May you live in interesting times                James Vinall 28Th May 2010<br />The old Chinese curse “may you live in in...
May you live in interesting times
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May you live in interesting times

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The old Chinese curse “may you live in interesting times” springs to mind. This means the old style of “buy and hold” is now being questioned as continual future long term growth can no longer be assured. Basically, all we can guarantee is volatility and taxes.

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May you live in interesting times

  1. 1. May you live in interesting times James Vinall 28Th May 2010<br />The old Chinese curse “may you live in interesting times” springs to mind.   Richard Russell wrote yesterday “these are the most dramatic times since World War II. For 65 years the world has been living it up on money that was not earned -- money that was created out of " nothing" or borrowed. Now it's pay-back time, and the world of entitlements and free lunches has run headlong into a stone wall. My three-word description of the picture ahead is this -- " the Fun's over." <br />2451735445770This means the old style of “buy and hold” is now being questioned as continual future long term growth can no longer be assured.  The resulting volatility means markets need to be traded cautiously and wisely.  If you look at the Nikkei 225 index chart below from 1984, you can see the massive “low interest rate - asset bubble” that burst in 1990.  <br />Following that ultimate peak at on the 4th January 1990, the Nikkei 225 fell by 63% over three years under a deflationary spiral.  The subsequent bounce back over the next 15 months was over 50%.  The range then traded from 23,000 in 1996 to 7,000 in 2009 and is currently 9,600.  <br />This is “economic uncertainty volatility” in the extreme and is what Europe and the USA should expect over the next decade.<br />Japan is a dreadful example of the economic ravages overburdening debt has on an economy.  At least Japan had its export industry and vast consumer savings to tide it over.  The UK and the PIIGS unfortunately enjoy neither, but the Price/Earnings ratios at the peak of the Japanese and NASDAQ market were way beyond the bubble height of the UK, Europe and the USA.<br />2617470131445<br />The two charts below compare the movements of the Nikkei 225 and NASDAQ Composite index following their debt driven, financial collapse from their ultimate peaks with the FTSE 100 and the S&P 500 now.<br />Some say we should start looking at the FTSE 100 and the S&P 500 from the 2000 “tech wreck” ultimate peak when Greenspan artificially lowered interest rates to transfer corporate debt to consumers to fight off the recession. This only postponed dealing with the debt and may have exacerbated the problem we have now (which is a stark warning to Greece and the ECB).<br />Others say we should start from 2007 when the current debt crisis started impacting the FTSE 100 and the S&P 500.<br />lefttop<br />Either way, the FTSE 100 and the S&P 500 have significantly rallied on the back of massive government stimulus packages. Compared to where the Nikkei 225 and NASDAQ were in their debt unwind cycle, the FTSE 100 and the S&P 500 look like a beacon of hope rather than a representation of reasonable future value.<br />The UK and the USA have already played their interest rate, bailout, and Quantitative Easing (QE) cards. The resultant growth has not materialised as this stimulus money has been spent deleveraging debt rather than investing in growth. <br />With Euro-land already immersed in quagmire, China battling its own unique set of problems, and Japan's record of fighting deflation not exactly enviable, who can the UK and the USA enlist to join in any future deflation fighting campaigns?<br />The Bank of England and the Federal Reserve Bank are likely to start printing money again soon in a fresh round of QE, especially as their government bonds are being bought. This is obviously inflationary which should benefit Index linked Gilt Bonds and US Treasury TIPS. As this is also likely to weaken the US$ and GBP, Gold should be a hedge against the further creation of fiat (paper backed) money.<br />Basically, all we can guarantee is volatility and taxes.<br />Best regards<br />James<br />

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