If you occasionally like me follow the markets, from 8am to the close in New York and much to the annoyance of one’s family as this habit is hard to break even whilst on holiday, you will have noticed that last week a few hundred billion had been wiped off the value of shares. This cannot be ignored, although such stomach churning events such as a war or a country in financial trouble is now common place, but as it directly (by destroying your ISA or pension valuation) or indirectly (through just making the world a more dangerous place) affects you wouldn’t it be nice to actually understand why?
Most of you reading this column will have had a negative experience in the last 7 days and perhaps are feeling quite down, whilst others of you who hadn’t ventured back into investing since 2009 and watched the rises are feeling a tad smug.
Whoever you are and whatever financial position you’re in, I bet you don’t really know what is going on or how the whole financial crisis will pan out, as like me you may have strong thoughts and opinions and perhaps even an academic background in economics, but make no mistake we are in unchartered territory
The European single currency experiment in my opinion will never work effectively to the benefit of all its members and the inability of Greece, Spain and Italy to service the debts accumulated in the last 10 years is coming to the fore. So there is a problem as to how to unleash the weaker countries from the shackles of centrally set interest rates and the inability to compete in the export market.
Add to the European woes, a credit rating downgrade for the US from AAA to AA+ after the stock market closed last Friday and the investment mix now turns extremely toxic. In normal circumstances this would mean that America would now have to pay more money to fund its debt, i.e. new issues will pay more to replace maturing bonds as well as social security benefits and the various wars it’s currently involved in, but in reality I think this event is as much politically motivated as substantive, so I’m not too concerned about it just yet.
“So what is the way out?”I hear you ask and I would like to say that it’s likely that the authorities will lower interest rates, stimulate the economy and therefore generate more tax revenues, but “no”we can’t do that as this was attempted last time and it didn’t work.
Quantitative easing, whereby the central banks create currency to buy back government bonds and where the resultant cash can be pumped into the economy to kick start business and create employment, also seems a credible idea, but again it’s been used and hasn’t worked.With Western governments so bereft of ideas and an unwillingness to implement unpalatable measures in terms of spending cuts and labour reforms the future does genuinely look grim.
I have been chastised by my wife for being a bit down beat and at times sensational when writing over the last few years, but this phase of economic turbulence that we are heading into is far worse that what we had in 2008 when Lehman Brothers collapsed.
In 2008 I wrote in this that I thought Northern Rock would collapse due to its lending practices and that HBoS was in severe trouble and later when all this came true, that I had considered stocking up on fresh water and tins of baked beans, as I could imagine people rioting when trying to withdraw cash from machines and not being able to.
Oh how my wife laughed, until a year ago when we were at a party hosted by a very senior lady in the finance sector who recalled the story of how the Army was on standby the weekend the government were arranging a bailout of RBS; I just passed a knowing glance as I sipped from my champagne flute and into the eyes of my dear wife.
Having provided you with a very bad picture of what is happening and the manner in which I can’t see a pleasant outcome or solution to the current crisis, I again will reiterate my offer to any imminent economist reading this, in that I will buy them a very expensive lunch if they can provide me with an explanation as to how the governments of Europe and the US will find a way out of the current mess.
So finally, the facts are starting to hit home and if you remember the last time we all hid under our duvets and financial advisers considered going back to former jobs as double glazing salesmen and second hand car dealers, but I also think a sense of calm and perspective is needed, as no one likes losing money.
Many clients of mine thankfully have larger cash reserves and that their exposure to equity and bond markets, are in fact a small proportion of their wealth. Many have been underweight equities since 2008, missing the phenomenal gains of say the emerging markets funds, but through my “call to cash”in November they avoided the 50% plus falls.
There isn’t a generic way of dealing with such shocks as people have different needs and objectives, not to mention risk profiles, but I don’t mind telling you what I’m going to do, being a medium risk person, with three shares in my pension and 90% in cash. As soon as the FTSE 100 goes below 4800, I will be buying back into the markets, but there’s no rush to do this.
The key to making it through this current bout of volatility is to remain focused and if you believed in what you were invested in 2 weeks ago think about why you wouldn’t be now and if from what you read does the thought of selling make sense. Remember that private investors normally buy high and sell low. If this is you try doing something else
with your time rather than watching Yahoo finance with its 15 minute delayed prices and go for a bike ride, as you know what you’ll feel much better for it!