Turn your back on this market for an instant and you can find the mood dramatically changed.
Last week had shades of Armageddon re-emerging as investors dived for cover yet again. Quite what spooked
investors is far from clear, but there was a lot to choose from.
In Europe, rumours abounded that banks were still short of capital and, with the European Central Bank’s 12-month loans due for repayment at the end of June, fears of a funding crisis grew. On the other side of the world, a leading indicator suggested China’s growth had slowed dramatically.
True, the Leading Economic Indicator, published by the Conference Board in America, is new and was revised downwards after errors were admitted, but it caused markets to dip sharply.
Add to that all the concerns that a period of enforced austerity would tip the global economy back into recession and perhaps the nervousness that abounded becomes understandable. Certainly, with the FTSE 100 back below 5,000, it has become clear that equities have made no real progress over the past decade and a half. It does not really feel as though we have been treading water for such a length of time but the reality is that shares were certainly at their current level 13 years ago and, as long ago as 1993, stood at levels also seen within the last 18 months.
You have to question whether the cult of the equity is still alive. This is where I start to wonder whether we are seeing an inflection point, as Bill Mott might describe it, or if the change has already taken place and we are only now starting to recognise the fact.
I see enough scary macro research to realise that there are some very intelligent and experienced people out there who are admitting quite openly that they have not a clue what is going on.
What is clear is that much of the prosperity brought about by continued economic growth has been achieved only by excess borrowing.
Except that it did not feel excessive at the time. Indeed, obtaining goods on credit was what people did. Butwhen governments start building debt to keep their economies on course and maintain tax revenues (andhappy electorates), perhaps the game really did change. Reversing these trends will be difficult, painful and a lengthy process. This is really why investors are nervous.
They don’t know if it will work and whether the fabric of our financial society is up to handling the strain. And so gold remains in demand. Gold is more than a commodity – it represents money in its purest form.
While subject to changing conditions and perceptions, it can be considered a form of wealth that is immune to the follies of man – politicians in particular. When other asset classes, including currencies, look vulnerable to a drop in their valuation status, gold comes into its own.
But this revival in the fortunes of gold and the fall in the status of equities has been going on for some time.
How much further will it go? Meanwhile, at a time when governments are endeav – ouring to contain the size of the state in order to reduce
borrowing, government interference in the financial sector is on the increase.
I can understand why a new acronym is now going the rounds – Sirp, safety and income at a reasonable price. For the moment, nobody appears willing to take any big bets – other than in gold.
Brian Tora (brian.tora@ centaur.co.uk) is principal of the Tora Partnership