It happened that the day the news brokeI was due to broadcast on the state of the market. It made a pleasant change to be able to report a sharp improvement in share values, but the real task was to explain toa lay audience what it was that had so enthused investors.
The truth was that it rather looked as though the support Mr Buffett was proposing hardly justified the kneejerk reaction of the bulls. Bear closing looked a more sustainable theory for the sharp rise in share prices.
Later that day, I was privileged to hear Alchemy’s Jon Moulton’s views on a wide variety of topics, including the parlous state of the banking sector. His were not words of comfort. Credit seems likely to remain in short supply for the foreseeable future, with all the knock-on effects that will have onthe Anglo-Saxon economies.
This is also the view of the authors of the Barclays Equity Gilt Study, which was also published last week. Given that it represents the bible for those investors who seek reassurance that equities remain the asset class of choice, its conclusions were remarkably downbeat. The golden years are behind us, with inflation bolstered by higher resource prices and central banks unable to provide stimulus through the traditional means of monetary easing.
Certainly, the Governor of the Bank of England is preparing us for tougher times ahead. He warned of the potential for living standards to drop as a rising cost of living bites into the populations spending capability. The S word – stagflation -is appearing more and more. It is at timeslike this that we welcome gestures, suchas that of Warren Buffett, because ofthe hope that they can engender.
What we may be witnessing is the surrendering of American power over the global economy. For years, the US has been borrowing too much and saving too little and has suffered from adverse balances on both trade and budgetary matters.
Contrast this with the savings ratio in China or the positive trade balance enjoyed by Russia. In the end, the piper has to be paid.
In the meantime, there are confusingand contradictory messages.
Bill Mott’s latest missive points to “real value in many areas of the UK market”.The Bradford & Bingley results last week suggest that times for mortgage lendersand borrowers are testing.
Last October, when the market made what we now know was a potential double top at over 6,700 for the FTSE 100 Index, I decidedI should go substantially liquid. I was talked out of taking precipitate action by a wily old broker who convincingly delivered all the bull arguments that have failed to sway investors during the past quarter. Efficient markets are correctly priced at any given moment, so it is judging what might bethe valuation setting criteria in the future that is necessary.
In the final analysis, I have no one to blame other than myself for missed opportunitiesor faulty judgments.
My fear is that the central banks lose control over monetary stimulation policies, as was the case in Japan in the 1990s. But if inflation is the real threat – and if the populous nations of the East do take up the consumers’ baton – then carefully selected equities will remain the place to be.
Brian Tora (firstname.lastname@example.org) is principal of The Tora Partnership