Morning:
8°c
Anthony Bolton, whose record as an investment manager is among the best in the land, thinks shares are cheap. He's old enough to remember the last full-blown crisis in 1974, and explains to those who can't that the market turned on a sixpence (for younger readers: a small silver-coloured coin worth 2½p), stranding those who kept boasting about how liquid they were as shares fell.
He's right, of course. From its low point of 146 on 5 January, 1975, the FT 30 share index doubled in six weeks. Well, that was then. As Bolton should also know, that index had fallen by two-thirds from its 1972 peak, and the dividend yield on the All-share index was 10%. The yield is currently under 5%, and that's on last year's bank dividends, which are now history. To match the 1974 bear market, the FTSE 100 would have to halve from here.
Yet there are important differences between these crises. In 1974, British industry was in the vice of the Doomsday machine; companies were taxed on the illusory profits from double-digit inflation. In extreme cases, they had too little cash left to buy the raw materials to stay in business. The folly was finally realised in the autumn statement of 1974, which changed the tax rules. It took time for the penny to drop, while to economy continued to get worse. But share prices had sensed the change in the economic weather many months before it arrived.
So are things bad enough today? The economic outlook is dire; we'll be lucky to escape a worse recession than in 1992, profits and dividends will disappear along with many jobs, and sterling is falling. But Bolton is not the only one calling the turn. Jonathan Compton has been almost suicidally gloomy in his investment bulletins for fund managers Bedlam, but he's changed his mind. The prospect of our savings soaring as we cut back spending has him singing in his bath. "October and November have very high odds of astonishing gains in global equity indices. Sentiment is at record lows and bank shocks have peaked. Fund managers are boasting about their high cash levels."
Bedlam, he adds, is fully invested, but with no financials, little property and "very low exposure to consumers." He favours large, low-growth companies which resisted the pressure to replace equity with debt from the same fund managers who are now dumping stocks which they fear are overborrowed.
In 1974, Britain's crisis was largely home grown. Today's is global, the result of the huge trade imbalances between producing and consuming nations that have built up over the last decade. The recapitalisation we're all paying for is needed to replace what the banks have lost in foolish loans made to people and businesses who simply spent the money.
The good news is that inflation will come rattling down. The Bank of England's fear that workers would demand big wage rises has not been realised.Private-sector workers are grateful to have a job, and greeted the blood-curdling threats from the public-sector unions at the TUC conference with hollow laughter. State employees are sitting pretty, with steady (if frequently worthless) jobs and index-linked pensions.
The world is not going to end, however much it might seem that way to shareholders in Royal Bank of Scotland or HBOS. Their shares are for gamblers only, although if yesterday's rescue means banks start to become rated on their earnings prospects rather than the likelihood they will survive, brave buyers during the downswings could make a great deal of money. Almost every big investor has cash, poised to invest in boring, well-capitalised shares, and confident that he can get in at, or immediately after, the turn.
Just as in January 1975, only one or two lucky ones will do so. The rest will be left to pick up what they can from holders whose enthusiasm to sell evaporates in a roar of rising prices. Between them, Bolton and Compton have over half a century of experience. This seems the time for the rest of us to exploit it.
Bank undertakers put GuestInvest to sleep
I've written before about Johnny Sandelson and GuestInvest, whose slogan "Make money while others sleep" adorns the sides of buses. He reckons he's an innocent victim of the credit crunch, thanks to panic stations at HBOS.
His company was part-owned and fully-financed by Bank of Scotland, and last week the bankers pulled the plug. The financial undertakers have moved in on BoS's eclectic mishmash of loans, minority stakes and joint ventures, but putting Sandelson's business into administration may not be their best move. He's sold most of the 157 rooms in his new hotel, The Nest near Paddington station, for between £250,000 and £450,000 each. He says the buyers' money is safely held in escrow.
The development is late and over budget, but is now 95% complete, and Sandelson is now competing with others to buy back the farm. If he does so, his new slogan could be: "I made money while the bankers were asleep."
Beware of Greeks bearing promises
Government guarantees are fine, provided the governments giving the guarantees are considered creditworthy. Reassuring domestic savers can come at the price of scaring foreign holders of the currency, even when it's the single currency. The Greek government's promise to its bank savers is reflected in a jump in the premium the country has to pay for borrowing.
In theory, a Greek 10-year sovereign bond is as valuable as one issued by the Bundesbank, but the Greeks are now having to pay 0.88% more for 10-year money, reflecting the rising possibility that the euro zone won't survive intact until 2018. Given the beggar-my-neighbour response of most of Europe's leaders to the financial storm, it's surprising the gap isn't wider.
In America, where they print greenbacks instead of euros, you haven't been able to swap paper for gold for years, and now you can't even buy American eagle half-ounce coins. The buyers have cleaned out the US Mint's gold supplies.
Meanwhile, as if to show how strange the monetary weather is nowadays, the Japanese central bank has cancelled an issue of index-linked bonds because of lack of interest. Its conventional 10-year bonds yield just 1.4%, and it was prepared to pay 2.25% for an index-linker. In other words, investors decided Japanese retail prices will fall by more than 0.85% a year for the next decade. Of course, it could never happen here...
Adair say this'll never happen
This week's nutty slack award goes to the Government's Climate Change Committee under Lord Adair Turner, who I greatly fear has allowed his day job at the FSA to distract him from clear thinking about the far future.
He wants us to cut down our carbon emissions by 80% by 2050, and has now decided this must include planes and ships. If nobody can invent the water-powered plane, that's just too bad.
These planet savers show admirable tenacity, even if it's not obvious which planet they're on.
The idea that the credit crunch will help develop alternative energy sources is economically illiterate, since the process of replacing fossil fuels will be slow, expensive, and driven by high oil prices, not Brownian motion.
Unfortunately, the global recession will send oil down in price, not up, and we won't have any money to spend on blue sky projects. Fortunately for Turner, he's likely to be past caring by 2050.
