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Last weekend another story appeared on the theme that the outlook for Gilts is black. The story focussed on the likelihood of increased supply of Gilts to pay for the Chancellor's overspending. Nowhere was any mention made of demand. There was no reference to the shortfalls in occupational pensions, which will one day cause trustees to run for safety rather than risk increasing the said shortfalls. There was no consideration of the possibility that equities will turn down again once the cyclical bear market resumes, with all that such a downturn implies for a renewed flight to quality. There was no mention of the deflationary forces still ripping through the global economy, demonstrated this week by further downturns in the inflation rate in both the UK and US.
Opinion pieces such as this depend on assertions that cannot be proved. Consider this typical statement:-"The tide of red ink .. will swamp institutional demand". No proof was offered, because none was possible. Figures were quoted in isolation, with unfortunate results. For example, 2003 has seen a major bear market rally, one that has now almost certainly run its course. Quoting performance figures that show a rising stock market and indifferent Gilts performance, without the qualification that 2003 was a bear market rally year, not typical of 2000, 2001, 2002, or many years yet to come, is not allowed for investment advisers. So why should pundits get away with selective use of statistics?
Indeed, the very statement that "gilts remain very poor value" is itself false. If investment A goes up by 17% and investment B by 1% then A becomes worse value than B compared to the outset. The mentality that A becomes better because it costs more is what drove people to buy the "new economy" when they should have been selling it. The idea is to SELL something that has gone up, not BUY it.
This opinion-editorial is actually valuable to you, the investor. For only examining part of the picture, this was the ultimate contrarian signal. The only way to read it is as proof that a major turning point is upon us.
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© Kauders Portfolio Management 2003