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We are in a Brave New World.
By Marco Pietropoli, 15th October 2010
The following is market and economic commentary. This is not general advice that should be acted upon unless you have the appropriate understanding of investments. We recommend that you seek Independent Investment Advice from a regulated professional.
It has been a while since my last blog. I have moved home and the back office to Kent. A little weird to be out of London after 17 years, but I am looking forward to a new life in the country.
Medway Independent Financial Advisor
We are in a brave new world! This blog is somewhat tongue in cheek, but the points are very relevant to the situation we are in.
• Since 1900 to May 2010 (i.e. about 110 years) the Dow Jones Industrial Average has given investors an annual real return of 3.22% after taking inflation into account. We should not expect similar returns from now on. Investors should expect annual real returns of more than 30-50% from now on as economic growth is going to far greater moving forward.
• Equity markets are not a pricing mechanism to reflect to fundamentals of the underlying economies. They are a gambling casino. Investment decisions should not be based on economic data as this is fundamentally irrelevant.
• Investors will always accept negative real returns on Government Bonds and on Cash.
• Money is no longer a way of storing wealth but it is simply units for leverage.
• Central Banks are there to print money in order to prop up asset prices and devalue currencies. Long term stability of currencies is irrelevant, as short-term political gains are far more important.
• We should never deal with our problems upfront. We should push the problems onto future generations as they will be far better at dealing with our mistakes.
• Saving is old hat. Borrowing as much as you can to spend on discretionary goods is the way to go. The more we borrow and spend the better the long term prospects for the economy.
• An even better tactic is to borrow to invest in assets, as this is the way to generate long term wealth without needing to have any upfront investment. High leverage to invest in property is by far the best option as it is a historical fact that property prices always go up.
• Borrowing as much as possible on a variable when interest rates are at historical lows is a safe bet and governments should encourage this because economic growth depends on people being geared up to their eye balls.
• Interest rates will never rise, even if inflation gets out of control.
• Governments should continue to borrow endlessly to pay for economic growth (anyone who thinks that the forthcoming cuts in UK government spending will reduce the national debt is delusional – the national debt will continue to rise during the term of this coalition government).
• Fiscal stimulus should focus on rescuing a few large companies, not on creating jobs and having a real multiplying effect. Politicians are there to help their friends in the financial sector and not to create jobs for the masses.
• Keynesian economics is not based on putting money aside in the good times to then spend in a downturn to stimulate growth. Governments should continue to borrow throughout the economic cycle. This will create long-term stable conditions.
• Governments and Central Banks should always encourage asset bubbles as this is great news for investors.
• Governments should control what investors can purchase and short. This creates stability and properly functioning markets in the long run.
• Banks should never be allowed to fail. It is fundamentally important that bankers keep receiving their bonuses so that they can buy their Ferraris. This will stimulate real growth for all in the long run.
• Financial institutions should be a law unto themselves. They should be able to charge whatever they want for transactions. They should be able to borrow at next to nothing from Central Banks and lend money with a huge mark up. Banks with large profits are fundamental to a healthy economy.
• “Too big to fail” should be encouraged in all sectors, not just in the Financials. It is important that we allow companies to hold governments to ransom. Oligopolies are fundamental to a healthy economy.
• Banks should be allowed to borrow cheaply from Central Banks so that they can gamble on the markets and create great profits.
• The world doesn't need a stable reserve currency. The weaker the reserve currency is, the greater the economic prospects.
• Commodities should never be part of any standard asset allocation model as they are irrelevant for investors.
• Inflation statistics should not reflect what people actually spend their money on. CPI and RPI are propaganda tools to justify government and Central Bank policies.
• High inflation is good news for all, especially is wages are flat.
• A weak currency is good news if you are an importing nation.
• We should always focus on having capitalism on the upside and socialism on the downside. This will lead to long term social stability.
• We “rich” Western countries will continue to have negative trade balances forever. Emerging Markets will always allow us to borrow the money back so we can carry on buying their products.
• Economic downturns should never happen and governments should always try and prevent them even if it means bankrupting the country and destroying the value of currencies.
• Competitive currency devaluation is the way to go. This will lead to long-term stability and a great international trading environment.
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