Something has changed. Until very recently the investment world was, for the most part, convinced that the worst was over, and that a recovery of sorts had taken hold.
No longer. Today, as Sean Corrigan of Diapason Commodities Management puts it, everyone has been “whipped to the bearish side of the boat” by the crushing data pouring in on every side.
Combined new and existing house sales in the US fell 27% in July – taking them to levels last seen in the 1980s, a time when rates weren’t exactly at the record lows of today. US credit-card debt has hit its lowest level for eight years. Unemployment is high, spending on (non defence-related) capital goods is falling and US GDP forecasts are being cut all over the place. At the same time, sovereign bond yields are still falling (and prices rising) in the US, the UK and Germany as investors rush for some kind of security.
And, as Halkin’s Robert Brooke puts it, the yen is acting rather like our canary in the coalmine. Since mid-2007, it has “surged at times of financial stress”. It is doing so again: this week it is “within singing distance” of its all-time highs against the dollar and the pound. The fact is that a double dip in the US is almost certain and the odds are we’ll be getting one here too.
But I do wonder if that means we will really move into deflation proper. One of the extraordinary things about governments’ attempts to stop this crisis has been their speed. One day we had what looked like a functioning banking system; the next, our bankers were on the phone to poor Mr Darling telling him the ATMs were about to shut down. Then government action arrived double quick and markets rebounded.
So, as these bad numbers keep rolling out, it might be that the authorities will not even wait for a double dip to kick off. It is surely only a matter of (not much) time before the US is printing money on a scale that will dwarf previous quantitative easing (QE) attempts; before the European Central Bank is forced to get on with its own security purchase programme in earnest; and before we add another couple of hundred million to our own version of QE. We might think that the QE we have seen so far has been mind-boggling stuff, but it is nothing compared with the shock and awe the US Federal Reserve can come up with if stock markets really start to fall again.
I’m also mildly bemused by the sudden reintroduction of fabulous credit card deals into the UK, a sign perhaps that the consumer is not quite as short of credit – and hence spending power – as one would expect at this point in a real deflationary cycle. I asked my favourite deflationist, James Ferguson of Arbuthnot Securities, about this earlier this week, and pointed him towards one new deal. Average credit card rates may be at an eight-year high, but take out an AA card and you pay 0% in interest on all new purchases for 12 months. His answer? “Bloody hell.” It is, I think, confusing.
However, from an investor’s point of view it really doesn’t matter if we have actual deflation or simply a deflationary shock (in which everyone expects deflation). Deflation is terrible for equity markets and everyone knows it – that’s why the FTSE 100 is 11% below its May high. So it is looking increasingly likely that, as Société Générale’s Albert Edwards says, the global “equity bloodbath of the last decade” is about to enter its “final even bloodier stage”, where “revulsion in equities as an asset class hangs in the air like a fog”.
All this means that you should be watching your currency exposure: when stock markets fall, any fragile-looking currencies (such as the euro) tend to fall against the dollar. It also means you shouldn’t have large generalised equity holdings – the high- yielding defensive stocks discussed here before, along with some gold exposure, yes – but not much else unless you are happy to take risk and it really has a genuinely good story attached to it.
With this in mind, I bring you a tip from veteran investor, Jim Mellon. He has recently raised his holdings in UK-listed Billing Services Group, a firm which plays a huge part in the US phone billing market, sending out 125m bills a month. The key to Mellon’s enthusiasm is the fact that you can put downloads of all kinds (iTunes and so on) onto your phone bill, which allows the unbanked (of which there are many) to buy online just as the rest of us do. Mellon expects the firm to grow fast from here and to be “snapped up by one of the big payment processing firms”.
• This article was forst published in the Financial Times