Becoming more bearish

itwasntme001

I also think central banks and government officials have been completely reckless with their policies.  When you have central banks doing what they have done, you are going to blow bubbles.  And bubbles will pop sooner or later - and usually they will have consequences (wealth effect in reverse).  All this goes back to Greenspan - give into market pressures and keep easy money going.  Keeping zombie companies afloat, debt levels high and you have a recipe of a massive miss-allocaiton of capital.  If they had done the right thing from day 1, we would be seeing real growth for the last 20 years that would raise the living standards for all of us in a sustainable way.

Alexland

itwasntme001 said:

I can't see how financial assets (equities and bonds) can deliver a +ve real returns long term under this scenario - you will have bonds and growth stocks suffer due to rising yields (I doubt growth stocks will boost earnings growth by enough to compensate for the rising yields - e.g. Amazon, Tesla, bond proxies like consumer staples will have more competition over time) and value stocks suffer from a weak economy and too much debt (both in the economy generally and value stocks tend to have more debt).

It reminds me of a recent comment from Tom Slater of SMT that "many, if not most, investments won’t turn out as we hope". While I remain optimistic that equities will still provide a modest long term return above inflation I am derisking with excess contributions such that perhaps my plans eventually won't require more than an inflation level of return. A below inflation return would be a real problem for everyone. Maybe one factor is that investment strategies have now become so well understood they no longer carry enough long term risk to justify the reward? Or that the market is not expanding enough to meet demand due to shrinkage caused by buybacks etc? While many companies will suffer increasing competition those with strong moats setting high barriers to entry should provide some protection.

itwasntme001

Alexland said:

itwasntme001 said:

I can't see how financial assets (equities and bonds) can deliver a +ve real returns long term under this scenario - you will have bonds and growth stocks suffer due to rising yields (I doubt growth stocks will boost earnings growth by enough to compensate for the rising yields - e.g. Amazon, Tesla, bond proxies like consumer staples will have more competition over time) and value stocks suffer from a weak economy and too much debt (both in the economy generally and value stocks tend to have more debt).

It reminds me of a recent comment from Tom Slater of SMT that "many, if not most, investments won’t turn out as we hope". While I remain optimistic that equities will still provide a modest long term return above inflation I am derisking with excess contributions such that perhaps my plans eventually won't require more than an inflation level of return. A below inflation return would be a real problem for everyone. Maybe one factor is that investment strategies have now become so well understood they no longer carry enough long term risk to justify the reward? Or that the market is not expanding enough to meet demand due to shrinkage caused by buybacks etc? While many companies will suffer increasing competition those with strong moats setting high barriers to entry should provide some protection.

Yes I agree with all this.  It doesn't make sense to materially change asset allocation (especially if you have a multi-decade time horizon) but perhaps gradual steps to reduce a bit (by allocating new money to more defensive funds - something I am doing).  Buybacks funded by debt and almost perfect competition in investing due to the availability of information are certainly problematic for longer term returns.  So owning a concentrated portfolio of high moat companies as you say along with defensive assets may work well and better in a more competitive world.

I own SMT and have reduced some due to it being over-bearing but still hold a sizeable holding for the long term.  I also hold quite a lot of tech which I don't plan to sell either.  But at some point even high moat companies become over-valued and everything and then some is priced in.  Especially if anti-trust regulations are taken more seriously.

I think the key to all this is that the real economy is suffering and has done so for quite some time.  This goes hand in hand with the wealth inequality we have seen.  At some point this will become problematic enough that financial capital will have to take the hit in some form.  And I suspect that is the point to be bearish for the longer term.

Notepad_Phil

Alexland said:

... While I remain optimistic that equities will still provide a modest long term return above inflation I am derisking with excess contributions such that perhaps my plans eventually won't require more than an inflation level of return. A below inflation return would be a real problem for everyone. ...

One of the things I did before deciding that I could early retire was to check that we could copy with our investments initially falling by 50% and then only return an inflation level return from then on. Certainly I'll be happier if the markets long term real returns stay at around their long term average, but it's nice to know that we wouldn't be destitute should the next 40 years be completely different to historical returns.

dunroving

Notepad_Phil said:

Alexland said:

... While I remain optimistic that equities will still provide a modest long term return above inflation I am derisking with excess contributions such that perhaps my plans eventually won't require more than an inflation level of return. A below inflation return would be a real problem for everyone. ...

One of the things I did before deciding that I could early retire was to check that we could copy with our investments initially falling by 50% and then only return an inflation level return from then on. Certainly I'll be happier if the markets long term real returns stay at around their long term average, but it's nice to know that we wouldn't be destitute should the next 40 years be completely different to historical returns.

I think your post highlights the different mindset "in retirement" (or "imminent retirement"), to "pre-retirement" (especially, "way pre-retirement"). When I was in the latter phase, especially more than 5-10 years before retirement, bumps in the road were kind of a "meh" event - "meh, the bumps will even out between now and retirement; besides, I'll be getting equities cheaply at the moment".

Although when you're in retirement, you could still say, "meh" ("meh; hopefully I'll be alive for at least another 10-20 years, during which time the bumps will even out"), and apply the same long-term outlook to at least a portion of your investments, it's more necessary to fine-tune your proportion of equity types X, Y, and Z. My reading of a lot of the comments on this forum and in the media goes along the lines of, "stocks and shares are due for a bumpy ride, and we may be approaching a bubble bursting; bonds are yesterday's news as a low-risk, moderate return investment; and cash returns are almost nil so won't beat inflation". I know there are other investments (gold, for example), these are the three I am most familiar with and have invested in up to now. I'm in a quandary what to do, in between FOMO (Fear of Missing Out on the ongoing rise in stocks), and FOAIC (Fear Of An Imminent Crash). Mind you, as long as the equity markets don't go absolutely to Hell in a handcart, my gut tells me that even if there's a drop, it can't be as bad as March-May of last year. I feel like I really dodged a bullet in terms of being about 40% up on where I was in March.

ETA: Just as an FYI, I am about 55% in "stocks and shares funds", 26% in "bond funds", and 19% in "cash" (premium bonds).

Alexland

itwasntme001 said:

I own SMT and have reduced some due to it being over-bearing but still hold a sizeable holding for the long term.  I also hold quite a lot of tech which I don't plan to sell either.  But at some point even high moat companies become over-valued and everything and then some is priced in.  Especially if anti-trust regulations are taken more seriously.

Yes I think that's the problem as the obvious strong global companies held in Lindsell Train, Fundsmith, etc have been underperforming since the market quietly rotated from growth into cyclical shares last summer. The consensus seems to be that we are now at the start of a new cycle (rather than still at the end of the last one...) and perhaps the pandemic saved us from a deeper and longer drop in share prices that was about to happen.

There's an argument that quality companies were just undervalued in the first place and now they have been valued more correctly their future returns will be less attractive. Fundsmith's outperformance lasted a bit longer than Lindsell Train as the companies it held were better suited to the pandemic but I see today they are both showing a YTD loss and underperformance in the second half of 2020. Maybe some of that is that they didn't have as much scope to recover as they didn't crash so badly in the first half.

With SMT the pandemic also accelerated a lot of future returns but their undiversified style risks Ballie Gifford going from "having everything looking brilliant to suddenly having a tougher patch across a number of products". Still impressive returns for those that didn't rebalance their portfolios for the past decade.

https://citywire.co.uk/investment-trust-insider/news/baillie-gifford-hold-or-fold-is-it-time-to-pocket-huge-gains/a1449013

Even if cyclicals and value are going to do well in the next few years I don't really want to go too deep into them which is why I decided that CTY wasn't for me despite wanting to own it for years and making a small profit. Similar to Bitcoin I am becoming more picky on what I want to own even if that means there are times when I won't get the best returns. Maybe that's just frivolous indulgence.

It might even be a good couple of years to 'stock up' on better quality companies while they will be at more reasonable prices for their long term prospects? Although buying into 'bond proxies' might be unattractive with rising interest rates some of them have enough pricing power to manage that situation.

MichelleN

Alexland said:

itwasntme001 said:

I own SMT and have reduced some due to it being over-bearing but still hold a sizeable holding for the long term.  I also hold quite a lot of tech which I don't plan to sell either.  But at some point even high moat companies become over-valued and everything and then some is priced in.  Especially if anti-trust regulations are taken more seriously.

Yes I think that's the problem as the obvious strong global companies held in Lindsell Train, Fundsmith, etc have been underperforming since the market quietly rotated from growth into cyclical shares last summer. The consensus seems to be that we are now at the start of a new cycle (rather than still at the end of the last one...) and perhaps the pandemic saved us from a deeper and longer drop in share prices that was about to happen.

There's an argument that quality companies were just undervalued in the first place and now they have been valued more correctly their future returns will be less attractive. Fundsmith's outperformance lasted a bit longer than Lindsell Train as the companies it held were better suited to the pandemic but I see today they are both showing a YTD loss and underperformance in the second half of 2020. Maybe some of that is that they didn't have as much scope to recover as they didn't crash so badly in the first half.

With SMT the pandemic also accelerated a lot of future returns but their undiversified style risks Ballie Gifford going from "having everything looking brilliant to suddenly having a tougher patch across a number of products". Still impressive returns for those that didn't rebalance their portfolios for the past decade.

https://citywire.co.uk/investment-trust-insider/news/baillie-gifford-hold-or-fold-is-it-time-to-pocket-huge-gains/a1449013

Even if cyclicals and value are going to do well in the next few years I don't really want to go too deep into them which is why I decided that CTY wasn't for me despite wanting to own it for years and making a small profit. Similar to Bitcoin I am becoming more picky on what I want to own even if that means there are times when I won't get the best returns. Maybe that's just frivolous indulgence.

It might even be a good couple of years to 'stock up' on better quality companies while they will be at more reasonable prices for their long term prospects? Although buying into 'bond proxies' might be unattractive with rising interest rates some of them have enough pricing power to manage that situation.

You recently changed from CTY to MUT - do you only want to consider IT’s for this part of your portfolio? If you could invest in an OEIC you may want to consider Royal London Sustainable Leaders Trust C either Acc or Inc versions.
Also, your point on stocking up on good quality companies that are underpriced at the moment, I have recently taken a position in GSK, AZN and UVLR all at in my opinion decent ‘buy in’ prices so I’m hoping their share prices improve over the next few years as well as the yields they produce. I would be interested in your thoughts on this?

itwasntme001

Alexland said:

itwasntme001 said:

I own SMT and have reduced some due to it being over-bearing but still hold a sizeable holding for the long term.  I also hold quite a lot of tech which I don't plan to sell either.  But at some point even high moat companies become over-valued and everything and then some is priced in.  Especially if anti-trust regulations are taken more seriously.

Yes I think that's the problem as the obvious strong global companies held in Lindsell Train, Fundsmith, etc have been underperforming since the market quietly rotated from growth into cyclical shares last summer. The consensus seems to be that we are now at the start of a new cycle (rather than still at the end of the last one...) and perhaps the pandemic saved us from a deeper and longer drop in share prices that was about to happen.

There's an argument that quality companies were just undervalued in the first place and now they have been valued more correctly their future returns will be less attractive. Fundsmith's outperformance lasted a bit longer than Lindsell Train as the companies it held were better suited to the pandemic but I see today they are both showing a YTD loss and underperformance in the second half of 2020. Maybe some of that is that they didn't have as much scope to recover as they didn't crash so badly in the first half.

With SMT the pandemic also accelerated a lot of future returns but their undiversified style risks Ballie Gifford going from "having everything looking brilliant to suddenly having a tougher patch across a number of products". Still impressive returns for those that didn't rebalance their portfolios for the past decade.

https://citywire.co.uk/investment-trust-insider/news/baillie-gifford-hold-or-fold-is-it-time-to-pocket-huge-gains/a1449013

Even if cyclicals and value are going to do well in the next few years I don't really want to go too deep into them which is why I decided that CTY wasn't for me despite wanting to own it for years and making a small profit. Similar to Bitcoin I am becoming more picky on what I want to own even if that means there are times when I won't get the best returns. Maybe that's just frivolous indulgence.

It might even be a good couple of years to 'stock up' on better quality companies while they will be at more reasonable prices for their long term prospects? Although buying into 'bond proxies' might be unattractive with rising interest rates some of them have enough pricing power to manage that situation.

Yes I noticed the under-performance of Fundsmith (I own it and LT).  It was always going to under-perform in a more reflationary narrative.  That is why I have said so many times before, with actives you are essentially buying into a style and that means it will only work in certain economic environments.  The funny thing is Smith said how Amazon is essentially profitless and thus overvalued.  But its exactly the kind of disruption Amazon has that could ruin some of the businesses that Fundsmith owns.

Smith himself basically admitted that his style suits a low interest rate disinflationary environment - he expects rates to stay low for a long time like Japan.  That in itself should tell you it is not advisable to have a lot invested in his fund because no one can forecast the economy well consistently.

That said, I think this whole reflation narrative has got ahead of itself and we have seen this play out the same way many times the past 10 years - rates end up falling back due to deflationary pressure.  I can't see how things will change anytime soon until we solve the fundamental problems, some of which I am not sure there is a fix to (e.g. demographics).

I am open minded to inflation however, but that does not mean reflation.  It could be the stagflationary kind which probably won't be favourable for cyclicals/value and certainly not for growth/ bond proxies stocks IF rates start to rise meaningfully.  Which is why I don't expect stock market returns to be anything like the previous 10 years.

BananaRepublic

I don’t normally read opinion pieces by financial commentators, but I have done so lately, and it’s surprising the wide spread of views. There are some predicting a huge crash, but at least some of those people are hawking financial advice to deal with the predicted crash. Others are more measured. Some technical analysts are having kittens. One of the inventors of the CAPE ratio is relaxed due to low interest rates and fiscal stimulation policies. Warren Buffett has been selling lots of stocks and an associate has predicted a crash. I wonder if the sage is right this thyme that a crash is cumin? 

My concern is how any US crash would impact other markets. When America sneezes, we catch a cold. 

There is a bubble in US tech stocks, but bubbles can go on for years until something pops them eg an oil crisis. 

MaxiRobriguez

BananaRepublic said:

Thrugelmir said:

masonic said:

Thrugelmir said:

BananaRepublic said:

Thrugelmir said:

BananaRepublic said:

itwasntme001 said:

BananaRepublic said:

itwasntme001 said:

It is what happens when you have 0% interest rates, massive fiscal and monetary stimulus in many major economies and human nature driven by greed.

The interesting question is why did we not do all this in previous recessions like 2008 or early 90s?  I think the answer is inflation and the political will to unleash it.  Now it seems inflation is not a concern so they have more room for stimulus.  So every trade is essentially a view on inflation and no one can forecast inflation well at all.

The covid recession is fundamentally differerent from the GFC. Back then credit dried up, people couldn’t borrow, it hit the economy quite widely. This recession is hitting some parts of the economy badly, others not at all. Cafes and restaurant jobs will bounce back quickly, even though some businesses will go under staff will be rehired by new owners. There are many people working from home or on furlough, spending less than usual. Trades have been busier than usual, DIY is booming, people are having house extensions, loft conversions etc. 

We have as a nation run up huge debt, and somehow we will have to pay for that. Some say a wealth tax is coming. Whatever happens, spending on public services may be squeezed. 

That is because 2008 was a financial crisis and everything was done to recapitalise banks (and QE was seen as a way to kick start the economy).  But my point was that why wasn't any fiscal stimulus done back then to encourage growth - it seems it was only monetary (QE) and even that was not nearly as forthcoming as we saw last March?  Now you have huge fiscal stimulus after 10 years of austerity in the UK and 5-6 years in the US (until Trump cut corporate taxes).

To me it seems like policy makers are becoming less and less concerned about inflation because they saw QE did not generate any, so why not push ahead with fiscal.

For me the question is why testing and track and trace were so royally messed up. 

Ever built something from scratch in a matter of weeks?  Unfortunately Alexa is actually pretty dumb. Other countries systems aren't a roaring success either. 

They had months, not weeks. Some countries such as South Korea managed it. China has the virus under control. It might be our inability to obey lockdown, or government projects.

South Korea has had viruses previously.  Chinese state control is something that many would object to. Not just the Covidiots either. There's objections in Singapore now as appears that the data is going to be used for other purposes. The grass is far from being greener taken as a whole.

Germany did quite a good job though. Not an example of a country with previous experience.

Had a system in place for another reason. Though that in itself has proved insufficient. 

I'm surprised more people haven't emigrated over the years. Given the negative attitude towards their own country. 

I don’t understand the negative attitudes of many towards the UK, but I guess age and having lived in Canada has inoculated me against left wing anti European self hatred views that seem so prevalent these days. 

It's not "self hate" - those people you insult genuinely care about the country and others and are aghast at the rampant cronyism and profiteering on the backs of the poor. I often find it funny that those who claim to be patriots, demand foreign aid to stop so we can "take care of our own", then get presented with a problem where "our own" are really struggling, and their response is too often "it's your own bloody fault." My take on it is that's more self-hating than others who are pointing out the very real problems we have at the moment.

But I guess we all want what is best for our country, our friends, our family, and having a different opinion on how that is achieved or how it's currently going doesn't mean anything, just that people are different. Not wrong, or self-hating, just different.