Author: Lolly Ramlaul

Where are the markets heading?

If markets were like coin tosses (or perfectly efficient), you’d expect a two standard deviation event to happen every 44 years, says Grantham. As it stands, GMO reckons they happen in markets every 35 years. That makes sense if you believe that investors are not as narrowly rational as they’re cracked up to be, and that emotion-led manias are regular occurrences.

Now, however, we’ve gone even beyond the “normal” bubble. Instead, says Grantham, the US specifically is in a “super bubble”, having moved three standard deviations from the trend.

This is the sort of thing that should only happen once every 100 years. It’s not quite that rare, but Grantham reckons it’s only been seen on five other occasions: US stocks in 1929 and 2000 (the tech bubble); US housing in 2006; plus Japanese stocks and property in the late 1980s.

“All five of these greatest of all bubbles fell all the way back to the trend.” Grantham notes that if the S&P 500 does the same from here, it could end up dropping to 2,500 (it’s currently around 4,500).

First, as I always say, don’t panic. Apart from anything else, why would you? You’re sensible enough to be diversified. Diversification is key to smooth out any increase in inflation and market corrections. Ensure that your portfolio reflects your strategy and investment goals.

Money Week

UK after Brexit

Life is about choosing between alternatives and trade-offs. Brexit may only be marginally better than remaining in the EU. And it may take a long time to reveal this divergence.

To explain my point, consider this: I sort of doubt that UK politicians rank dramatically higher than EU politicians in the eyes of the public. And still, that small difference may matter.

Similarly, the UK hasn’t embraced the sorts of policies which will deliver all the benefits Brexit puts on offer for us. But it has adopted some of them.

Enough theory though – today’s message is that the benefits of Brexit are already emerging. The evidence is coming in. And it is adding up.

The first example comes from the OECD, which expects the UK to be the fastest growing economy in the G7 in 2021 – the year of Brexit!

It’s performing so well that, “Bank of England First Among Major Central Banks to Raise Rates” reported Barrons.

Notice the word “major” there. Those who see the UK as a “little England” that cannot compete on the global stage… well, why can our central bank be called “major” then?

But that’s not the point here. The point is that the UK economy recovered faster than others, requiring tighter monetary policy to rein in its recovery earlier than others. Or, as the International Monetary Fund (IMF) warned, “demand was too strong in the economy”.

And that divergence is set to continue. The IMF and Goldman Sachs have the UK outgrowing the G7 and other developed economies around the world, and the broader EU too, in 2022.

In fact, it’s set to grow faster than China. It’s also set to grow faster than US President Joe Biden’s stimulus flooded United States, not to mention faster than the euro area.

It’s no wonder an Ipsos MORI poll had rejoiner sentiment at just 24%, with 34% believing that Brexit had been the right choice.

Fortune & Freedom

Why is US Inflation at a 40-year high?

Markets spent most of last week awaiting the latest US inflation figures with bated breath. Turns out that in November, US consumer prices rose by 6.8% year-on-year. That’s the highest level seen in nearly 40 years.

If you’d been told this time last year that inflation would hit a near-40-year high in the US (and in lots of other places) by the end of 2021, you might imagine a number of scenarios.

So I still think that the market is underestimating the odds of a much more inflationary outcome here. What do you do? Same as we’ve been suggesting for a while: buy cheap stuff, hold gold, make sure there’s cash to hand for capitalising on opportunities as and when they arise.

You might imagine that the US Federal Reserve and other global central banks would have stopped printing money. You might imagine that the more overvalued markets might have crashed. You might imagine that bond yields would have risen significantly. The market reaction reads more to me as though investors are still hoping for a Goldilocks-style outcome. You’ll get a slow but steady shift higher in interest rates. The cycle will peak earlier than before but so will inflation – particularly if supply chains start to clear. And so it’s worth reining in bets on the more loopy stuff, but no point in betting on spiking yields or collapsing stock markets.

Money Morning

Is there a House price bubble coming?

House prices in the UK were up by 8.2% year-on-year in November. And up 3.4% on the quarter (the fastest such growth since 2006).

Housing bubbles cripple an economy when they burst. And unlike every other investment bubble, they leave no legacy of cheap infrastructure on which to build a future boom. 

They just leave indebted, possibly homeless individuals; bankrupt housebuilders; and a devastated financial system which then wreaks havoc on every other sector. 

But it’s not just the eventual bust that’s a problem. The boom is rubbish too. A lack of cheap housing makes it harder for people to move for work. It makes it harder to start a family. And it adds to the feeling that we live in an unfair society.

What is driving this near-global boom is low interest rates and cheap credit. And  the thing to remember about the housing market is that it lags behind moves in the Bank of England rate (assuming that even moves). 

If you’re buying or remortgaging, just make sure you can afford it and lock in the longest cheapest fix that makes sense for you (within reason). Beyond that, don’t put all your eggs in one basket.

Money Week