Financial Advice Enquiry
Investment Update Aug 2011
By Marco Pietropoli, 30th August 2011
It has been quite a while since my last blog. Business has been thankfully very busy. I have started recruiting again recently which is also taking a lot of my time in training. But we are getting there. The Wealth Management business is nicely stable and growing at a steady pace.
I am also planning my wedding in October, which is taking a huge amount of time.
I have been on TV quite a lot and I am enjoying being part of the discussion on the global economy. Recently did a book review about “Greece's Odious Debt” on Press TV which you can have a look at.
We have been working hard to look after client assets. The Investment portfolio has done really rather well over the last few weeks. Good to be different in this environment. We have been using a new platform for a relatively short while, so the charts don't go back that far. But we will aim to add to the performance page in months to come. We have benchmarked against the FTSE 100.
Medway Independent Financial Advisor
Earlier in the year we had taken profits on our Commodity and Precious Metal investments. We used the funds sold to build up quite a Short position in the FTSE 100 , this is now beginning to reward us. We also recently invested a not insignificant amount in a VIX fund (volatility index) which has done amazingly well. This investment seems to have been wonderfully timed.
We are doing another move at present and selling further our Precious Metals and starting to take profits from our VIX investment. It feels great to be taking profits when lots of people have recently taken a pounding.
I feel that we are now in a solid bear market for Equities. It has been a long time coming and quite a wait for those of us that were Short on the FTSE 100. But finally we are beginning to openly discuss the significant issues we face.
There is also a growing realisation that policy makers have used all their tools and there is not a huge amount more that can be done with monetary stimulus. Although, it is quite probable that there will be more money printed.
Fiscal consolidation, deleveraging and greater regulation of the banking industry will continue to be a drag on growth for a number of years.
Whether we like it or not, over the last few decades we have built up substantial global imbalances. These issues will not all be resolved quickly, but the real risk is of a disorderly re-correction in some of these imbalances.
I list some of the imbalances and problems we face as I seem them:
• There is far too much debt in the world. We have to face up to the fact that it is practically impossible that all of the money will be repaid. We have to right off some of the debt and deleverage.
• We have had an orgy of over consumption for years fuelled by excessive lending and the wrong sort of lending for decades. We have to now go through a period of less to rebalance the situation.
• The excessive leverage and the low interest rates have created asset bubbles especially in property. This has already been unwinding in some property markets like Dubai, Ireland, UK and the US but there may be a lot more to come especially in the Emerging Markets.
• The stupidly low interest rates are destroying savings and encouraging a speculative culture in Property, Equities and Commodities.
• Housing bubbles bursting and sovereign debt defaults are likely to cause more financial turmoil.
• The Euro is a destabilizing force in its current form. Either the Euro zone has further political and fiscal integration or there has to be a breakup of the Euro zone and only those economies that are truly aligned should remain in the single currency.
• The US and the many Western countries may not de able to get control of their public finances in a reasonable timeframe to be able to return on a sustainable growth path without defaults.
• A bloated Public sector and a benefits culture has combined with an aging demographic and a large welfare state to make the projections for pensions and healthcare totally unaffordable. This is the case in many Western Countries. Pension and welfare reform have been delayed for too long, but it would have been preferable to undertake the exercise when economic conditions were stronger.
• The banking system is out of control. These institutions have far too much power and have perpetuated a debt culture for their own gain. The cost of transactions and banking charges are totally disproportionate in the modern electronic age.
• Economic reforms and austerity measures may be difficult to implement if the banking system is not brought back into control.
• The Dollar as the global reserve currency is not sustainable. We are a long way from Bretton Woods and the US is now not the richest country, but it is the biggest debtor the world has ever known. The sums are staggering. A new global financial system will take a long time to formulate, achieve consensus and implement. The adjustment to a new system without significant pain may be difficult to achieve.
• China and many other Emerging Markets cannot continue to grow at a great pace simply on exports helped by devaluing against the Dollar. China is slowly appreciating its currency as it needs to control inflation.
• Emerging Market currencies are largely undervalued as many have been running trade surpluses for years. Whilst the Western countries have been running large current account deficits for years, fuelled by borrowing the money back from the Emerging Markets by selling them our government bonds. A sharp readjustment here could be quite dramatic.
• Interest rates have to be normalised so that there is value in saving money. The present situation of massively negative real interest rates cannot be maintained indefinitely or inflation will get totally out of control. It is very unfair on those that have saved their pennies and benefits and encourages too much leverage.
• If mainstream politics looks like it is unable to rescue the economic situation and return economies to a sustainable growth path, people will seek alternatives. Sharp political swifts to the extremes are likely in this very turbulent environment.
• Civil unrest and wars are also very likely when there is prolonged economic turmoil. The Middle East spring is a manifestation of this.
Asset volatility will continue to be sharp for a number of months/years until there is light at the end of the tunnel on at least some of these rather huge issues.
Politicians will blame speculators and try to impose bans on Shorting Equities and going Long on Commodities, but this will lead to further distortions and problems later.
As far as I'm concerned there is a point of principle here which goes back to the Magna Carta . This principle is that “I can do with my property what I wish to” (as long as it is legal). I should be free to buy or sell any investment or asset.
If policy makers continually devalue money you will get speculation, boom and bust in assets. This can be very destabilising.
I feel we are well prepared for what is to come.
London IFA | Portfolio Manager London | Wealth Managment | Wealth Investment | Investment Management London | Investment Manager London
