be doing something.

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Hmmmmm

Feb 02, 2013 at 16:25

"Continuous economic growth is not only unsustainable in the long term..."

I think it is, in theory - for some time, anyway. There is more than one way to get 'growth' though. Take the car industry. You can get growth through:

1) Selling more cars to more people

2) selling the same number of cars but made more efficiently

3) Sell the same number of cars, but better, more expensive cars with more efficient engines, automatic driving aids, computer control etc to reduce pollution, accidents and congestion

All three result in GDP growth. Only 1) is really unsustainable

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an elder one

Feb 02, 2013 at 16:38

No Peter, Neville Chamberlin thought he had come to an honest understanding with Mr Hitler, thus the solution to our problem then; but he was mistaken and hadn't, which demonstrates the frailties and limititations of the human being that are still with us; incidentally I was 9 years old when WW2 broke. In time solutions will evolve and any generation can only do the best they can; thus hope with optimism (the root of trying); it is silly to suggest we aren't trying.

Much of the current hiatus in the economic model (whatever that is) is simply that through conflicting political ideologies we have been blinded to the true nature of growth and assumed thoughtlessly that it can be pushed beyond a rate according a natural law; capitalism uses borrowed capital to grow and we have borrowed far too much. The previous government, in particular, sought to redistribute wealth throughout the community (by taxation) in order to build a following and in doing so created an enormous unproductive bureaucracy of state to manage it.

Meanwhile the populus generally were led to believe there was no limit to the pot of gold and borrowed beyond their real means of paying it off.

But I think the driver for the problem we have today is the matter exemplified in that political dichotomy; some people pay themselves and some others far more than they are worth in terms of sustaining life on earth, particularly in what I think is unproductive endeavour; and many are paid too little and/or are given little opportunity in terms of personal endeavour to do anything about it; hence the leftish intervention.

I am thinking of some of the people who manipulate finance in their various ways, raking off the percentages if not the lot, in the process

Thus much of the so-called capital disappears into an unproductive black hole. That all needs addressing in some way to bring us back to the proper norm for growth and the means to keep it there; should be a relatively straighforward matter though uncomfortable and not helped by the distraction of a reckless Euro experiment; the longer term considerations for mother earth are a lot, lot, trickier; an eventual world government?

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an elder one

Feb 02, 2013 at 16:47

Democracy is the best we have to work with, but isn't it truly problematic, full of conflicts as it is.

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an elder one

Feb 02, 2013 at 16:54

and a relavitively witless electorate

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an elder one

Feb 02, 2013 at 16:55

sorry relatively; fingers!

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Anonymous 1 needed this 'off the record'

Feb 02, 2013 at 17:05

We don't really have democracy. You get to vote for punch OR judy but don't get to change the puppet masters.

Absolute proof of this is the huge public opinion against the criminality of the banking industry with none jailed.

As one person commented in a discussion on another site :

"The only way we'll get a banker jailed is if he/she nicks a pair of trainers or a t-shirt in a riot"

I think its more like a Corporatocracy / Plutocracy really. Unproductive endeavors producing huge profits at the expense of the masses/planet.

At least in a truly free market greed would be allowed to destroy itself. Instead of propped up at the expense of the masses.

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an elder one

Feb 02, 2013 at 17:43

The fact is, we have a democracy in which the general populus is not fully enfranchised, because it is thought by an elite they have not the wit to use it properly; which has enabled the plutocrats to have free rein. Those reins must be brought to hand somehow, but how, we have only government to resolve it, and they are to some extent in the same mold.

It needs some body of expertise (if there is such a thing as true expertise in the realm of economics) without political prejudice to find and express some part of a solution in plain words to the populus for a plebiscite without the interference of government; can anyone see that happening, and in any case it would still involve a sort of pragmatic intervention used by government periodically brought about on some sort of signal.

Sorry. if that's all airy fairy.

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David West

Feb 02, 2013 at 17:45

Amazing that a piece about selling bonds and buying shares can stimulate such comments that stray so far away from the initial point. Entertaining though!!

At the end of the day I would rather be living here than many other places in the world. In my opinion we do have a fairly decent democracy but not enough of the population take advantage of it. This is born out by the small number of people who turn out to vote in a general election compared to the entire population.

It's partly our own fault we do not have a better system of government but I think a positive recent outcome is having a coalition. Not enough of us trust one party to represent us. That has to be good in my view. I sincerely hope this is a pointer to the future when we will have many more coalition governments. At least the Lib Dems prevent the Tories from having full sway. It's a great pity we did not have a coalition from 1999 onwards. It may have stopped Brown and Balls from selling off most of what was then our gold reserve and being so profligate with their spending.

Just a thought but I felt like doing a litting straying of the point as well!!

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Anonymous 1 needed this 'off the record'

Feb 02, 2013 at 18:09

got carried away too - good discussion though chaps.

over and out.........

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Peter Lihou

Feb 02, 2013 at 18:13

Anonymous 1 - excellent summary!

An elder one, nobody is trying to change the system, just keep fixing the one that's broken. And I don't think blaming the last government for the mess is any more helpful than laying total blame with this lot. They may have ignored the numerous warnings about the banking system, but they did reside over the longest period of economic stability since the sixties. The fact is that all politicians like to tell you how bad things are and that they inherited a mess. That way they hope they won't be judged too harshly when they fail. Most are too concerned with the support if their lobby groups and furthering their own careers. Another flaw in the system. I noted that word 'hope' again, it isn't all we can do. It's always welcome but no substitute for action.

Hmmmmm, option 2 wouldn't result in GDP growth but would increase the profits of the producer. It's an example of the point I'm trying to make. However, they have been trying to increase efficiency since Henry Ford's days. But improved technology will certainly facilitate lower cost materials, engine efficiency ( if we still use them) and the driving aids.

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Peter Lihou

Feb 02, 2013 at 18:15

I meant your previous post Anonymous 1, but I might be heckled off soon for going just a little off piste! Thanks all for a stimulating dialogue - and nobody got bad tempered, that must be a first! :)

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David West

Feb 02, 2013 at 18:26

Hi Peter Lihou

I wasn't blaming the last government but merely stating a fact, assuming your comment might have in part been in response to mine. If not, apologies.

However they did spend too much of our money without thought to saving during the good economic times for when the less good times came. A coalition may have tempered this.

Gordon Brown, bless him, said that there would be no more boom and bust. Admittedly he could not have anticipated the credit crunch but for someone in such an important position to have seriously thought that was a danger in itself and had he not had quite such sway the outcome for the UK might have been better.

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Peter Lihou

Feb 02, 2013 at 18:58

Gordon Brown steered the UK economy through years when other economies were failing. That was the reason the IMF wanted him to take the top job there. During most of his time as Chancellor, we did evade the type of boom and bust previously brought about, or not helped, by domestic governments. He got hit by the same economic psunami that flooded most if the planet and it originated in the US. It's a shame people, including the current Labour leadership, don't remember that.

As for the coalition, I think the idea is sound but the reality has failed to live up to it. The Lib Dems have been far too weak to exercise any real restraint or influence on the Tories. I'm just glad there isn't an election now because I really wouldn't know who to trust or vote for. I might have to exercise my democratic right not to vote at all. Don't be conned into thinking this is a cop out, politicians want you to vote to legitimise the system. I don't think anyone should vote strategically, they should vote for people and parties they believe in.

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Peter Lihou

Feb 02, 2013 at 19:25

Got on the soap box again, sorry Chaps! I just feel very disappointed with the broken pledges of the Lib Dems and the assault on the NHS by Tories who promised it would be safe. There must be a better way!

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an elder one

Feb 02, 2013 at 19:57

Peter, if you mean me, then I simply cited the last government as an example not the sole author of the cock-up; however as far as boom and bust is concerned, Brown easily managed the boom but left the bust for the following government to deal with; as far as putting the world to rights is concerned, he had been an author thus knew the plot.

Just a fact, nothing of my politics!

I don't hold with coalitions either, they seem neither fish nor fowl and are in fact an accident of suffrage, mostly not intended; they may work in other countries, but here they seem to be an extension of party political embattlement; frustration all round getting us obviously nowhere.

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David West

Feb 03, 2013 at 16:14

Peter

The IMF actually did not want Gordon Brown. He wanted the job but did not get it - thank goodness. I agree with an elder one, Brown left a hell of a mess for the current lot to try and clear up. I am not against the Labour party but I am old enough to remember many Labour administrations and none of them have demonstrated that they can be trusted with our economy. Every time they left it in a complete mess. Having said that I think Labour is fantastic in many other ways and has a social heart that the Tories just don't have. In an ideal world it would be great if the good politicians from all political persuasions could be gotton together to form a government. That's just my personal opinion and a daydream of course. However, I reiterate my point that none of the main parties can be trusted and a coalition is the best guarantee that we currently have of not giving sole power to one political party.

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john_r

Feb 03, 2013 at 17:01

This blog is politically deteriorating. Let's just agree that most people realise that Brown's period of economic stability caved in when he ran out of other peoples money to spend.

Can we get back to investment choices and the right of everyone to dig for gold.

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Peter Lihou

Feb 03, 2013 at 17:52

David, they did want Gordon Brown but he already had a job at the time.

John, GB ran out of money went the banks were bailed out. Something that any other chancellor would have done to avoid an even worse meltdown.

However, I do agree that this is now a long way from investment choices, so I'll hang up my hat and leave you to dig.

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David West

Feb 03, 2013 at 18:17

Peter

Just google "IMF Job Gordon Brown" You will see beyond any doubt that he wanted the job and campaigned for it. However, I agree that we should end this discussion.

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david kempton

Feb 04, 2013 at 05:13

Some good erudite comment and enjoyed reading. Thanks to all. Bear in mind I'm supposed to be 400 words and normally get about 600, so can't cover every issue in that.

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an elder one

Feb 04, 2013 at 11:30

I guess so, just when a debate was getting interesting, but we've gone beyond the bounds of Mr Kempton's essay I guess, but let's thank him for providing a stimulus and an opportunity to analyse our woes; if incompleted.

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William Phillips

Feb 04, 2013 at 13:06

Mr Kempton: Please don't let my warning about your choice of investment trusts get smothered by all this geopolitical chitchat.

See Feb. 1, 13.30.

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john_r

Feb 04, 2013 at 19:22

@William Phillips,

Nothing wrong to my mind in substituting high yielding Income Trusts for those top heavy bonds. I agree that capital growth won't be a driver in these particular choices but each trust has a credible 4.5% to 5.5%pa dividend to underpin its share price for more cautious investors.

But probably like you, my own preference is not for these heavyweights.

I prefer the nimbler mid caps of the uk as well as emerging markets where consistent high capital growth has been the order of the day albeit at higher risk. In my own case I hold Acorn Income Fund and First State Oriental Smaller Co's IT's. And for a heavyweight backup I've gone for a more international flavour with - Fundsmith.

Lets face it the the uk has not been an industrial growth area for many years while asian economies are generally booming. They are well educated, work hard and frankly they've never had it so good!.

Now many of our successful mid cap companies are chasing for a piece of that action ... and thankfully this government is backing industry to do just that.

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david kempton

Feb 05, 2013 at 06:34

Yes, all good funds which have done well, also with very good managers. It is hard for me to be all things to all men (and women), but do agree the merits of your own choice. I'm in Cape Town now at Mining Indaba, so hassled a bit and will have to close on this for now

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