Is now a good time to invest?

I've just been asked by a client whether he should switch from cash to equities. Here's my view, and it may explain why I haven't earned much from investments over the last few years:

It is not possible to predict the market with any accuracy, but I think I have done well in foretelling the current state of affairs as early as the late 1990s. The market has dropped to half its 1999 peak (again, as it did in 2003), but that is not to say we are now at the bottom. Some (and I am moderately persuaded to this view) think that there may be a "bear market rally" soon-ish - maybe a rise that recovers perhaps 50% of the losses so far - but it is perfectly possible that the underlying trend is still downwards, so there may then be a horrid lurch towards - what? Maybe, ultimately, 4,000 on the Dow and 2,000 on the FTSE.

We are in the middle of an exciting ride and I fear that entering the market at this stage may still be for the adventurous and nimble. Yes, had one invested in mid-2003 and got out, say, late 2007, it would have turned a nice profit; but much depends on the entry and exit points. So as ever, attitude to risk and corresponding watchfulness are key factors.

There is also the question of what asset class to choose. I think domestic and commercial property are still overvalued, relative to income; because of fears regarding other assets, and also because of central bank investment ("quantitative easing" etc) government bonds are very highly priced, which is why the yields are so low (and if interest rates rise, bond values could then drop sharply); equities are depressed, but as dividends decline in very testing economic conditions, they may ultimately be depressed still further. Commodities (e.g. gold, silver, oil) are the subject of some speculation, but owing to shortage of borrowed money to invest with, not quite so much institutional speculation as formerly; even so, gold (for instance) is a bit above its long-term inflation-adjusted average, as far as I can tell - though if inflation takes off, the price could indeed escalate.

And then there is the question of currencies. The pound has lost heavily against the dollar; but some say the dollar may catch us up again. The Euro may also not stay as strong as it is now - several countries within the Eurozone are suffering economic problems and are hampered by the common currency; I have even read speculation that the Euro system may fall apart within a decade, or some states may secede from it.

In short, I still urge caution, and if you do decide to get in, be prepared to move quickly if the market should turn. Meantime, there are relatively safe options such as National Savings Certificates, including the index-linked ones that will at least keep the value of your savings roughly in line with RPI...

A safe haven?

Just a thought.

Like I said

I've said more than once, including in my latest letter to the Spectator, the notion that the East is going to suffer from the slump as badly as the West needs some qualification. It's what happens after the slump that will be decisive, and the East has the gear and skilled people to lead the way out, as the Telegraph reports:

Arcelor, being three times larger than its nearest rival, Japan's Nippon Steel, and sharing 10 pc of the industry's global sales, wields huge power to determine what happens to prices and production. In the medium to longer term, Mr Mittal expects the industry to bounce back sharply as the pace of industrialisation in China and India picks up again.

In China, billionaire Shagang steel magnate Shen Wenrong has also planned for the coming downturn. In fact he's not even cutting his prices, since (I surmise) his game plan is that his over-leveraged competitors are going to go bust and customers will have to come to him anyway.

This is smart, counter-intuitive strategy for dealing with a recession. Those who try to survive by cutting margins will get skinny and become more vulnerable to delayed delivery by cash-strapped suppliers, bad-debt customers, and shark bigger-business customers that deliberately pay late to force your business under and then buy your goods from the official receiver at a 90% discount.

In a really post-industrial economy, we in the UK and USA will discover the disadvantages of being run by money-grows-on-trees lawyers, box-it-all-up-and-get-it-on-the-train-before-the-war-ends bankers and hang-onto-office-by-your-bitten-fingernails politicians.

My plan? Pay off debts, hoard some emergency cash (and maybe gold), and if I have to invest, put it in something that's secure and inflation-proofed.

How to force the UK Government to give 100% guarantee on your deposits

... Transfer all your money to National Savings and Investments.

Their guarantee:

"Backed by HM Treasury
100% secure

National Savings and Investments is backed by HM Treasury, so any money you invest with us is 100% secure."

The Easy Access Savings Account can take up to £2 million per person. In all, depending on your age, NS&I could take more than £6 million per head.

If enough people know about this, and act on it, only Northern Rock will be run-proof. HMG will have to provide an "Irish guarantee". Unless, of course, the Chancellor suddenly welches on government credit, and that really would be the end; or closes the door to new NS&I deposits.

Total retail deposits in the UK are now around £1.17 trillion, of which nearly half is not covered even by the £50,000 deposit protection limit that came into force on October 3rd. So if everybody takes appropriate action, NS&I (and/or Northern Rock) should expect an influx of about £468 billion pounds.

Funds invested in NS&I stood at £84.8bn in 2007/08. A full-scale "flight to safety" would entail an abrupt 550% increase in their deposits.

Get in while you can?

But not into Ireland:


However, experts are already raising questions over the Irish scheme, and asking how much protection it really affords. Adrian Coles, the director general of the Building Societies Association, said savers should write to the Irish Embassy to ask them how they intended to guarantee UK savings, and how they would obtain enough sterling in the event of a bank failing.

"Has the Irish government quantified the potentially huge liabilities it is taking on by guaranteeing sterling deposits in Britain, where household cash savings amount to £1.1 trillion?" he said.

"Savers should beware that, if they switch accounts to take up this guarantee, they are effectively betting on the Irish government's ability to buy sufficient sterling in the foreign exchange markets.