Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
Return to home page of contrary view or return to complete index
For information about our advice and services visit our main site
Last week we read not one but two stories by a well known economic pundit arguing that recovery is about to commence and the stock market is too gloomy. We beg to differ.
An elaborate argument revolves around continued high consumer spending in Britain and the US. It's the story of the twin speed economy. As the argument goes, consumers are still spending and capacity is falling, so the upturn must be about to appear. Inflation is also falling, therefore the upturn will be prolonged.
Consumer spending is the tail end of the great credit boom of the last five years. As jobs are lost and confidence goes, pressure on the housing market will ease, and consumer spending will fall away naturally. That spending was financed by massive borrowing on credit cards, personal loans, and bigger mortgages. Those debts have to be serviced! They will not be serviced by rising unemployment. So consumers are likely to cut back their spending as jobs are perceived to be more vulnerable.
Putting together the natural falling away of consumer spending and the cost of debt service, tells us that this recession has to go a lot deeper before there can be any sustained recovery. The woes of the "new economy" are spreading slowly to the "old economy" and will take another couple of years to infect property markets. Those are the natural lead times of a modern economy. The argument that "consumers are still spending" suggests a lack of understanding of the different lead times in the economic cycle.
Stock markets anticipate the future. They are a leading indicator, compared to the lagging indicators of unemployment and property market activity. Every opinion and thought anywhere is reflected in share prices. The market is your best guide to the future.
If you read past newsletters on our main site www.gilt.co.uk/news.htm you will find our forecasts that inflation will give way to deflation (see, for example, Newsletters 38 and 40 published in 1998). Even this point still escapes the understanding of this particular pundit. Our advice is that the next decade will see Britain and America joining Japan in a painful slide into deflation. That means less economic activity all round. Far from less inflation being a good thing, it is a very bad thing - Governments lose all ability to manage the economy with their traditional tools of fiscal and monetary policy.
Assertions that "the expansion is set to continue" are little more than moonshine. Of course, one expects moonshine from much of the investment community in a bear market. You can find any number of recommendations to "buy cheaply" alongside "this is not the time to sell". If you want to be wiped out, all you have to do is follow such advice. Bear market history is that share prices have to fall by between 75% and 90% before any lasting trend change can occur. We think the bottom end 90% loss is quite likely to occur.
You are welcome to quote or re-use this material, provided you acknowledge the source "www.contraryview.co.uk, published by Kauders Portfolio Management".
Return to home page of contrary view or return to complete index
For information about our advice and services visit our main site or click for contact details
WARNING: The firm can only be responsible for action taken on our advice given personally and specifically to be suitable for each individual. Statements on this site do not, on their own, constitute advice. Please note that UK regulatory requirements prevent us commenting on your existing investments or giving specific advice, unless you first sign one of our portfolio service agreements.
This advertisement has been approved by Kauders Portfolio Management, who are authorised and regulated by the Financial Services Authority in the conduct of investment business in the UK. Opinions and statistics are valid at time of publication but may differ later. We leave them on the site so that you can see how useful our point of view has been.
© Kauders Portfolio Management 2001