I’ve just been reading one of Marc Faber’s excellent Gloom Boom and Doom Reports. I’m a bit behind – it’s the March issue – but the points Faber makes are as valid now as they were three months ago. Faber starts his writing with the story of the modern Red Indian chief on a remote reservation who had no idea what the winter would bring and so was unable to tell his tribe – who kept asking – how much wood they should gather.
To be on the safe side, the chief told them it would be cold and they should get gathering. Then a few days later, he rang the National Weather Service and asked them if it would be cold. “It looks like it is going to be quite cold,” he was told. So he got them to gather more wood. A week later, he called to double check just how cold it would be. “Very cold,” said the meteorologist. So he told the tribe to collect all the wood they could find. Two weeks later, he checked again. “Are you sure that this winter is going to be very cold?” “Absolutely,” said the man, “one of the coldest winters ever.” “How can you be so sure?” asked the chief. The answer? “The Red Indians are collecting wood like crazy.”
The point of the story is to remind us of the self-reinforcing mechanism of markets, the way we gain confidence from the confidence of others, regardless of whether this is rational or not. Today’s markets offer endless examples of this. With a few exceptions, everyone is bullish and mostly they’re bullish because everyone else is. Ask why, and you’ll get told there’s so much ‘liquidity’ it’s impossible not to be.
They may be right, but if the fundamentals behind a market aren’t sound, liquidity alone can’t keep it going for ever. What if the US consumer really does retrench (hence cutting the trade deficit, one of the prime sources of liquidity)? Or what if the Bank of Japan raises rates (which it clearly really wants to do) and destroys the yen carry trade? Or there’s a big failure in private equity and the big banks tighten lending criteria? According to Paul Hill, MoneyWeek’s star stockpicker, all these things are possible. So much so that he sees a one in four chance of equities ending the year 20% below their current levels. In our cover story, he looks at how this might happen and tells us what we can do about it. MoneyWeek regular James Ferguson has been pushing us towards mega-caps for some time and Paul agrees. Dump your “bubble stocks”, he says, and get into the likes of Glaxo and HSBC.
On another matter, we’ve had a fantastic response to our request for the details of UK-based fee-only independent financial advisers. It’s going to take us a while to sort out a system and get the directory up and running, but I hope that in a few weeks anyone looking for someone who has opted out of living on the corrupting commissions the financial services industry pays to help them with their money will be able to find that person at Moneyweek.com. If you are a fee-only adviser and you haven’t sent in your details yet, please do. Reader recommendations are also very welcome.