Biggest bubble is about to burst


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The biggest bubble that is about to burst considers the bubble is risk aversion. Bonds is taking more money now that has been seen since 2007 however this doesn't reflect the reality of what is happening. Investors are like sheep and need to leave the party.

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Biggest bubble is about to burst

  1. 1. We don’t get sucked into bubbles – do we? “The biggest bubble since the TNT bubble WILL BURST”
  2. 2. The Biggest Bubble is about to burst  There is a big bubble in investments and investors are doing nothing  We know the party is over  We know the bubble will burst  The only thing we don’t know is when
  3. 3. Introduction  Of course rational investors don’t create bubbles:  Tulip Mania 1636 – 1637  Wall Street 1927 – 1929  Japan 1982 – 1989  Dot Com 1997 – 2000  US Housing Market – 2007 – 2008
  4. 4. “At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble” Investors are swayed by recent events i.e. investors are not rational and make decisions based on biases, not logic……
  5. 5. Why bubbles? Why bubbles?  Over optimism – people believe they are better than they really are  Illusion of control – people believe they will know when to get out  Self serving bias – people believe what they want to believe  Inattentional blindness – people don’t pay attention to what they are not looking for
  6. 6. Blindness  Investors have risk aversion, everything we are told tells us that cash and bonds are safe assets  We are told that equities over the last ten years have underperformed equities  Retirement forces us to move to safe assets where there is no risk
  7. 7. The Facts Bubbles are a by product of human behaviour, they have the same pattern  Change in circumstance – internet creation  Credit creation – finance available  Euphoric – mania  Financial distress  Revulsion They will continue to happen because its who we are…
  8. 8. The Facts  FT Money – investors are in no hurry to rotate from bonds to equities  You Gov Survey shows 71% of those asked wouldn’t be prepared to take any risk with their money  Bonds have delivered over the last ten years but growth does not correspond to the gilt yield, it will correct
  9. 9. The Facts  Actual returns over last ten years – FTSE All Share 132%, Gilt Bonds 49% and Gilts 56% - have bonds out performed equities?  Difference is that equities have been more volatile than bonds but that could change  Cash is DEAD and there is no life support machine for some time to come
  10. 10. The Facts  Cash:  Between 1992 and 1997 inflation was 14.9%, the Halifax Liquid Gold account paid 16.4%  Between 2007 and 2012 inflation was 16.5%, the Halifax Liquid Gold account paid 0.8%  Interest paid to savers fell by £5 billion in the last five years and will keep on falling
  11. 11.  Interest rates are unlikely to change until 2017 and the banks will not be in a hurry to pass those increases to savers, so savers have to accept a long period of poor rates  The new BoE Governor has clearly indicated his focus is on growth and not inflation, inflation is only going one way  Cash can no long be seen to deliver income and inflation protection Inflation, inflation, inflation
  12. 12.  Maybe 30 years ago we reached retirement and died, this is now unlikely to happen  Average person will live twenty plus years in retirement  Investors need to stop being sheep Retirement, Retirement, Retirement
  13. 13.  2012 equity funds suffered outflows of Eur 6.8 billion  Bond funds took Eur 176.5 billion in 2012, highest level since 2007  In fact bond funds captured 10 times the inflows in 2012 than they did between 2007 and 2011 combined Be a contrarian investor
  14. 14.  THE PARTY IS OVER – but investors are reluctant to leave  Investors are fearful to leave the bubble they are sitting in – the bubble is one of risk aversion  Its not if, its when the bubble bursts and it will be messy Be a contrarian investor
  15. 15.  Investors have to accept they are all ready taking a risk with their money  Crucial that assets are diversified  Important that investors don’t follow the herd and look harder and deeper to get growth and income  Investors need to accept changes to retirement and that investing is a lifetime option How to react
  16. 16.  Research, research, research i.e. investors shouldn’t just accept an investment, they should break it before they invest in it  Consider globally away from the noise – consider changes to political landscape in Japan, what does that mean are there opportunities. If global bonds are dead where are there options for bond investments. Emerging markets is China really dead or is there more to come. Resources what will be the winners for example agriculture etc etc etc  And finally be contrarian, be brave and hold your nerve How to react