News & Analysis
21st Century Investing NOT Business As Usual
The challenges facing investors and investment professionals ... Personal investment is a goldmine for some but a minefield for most. The decade ahead is going to pose tough challenges for both personal investors and the investment professionals who serve them. There will always be some shares that deliver spectacular returns to their shareholders, just as there are always winners of the Grand National, but picking them can be very difficult. – Roger Bootle, UK Telegraph
Dominant Social Theme: It's a tough time in the markets but this too shall pass. Just don't do anything rash.
Free-Market Analysis: Fund manager Roger Bootle is back in the Telegraph with another article on investing (actually it appeared a few days ago) that predicts rather gloomily the upcoming difficulty in making decent returns in the ongoing low-inflation climate.
He explains that most investors are unrealistic because for the past 40 years, until fairly recently, "high" price inflation was normal and this allowed investors to achieve gains that at least looked good on paper even if at the end of the day, price inflation and taxes meant there was really very little profit at all. We'll note here by the way that Bootle does not (as most in the mainstream press do not), differentiate between price inflation and "real" monetary inflation, which is based on the quantity of money circulating in the larger markets. We do, though.
The larger difficulty that we have with these kinds of "investment analysis" articles is they completely overlook the large chaos that is taking place in Western society both economically and politically. Wherever once looks in the West (and the East as well) one is confronted by unusually challenging environments that seem to preclude business as usual.
Of course Western fund mangers thrive on business as usual, so it is no wonder that managers like Bootle return to paradigms that are profitable for them, even if they don't shed a lot of light on how radically different tomorrow's markets shall be from today's.
Bootle's main issue here is to deflate the idea that inflation is going to come to the rescue of performance. And by inflation, of course he means price inflation. In a higher-price inflation environment there are options other than equity markets. Price inflation provides a seemingly forgiving environment for investors. (It doesn't really because costs are going up everywhere, but it seems to anyway.) Higher rates boost profits in bonds and even in bank cash deposits. So investors have a broad panoply of potential investments that can provide fairly generous returns, even if they are only nominal.
But the bottom line for Bootle is not one focusing mechanically on price inflation. It one we have written about time and again and has to do with the proactive monetary polices that bankers will put in place once inflation begins to become a "problem."
If Western economies do recover as a result of the massive amount currency that has been stuffed into the larger markets – tens of trillions – really, incomprehensible and stupefying numbers, then central bankers will start to yank up interest rates hard. That will have a negative impact on the portfolios that people have assemble in the meantime. Here's how Bootle sums up his argument:
In a way, the modern investment management industry and the average private investor deserve each other. They are both too greedy. Over the next decade they will both have to learn to be less so. Investors will have to accept that getting 20pc, or even 10pc, returns is distinctly abnormal – unless you are taking huge risks. And the investment professionals will have to learn that earning huge fees from managing investments only makes sense if you add value by delivering above average performance ...
I suppose that it is possible that both could enjoy a respite as a result of a surge in the world's investment markets. But I doubt it. Although I don't buy the idea that emerging markets are caught up in a bubble, equally, equity markets there do not look cheap.
At least Bootle is not painting an over-optimistic picture of what may be expected in terms of investing over the next decade or so. But as we indicated at the beginning of this article, we don't think Bootle goes nearly far enough. He seems to believe that markets won't offer business-as-usual because price inflation has been tamed. We think investing is going to be difficult over the next decade because the world's markets (and the world itself) are going absolutely bonkers.
There already IS inflation built into the markets – tens of trillions has been pumped into the market. And all that currency, like a ticking bomb, is just waiting to explode into price inflation. It hasn't yet because demand for money remains relatively low and thus the velocity of money has not generated high prices. But unlike Bootle, we believe those high prices may arrive sooner rather than later, at least in some Western countries. Additionally, we should point out that significant price inflation HAS arrived. Western government figures are specifically designed not to notice it below a certain pain threshold.
The problem that markets will have is what Bootle points out toward the end of his article. If Western economies do get back on track, they will be promptly be stuffed down by central bankers desperate to drain money from the markets before all that currency begins to ignite hyperinflation. It is this that will keep markets in check over the next five to ten years. There is no doubt that markets have already been ignited to some extent by all the quantitative easing and pump priming going on. The problem is not low inflation per se but central bankers perpetuating an investment environment over time that will not be conducive to high returns, certainly not in the equity markets.
But there is a larger issue here. The dollar-reserve system is dead from our point of view and this is surely a more important issue than the state of price inflation in the Western world. We think a new currency will eventually make its début; one possibly linked to gold and perhaps silver. Meanwhile before that takes place gold could run up toward US$3000 and ounce and silver toward US$100 an ounce. These are investment trends that are far more important than the state of the market as regards price inflation.
We also are not nearly so optimistic that the motors of the current global economy will continue to function harmoniously over the next decade. We have noted in the other article today that the serial wars the West has embarked upon, along with the strange push of Western elites for increased global governance, is itself going to cause significant upheaval in the world over the next decade.
Not only that but there is bound to be pushback to these plans, enhanced by the availability of information (thanks to the internet) that was not to be found in the 20th century. The result could be a good deal of civil unrest not just in the developing world but in the West, too. We would argue it's already begun.
On top of elite turmoil caused by a move toward one-world government we believe that the world's current engines of prosperity – the BRICS – will begin to sputter if not fail. China, India and Brazil are all suffering from high price inflation already and it usually takes a fairly significant recession or depression to wring inflation out of the system. The eurozone, too, is unhealthy and we may see a fragmentation of the union or at least the euro in the near or not-so-very-near future.
Bootle is right to point out the reality of a low-inflation future, not necessarily because of stagnant economic growth but ironically because of excessive monetary stimulation that will demand that governments and bankers react with higher rates. The larger issues however have to do with what we believe is the ongoing collapse of the West's 20th century economic and financial system – and the determination of elites to pursue this loony goal of global government. These are the trends, not inflation that will pose the greatest challenges to investors in the 21st century. It will also provide some investors with terrific rewards, no matter the state of price inflation.
Conclusion: There are great challenges ahead. Investors who understand how to navigate them – and who also understand the potential price action of gold and silver – may do very well over the next five to ten years. The markets themselves in the narrowest sense of the word may not provide opportunity but there will be plenty of other venues that will offer significant upsides. There will be chaos, yes, and also opportunity.
Posted by Mark on 04/21/11 02:43 PM
When considering the history of money....
Capital needs to be apportioned between Savings and Investments. Dependent on the nature of the owner of capital, their objectives and age would determine their allocation to Savings as opposed to Investments.
Savings are by definition currencies. Many of them come in a paper variety and behave much like an isotope, continually losing half of their value, its just not known how long each half life is and its not at a constant rate. Gold and silver bullion are also currencies.
Everything else is an Investment.
If all of our older generation relatives came back to life and we were able to meet them the only method of being able to compare and contrast the relative value of any asset now compared to when they lived would not be through the eye of a dollar, euro or pound but by an ounce of gold. The ounce of gold is the closest measurement that we have to being a constant. It isnt a true constant as the total stock of gold increases over time but its the closest we have. We could then speak to our older geenrations and compare the value of our house for example as worth 'x' number of ounces of gold. All the generations would be able to compare and contrast the value of their house to current prices.
If we said that a house was worth 300000 pounds or 500000 dollars they would keel over and have another heart attack.
Many thanks for what you do.
Reply from The Daily Bell
Posted by Kriss on 04/21/11 01:05 PM
"At least Bootle is not painting an over-optimistic picture of what may be expected in terms of investing over the next decade or so. But as we indicated at the beginning of this article, we don't think Bootle goes nearly far enough. He seems to believe that markets won't offer business-as-usual because price inflation has been tamed. We think investing is going to be difficult over the next decade because the world's markets (and the world itself) are going absolutely bonkers."
YES the world does seem CRAZY and so do 90% of its human inhabitants !!!!! It is very very difficult to see any REAL SENSE in much of what appears to be happening.
Posted by Mountainview on 04/21/11 11:40 AM
That what tried Mr NotHaus with his Liberty Dollars but California judges punished him severely!
Posted by Bionic Mosquito on 04/21/11 11:33 AM
Agree with much of your comment.
I will caution on measuring value of investments in ounces rather than in currency units. There are times this might make sense, and times when it doesn't. After the last gold peak, at $800, then falling to below $300, if one's nominal portfolio stayed flat in currency terms, would they really be almost three times wealthier in 2000 than they were twenty years earlier?
For example, if one had $1 million cash in 1980 (equivalent to 1250 ounces of gold), and still had $1 million cash in 2000 (equivalent to 3300 ounces of gold), your calculation would say he was almost three times wealthier. Would he really be three times richer due to the fall in gold price? No, in fact given the price inflation in between, his dollars would be worth less in purchasing power; according to the BLS and "official" inflation statistics, in real terms his portfolio would have fallen by more than half.
Until it is gold that can be saved and spent as MONEY, taken by any shopkeeper as payment, with no legal tender or tax issues via government dictate, gold cannot be looked at as the denominator on a regular basis.
I am open to a different understanding on this, but for the moment I do not see it.
Posted by Mountainview on 04/21/11 11:06 AM
If you stick to the only term of productive investment the list becomes much smaller: Some technologic innovations, some pharmaceutical breakthroughs and investments in mining, exploring and cultivating rare commdities (given the demographics and wealth shift).
Government borrowing we should drop from the list as everything linked to it, including the scam banking system.
Your investment performance you should evaluate in gold ounces (not silver, its parabolic). Try to do it already today,ask your banker, it gives you a new completely new feeling of your portfolio.
PS: US and EU government debt is beyond the point of no return.
Posted by Bill Ross on 04/21/11 11:01 AM
JD: ""appalling cost" for freedom"
It must and, therefore will be paid because freedom IS ability to choose which ability to adapt to environment EQUALS survival.
So, the freedom question is: To be, or, not be?
You KNOW my CHOICE...
Posted by Bernie on 04/21/11 10:55 AM
Here is a good and very detailed article that makes the case for silver over gold:
Reply from The Daily Bell
Thanks for the link.
Posted by John Danforth on 04/21/11 10:42 AM
I was the one who wrote "appalling cost" of freedom.
Here's the scenario;
Government has succeeded in making over half the population dependent on handouts stolen from the productive (maybe including your own parents), and have destroyed the productive in the process. Their one claim to legitimacy is that you are heartless for claiming to own what you produce because you will starve out all those poor dependent people. And when the economy collapses because not enough people can or will produce any more, the same claim will be used to justify your direct enslavement under the whip and gun to keep feeding them. Their need is your duty to fulfill, no matter what, at the price of your freedom or maybe even your life. You will be told that your freedom is a small price to pay, they will make the cost of freedom unacceptable to most people. Their demands are humanitarian and are made at the point of a gun. They have a chokehold on food, energy, and transportation. They can starve YOU out like Stalin did. We aren't getting out of this pickle without some appalling costs.
Posted by Bionic Mosquito on 04/21/11 10:28 AM
"We think investing is going to be difficult over the next decade because the world's markets (and the world itself) are going absolutely bonkers."
This is quite so, and for the reasons DB mentions in the article. I will offer a few more reasons, for those not depressed enough....
1) Government borrowing is crowding out private investment. Private investment is the key to future returns, both financial returns and improved standard of living.
2) The ratio of non productive to productive is growing. I use the term non productive in a neutral manner, as there are both good and not so good reasons this category grows. Without productive, there are no returns.
3) Long term interest rate trends are probably the single biggest factor in determining profits from paper investments. The west has seen a decline in interest rates for 30 years, and it is a safe bet that rates are much closer to the bottom of this trend than the top.
4) Does anyone believe we will see LOWER tax rates in the coming decade?
5) Government debt must be sorted out. Some combination of outright default, restructuring, and inflation is in the cards. Pension plans and life insurance policies, to name but two groups, count on long term government debt to "pay." Either it won't pay, or the units paid will be worth significantly less in real terms.
"Investors who understand how to navigate them ‒ and who also understand the potential price action of gold and silver ‒ may do very well over the next five to ten years."
I think the only way to "do very well" is if one is wise enough to sell near the peak of the parabolic, assuming we see such a thing (perhaps what DB means by "understand the potential price action"). And this says nothing of the tax hit for all of the completely artificial gains due to the destruction of the fiat currency tax unit of measure.
Now one will retort "Yes, but if you bought at $300, you have made five times your money in 10 years." Yes, it's true. How many bought at $300? More importantly, do you sell today? Until you sell into funds used by the market, you have made nothing. And if you do sell, how do you know what those currency units will buy in the coming years?
Over the long run, they say an ounce of gold buys a good suit, and this is pre-tax. I think an appropriate long term view for those invested in gold and silver is a hope to break even in real terms; an insurance policy, if you will. Timing is everything, and not too many are good at it.
But DB is correct, there should be signs.
Posted by Thomas Molitor on 04/21/11 10:05 AM
World currency CDs
Inverse Interest Rate Funds
"The driving force behind the market is the profit-seeking speculator." -Mises in Human Action
This is the time to strap yourself in the fighting chair and exhibit the strength and endurance to pull out the big marlins.
Posted by Curious on 04/21/11 09:35 AM
@ Mountain View
Is there such a thing as an "appalling cost" for freedom? Especially when its the good ol' US? Anyway, the Chinese have zero income tax and, business being business, its their economy that booms. Wait and see what happens if and when the US does this.
Posted by Bill Ross on 04/21/11 09:25 AM
DB: "expected in terms of investing"
The KEY point. The future cannot be predicted because both those who enforce the rules and the measure of loss/gain ARE BONKERS. They are arbitrary rulers, unpredictable except they intend to profit at the expense of others (us). This is "rule of man" (historical destroyer of civilizations) and NOT "rule of law":
Click to view link
Of course, by consistent actions of predators in control, for all of history, the goal is to enslave the productive, which destroys the motivational economics of contributing to civilization (peaceful commerce for MUTUAL self-interest), collapsing civilization to anarchy and war of all, against all. The grim reaper of "Mathematics of Rule" PROVES that, when the productive are enslaved, stolen from or defrauded, productivity ENDS:
Click to view link
Then, another group of psychopaths takes control, with new pretexts for slavery. It has been like this, for all of history:
Click to view link
Now, YOU KNOW...
Posted by John Danforth on 04/21/11 09:19 AM
Of course, Atlas Shrugged was a fantasy in that there is no practical way to make a 'Galt's Gulch' (at least without having ICBM's for deterrence). It was intended as a warning, not prophecy. (I know you already knew this, I'm not preaching at you.) The 'happy days' are ending because nobody heeded the warning.
My point in raising the vision was to a) promote the book, and b) to point out that when it becomes pointless to generate wealth because it will be stolen from you and used to subjugate and destroy you, producers stop producing more than they need for basic survival, and this is a form of 'Atlas Shrugging'. Some of us can't or won't run. Brazilians and Chinese have no more reason to trust their governments than U.S. citizens do. The collapse of currencies and economies will likely be manifested as a crisis of governance as well. Reality will likely do what Ayn Rand tried to do: clarify the issues to the point of presenting a stark choice to everyone--freedom or slavery. With appalling costs for either choice. Hopefully we can inform enough people to make a difference.
Thanks for your insight. Your points about escaping jurisdictions (though risky) and a union of Atlases are well taken.
Posted by Mountainview on 04/21/11 08:54 AM
I have always a problem with Atlas Shrugged visions. The book was written in the happy days, when the US dominated easily the rest of the world.
Today John Galt has more options, he can go abroad, hire a excellent international tax lawyer and optimize his tax bill via fictive billing between subsidaries..
The common lad doesn't have these options an is fully in the hands of his rulers. So if only the US Atlas shrugs, the Brazilian (Chinese) Atlas has a laugh..
We need a union of Atlases...
The Swiss start to be worried about their Swissy stronger than Gold attitude...
Posted by Curious on 04/21/11 08:47 AM
Yo! Are you Russian?
Posted by Victor Barney on 04/21/11 08:40 AM
BD, Let me give you the heads-up: The New World Order that everybody always is talking about transends religion! It's called Marxism, and like Islam, which is specifically called the Beast in the book of Revelation(i.e., caliphate of Islamic countries); it is Anti-Christ in disposition! The Anti-Christ, unlike the "BEAST CALIPHATE" will ride the white horse in the UN to destroy anglo-saxon white men, or at least that is the plan. However, the two-witnesses will intervene for 3 1/2 years and they will call out a total of 288,000 persons in Amercia alive before the Anti-Christ using the white horse in the UN kills them? Who do you think will give each other presents when the Anti-Christ in the UN kills them?
Posted by Alexsemen on 04/21/11 08:14 AM
Your narative talent si genuin and huge !
How nice and eassy could and would be life following way of thinking.
I am convinced that is 100% possible , but way logical when could be absolutely wrong, why simple when is possible imbecile complicated !
Your first quality is that you give to the people the freedom of choice, as log the rest of system is an atrocyouse dictature of moron dogma's ! You set people free you reourne freely their human dignity !
Have a nice and happy Easter ! You deserved it !
Posted by Curious on 04/21/11 08:07 AM
In a sovereign debt crisis, it is Bond Holders who get wiped out. Buy Swiss gold, silver coins and stash till 2016. Don't tell anyone, especially government warriors, that you have a secret bank account. Otherwise it won't be secret anymore... ;)
Posted by John Danforth on 04/21/11 08:01 AM
The view from the industrial wastelands of America:
Precious metals are a way of saving value in the worldwide race to the bottom of currency defilement.
Sovereign debt is sold in the form of bonds (bondage). The promise of each bond is to collect the money to repay them from citizens at the point of a gun.
Here is what is coming in the government bond market:
It is beyond obvious that governments have broken the back of the productive sectors of their economies. The debt being issued now is uncollectable. Attempts to extract money to pay these bonds will result in further destruction of the activities that generate money to pay them. Governments know this. Governments are not in the business of paying down their debt, but instead are rolling the debt over and paying for it with issues of new debt, while borrowing and spending as fast as they can before the whole thing grinds to a halt. Cost of borrowing is being held artificially low by their central banks. The fuse of inflation has been lit, and once it takes off, central banks will have to raise interest rates, supposedly to stop Weimar-type hyperinflation. Governments, unwilling to stop spending, will be forced to offer higher interest rates to sell their bonds. By either or both mechanisms, a big jump in interest rates is coming, like a tsunami.
The hike in interest rates is not going to change the appetite of governments for money to spend. It is not going to help the productive sectors of the economies, either. It will leave them with one tool left in the toolbox: more counterfeiting (as in currency being counterfeit wealth).
I'm not an investor. I could be all wrong about all of this. I hope I am. I see a bond bubble collapse coming, probably with destruction of currencies, and the 'average investor', who is likely the working stiff with a 401K who has no control over his retirement savings, taking a "haircut" along with bondholders. If his account value goes up in numeric terms, any extra value will be stolen via taxes and inflation. Or simply confiscated to be put into a Social Security-type 'trust fund' (government-speak for 'you can't trust them and there are no funds'). Or the stock market will crash as people decide it is cheaper to cash out their retirement, pay the penalties, and buy physical metal. (When I did that with my paltry few thousand when I changed jobs, silver was appallingly high at $14/oz.) Or the stock market could crash when or if the flow of counterfeit wealth stops flowing directly from the printing press into the stock market via 'high-frequency' trading, which is where the criminal banks are skimming all their profits from now that they don't do banking any more.
The bottom line is, a lot of people are coming over to my view. My view is: It's Not My Debt. And I'm Not Paying It! It was incurred without my permission for the purpose of milking me like a cow and using the proceeds to rule over me. I'm not inclined to submit to the bondage embodied in those bonds. I'm not going to run on a treadmill only to have everything I produce stolen from me. This milk cow has gone dry. Atlas is Shrugging. NONE of my earnings are going into a completely rigged stock market as a wealth transfer mechanism to the banks that already stole all the real estate. If they want to play bondage with me, they'd better be good looking and wear high heels, otherwise, they won't find the submissive bottom they hope for when they come to collect.
Posted by Mountainview on 04/21/11 05:32 AM
Investing today is tricky. Ther is often a confusion between hiding from a debasing currency and investment.
Hiding from a debasing currency is for example buying Gold and Silver with US Dollars. Gold and Silver are non productive, They don't produce young gold or silver coins.
Investment is participation in real productive capital. If you buy shares or bonds of a company like Apple you participate in a process of real added value...
It turns tricky in the case of soverign debt...Is this investment in public services or a simple contribution to an unmanagable heep
of I don't know what? It depends probabely on the country?