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Ten years on, where to place your financial bets

Let’s take a bet on what happens now financial markets have experienced a recovery since the distress experienced by banks and other financial institutions in 2008. Ten years later, what’s going on?

Things are getting back to normal in the vernacular of people participating in the market. Normalisation, to turn a noun into a verb, has begun. People who have been in the market for the last few years have probably succeeded in growing their wealth. Let’s Compare Bets’ tips have done pretty well to.

People with money to plough into financial markets may be scratching their heads wondering what should I do…. advice, bank account, premium bonds (in the United Kingdom), under the mattress, start a business, travel around the world, or, have a craic and wager some of this money personally into financial markets.

Other posts in this series have gone into detail about what’s happened in the past and some predictions about what’s going to happen in the future. In the context of full disclosure, we’re not messiahs at Let’s Compare Bets, in so far as you won’t find any messianic prophecies here and there will be no mention of the apocalypse. What you will find is some ideas about where to place your bets: which have been cobbled together using some voices in the market that have had interesting things to say. Sources have been named at the end of the post in the tradition of scientific publication (but there won’t be individual citations because this a post about betting. Let’s Compare Bets doesn’t want to reinvent the wheel!). After you listen to a various voices in the market you also get a feel for who you trust and who you don’t. Trust is a dynamic and complex concept and changes constantly. After listening to voices in the market a bit of objectivity about who you trust allows you to filter out different people and sources of information. Rather than deciding if the person or organisation was likeable: you know, what sports do they like, are they idiosyncratic, aggressive, or arrogant etc , it’s possible to be objective about the process. In the process of learning a bit about the economy and financial markets, bits and pieces from sources perceived trustworthy have been cobbled together here so that readers can make better bets.

Previous posts in the series can be accessed from links at the end of the post. Among other things we’ve spoken about how to frame your view of investing in the context of world wide trends and how to bet your funds now the current economic expansion is maturing. To illustrate certain points about financial markets and relative returns exchange traded funds or ETFs will be used in this post. Also there will be some candid pithy comments from the Author to spice things up a bit, and the odd anecdote.

Let’s condense some major trends first, then look at where to place your bets in the context of the current cycle (debt cycle and business cycle). Unfortunately this isn’t a short post. It is difficult to get everything in and it be a short post.

Major trends

Technology is accelerating and will increase productivity of the economy (it doesn’t necessarily mean jobs losses in aggregate over the long term if productivity can keep up, but it’ll be your kids or kids kids who’ll really benefit). Talking about reinventing the wheel, as an aside point, readers might like to check out how Goodyear is doing just that with their Eagle 360 spherical tire. Technological advancement is said to reach inflection points that allow human endeavour to progress in leaps and bounds. Amazing how the internet has reached so many people and allowed information to reach curious minds. Having visited the Roman Forum recently, knelt at the foot of the Temple of Saturn staring up at the preserved pediment restored for the senate and the people of Rome (wishing I could read Latin) with the low December sun warming my face it struck me like a bolt of lightening from Jupiter’s very hand (or should I say Zeus)……. the Plebs have never had it so good! That’s down to technology and access to information. It’s no wonder the combined market cap of Google and Microsoft is higher than the GDP of Spain.

Debt. We’re past the bottom of the long term debt cycle; in terms of interest rates, the bottom is when central bank interest rates go to zero in some countries and negative in others (and are currently still negative in some countries). Now interest rates are going back up, but, they may bump along the bottom first. Biblical amounts of debt, and when the total aggregate amount of debt gets biblical it leads to change.

Change. Change in politics, structural changes to economies and increased geopolitical activity or realpolitik. Bringing us nicely into the last major trend that’ll be shared with readers for this post….

A rise in the number of inquisitive minds inspiring creativity, and more technological advancement.

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Shibboleths and self fulling prophecy, betting on the next financial crisis

Would it be good to know what’s going to happen in the future? Planning for retirement and investments would be easier if you could see the future.  Being editor of Let’sCompareBets.com I am constantly looking at ways to take a bet on the future. Not an easy task by any means, because, that’s a bet you don’t want to lose. Especially if you are investing for retirement or family.

What to do? Long story short, with no employer pension and no prospect of having an employer to pay into a pension, who’s going to save me from this quandary? That’s that’s right no one! WAIT, no sorry, ME. Of course there’s financial advisers and other industry professionals, but by comparing bets, we surely stand a chance of winning more wealth.

Readers may want to use this post to frame thoughts about how to plan for a financial future-self. What does the future look like? Comfortable retirement, new house, it’s all in the realms of possibility.

Out of a fear of being on the wrong side of financial markets a question preoccupying my mind has been when will the next financial crisis hit, what is going to happen and what it means for the future. Many other people are asking similar questions.

Cutting to the chase, YES, another crisis is going to happen. Possibly in the next 24 months. But, why, how, and for how long.

To answer this question, readers may want to ask how deep does the rabbit hole go? After a bit of digging about this subject, the answer is unsurprisingly really deep. A better question is, if I where a rabbit, how deep would I want to scurry into the rabbit hole? Bearing in mind, ‘going all in’ with managing personal finances is a big bet (if you think about it): so it’s not going to be something you can scribble on the back of an envelope (except possibly the following words, dollar hegemony, shibboleth, self fulfilling prophecy, financial institution, cooperation, and gold).  Read on to find out what the hell we’re talking about.

In the words of Deutsche Bank emanating from their annual long-term asset return study “ we’re quite confident that there will be another financial crisis/shock pretty soon”. For the purposes of this post we’re going to roll with Deutsche Bank’s definition of crisis (all from October 2017 prices); a 15% drop in the equity market (or more), a 10% fall in government bonds, or double digit inflation”. Interesting, there no mention of deflation in this definition. Deflation is definitely a bogey man for mainstream economists and politicians. Deflation would be bad for Wall Street, The Square Mile and main street (the man on the street).

Having started in 2009 the current economic expansion (although it may not feel like that for some people) is the second longest period of expansion since WW2. May 2018 marks the date making it the longest period of economic expansion in recent times. Taking a simple look at previous cycles a crisis will probably be caused by a recession or abrupt slow down in economic activity. How is it going to play out?

To answer this question without help, as a layman, would be like pissing in the wind. Let’s face it, what do I, you, we, know about economics, and how is it going to be possible to predict what hasn’t happened yet? Understanding economics in a bit more detail is an essential ingredient of tackling this question.

We have assembled a team of experts to help in our quest. This post will focus on the macro economic view point and suggest ways to place financial bets moving forward. Reader’s will notice a big slant towards what’s going on in the USA. The USA is the global command economy and what happens there will ripple across the pond (both ponds). To take teaching from the Sage of Omaha (Warren Buffet CEO and Chairman of Berkshire Hathaway) “ don’t bet against America”. Wise words.

Who is going to help us see the wood for the trees?

Our A-team consists of two economists, a hedge fund manager, a lawyer, a historian and a physicist. All are commentators about current affairs and what’s happened in the past. An almost random selection of people to answer the question. You may have guessed it, this post is not going to be a short one, be prepared. Here’s our list of experts, not all to be used in the post directly but have been indispensable sources of information.

The economists
After stumbling upon a book called ‘The Accidental Theorist and other dispatches from the dismal science’, the Author Paul Krugman, is going to be the first economist to help. Krugman’s book is well written with short essays and witty criticism of other economic ideas. I also digested this book quickly as it’s easy to read and light on complex theory, equations and the like. Mr Krugman is a American economist (Professor of economics at Princeton University USA and a Nobel Prize winner). Published in 1999 during the Clinton administration (you know, I did not have sexual relations with that women!, and generally well received welfare reforms and economic policy), it is great because his criticisms of other economic ideas can be assessed using the test of time. Krugman specialises in recessions making him perfectly positioned to help.

Steve Keen is an Australian professor of economics and head of School of Economics, Politics and History at Kingston University London. Contributing to the subject by studying instability in financial markets. Influenced by Hyman Minsky (and others) he’s built mathematical models that help predict the future. Being a straight talker he’s unlikely to win the Nobel Prize, in my view making him a perfect fit for this task. His material includes books, and Youtube content – which is more detailed than output from Mr Krugman, which is more marketed towards the mainstream.

The hedge fund manager
Ray Dalio, billionaire hedge fund manager of Bridgewater Associates. Having built up the worlds largest hedge fund Mr Dalio has taken a more public profile, is writing books and doing interviews. Hedge funds have been a source of economic crisis in the past making Dalio a good selection. During the economic crisis of 2008 he made a group of wealthy people even more rich so he is popular with his clients amoung other people. As rich as Mr Dalio is, his books and commentary have not been produced out of necessity but from generosity, so he’s making the cut for our A-Team of advisers. His views are mainstream. His hedge fund is so big that it takes a command position in the markets and may also be contribute to future instability. Cynics may mumble that a multi billionaire hedge fund manager writing a book is a sure fire contrarian indicator suggesting something is about to change.
Great economists of yesteryear have described the economy has being a delicate machine, which is perhaps by Mr Dalio has released a video called “How the economic machine works”, which has helped me with a general understanding of economy. It’s simple but doesn’t make you feel like a simpleton, so it’s worth 30 minutes of your time. Here is the link. Bridgewater associates have made it available in multiple languages, they’re clever guys at Bridgewater Associates.

The Lawyer
James Richards was the lead lawyer for the bailout of Long Term Capital Management, which collapsed in 1998, and has given advice to US Government agencies. Mr Richards made the New York Bestseller list on a number of occasions. His geo-political insights make him stand out from the crowd as does his apocalyptic narrative of current economic affairs. He has said the US Federal Reserve is involved in what he calls “the greatest gamble in the history of finance”, making him a perfect source of information for LetsCompareBets.com. Apparently Ray Dalio makes his trainees read Richards’ book, Currency Wars, when they start working for him. Richards is a good communicator and helps make complex geo-politcal interactions comprehensible for the uninitiated. One of his projects it to tinker with a predictive analytical systems that use techniques and methodology not used by the big banks.

The historian
Mary Beard professor of classics at the University of Cambridge, UK. Beard has written a number of books and presented history programmes on the UK’s BBC and brings us a classical historian’s view point. Her book SPQR A History of Ancient Rome provided me with a number of light bulb moments regarding elitism, taxing the rich and the formation of institutions at grass roots level. SPQR is the Romans’ own abbreviation for their state: Senatus Populus Que Romanus, ‘the Senate and People of Rome’. This book gets into nitty-gritty of early Roman Empire and readers will get a proper understanding of how historians ply their trade. An understanding of the rise and fall of empire will help with answering our question, if only to discount the chance of a catastrophic bear market. There is no better place to look than Ancient Rome.

The physicist
Michio Kaku is a Japanese American theoretical physicist and professor of theoretical physics at City College of New York. Physics and especially theoretical physics is a good base to help answer this question of what the future holds, because, theoretical physicists are trying to work out how everything works. If you really want to see the wood for the trees, then check out Mr Kaku’s futurologist views in this video. In Mr Kaku’s view we are a multicultural, scientific and cultural society moving into a type 1 economy (among other things).

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Fire and fury like the world has never seen

The USA military will use fire and fury like the world has never seen. Words from President Trump of the United States in response to threats from North Korea to strike a US military base on Guam using medium to long ranges missiles. A tense situation. Let’s hope that if they are going to war they have agreed not to go nuclear.

Anyone doubting war may want to take a look at this video. Added here for a couple of reasons. One because the speaker, George Friedman, tackles the subject from an interesting angle. He says “ global war is sitting in your pocket”. Mr Friedman spoke at Brain Bar Budapest, a forum for challengers and trend setters. Well, if Mr Friedman is setting trends then what he says may just be a self fulfilling prophecy, but an important one.  Here is a link.

Fire and fury

Time for balance

As editor of Let’s Compare Bets.com I have showcased a number of posts about investing and trading.  Suggestions for investments have been given to readers with the caveat of do your own research (DYOR). Two things recently converged to spur a new post to review the performance off a hypothetical investment portfolio.  A portfolio where all the possible investment ideas have been followed and invested.  In the post title My Sip Conundrum…. (link below) we suggested a retirement investment portfolio, which should be re-balanced at regular intervals.

Two tings have converged to make me want to balance my hypothetical portfolio.  In the interests of full disclosure the auther has investments in some of the companies mentioned.

Number one.  War drums are getting loader in the USA. Geopolitical risks are on the up.

Number two.  The current phase of the business cycle for the USA and UK which normally precedes recession or a contraction in economic activity is getting long in the tooth.  Odds of recession or a contraction in economic activity are getting shorter.

Next we’ll check how each investment has performed from the date of the original article.  Links to the original article have been provided. The percentage change in value, with a suggestion to either buy, sell, hold, accumulate or reduce have been are given.  ‘Buy’ means now is a good time to buy more. ‘Sell’ means sell the whole investment (a sell suggestion would be based on the valuation and technical analysis of the share price chart), accumulate means buy more at regular intervals giving the benefit of cost averaging into the investment, reduce mean sell a portion of the investment in order to balance the portfolio to within your target range, and hold means do nothing.

Balancing a portfolio is not a science.  From the original article about running a self invested personal pension it was suggested dividing the portfolio into categories.  Each category has a target asset allocation percentage compared to the total value of the fund.  When the percentage goes over target it’s time balance. Readers should balance in accordance with their own style.  Normally holdings that get sold would be rotated into categories that are underweight.

For simplicity my portfolio would be split one third in equities focused on growth, a third focused on income, and a third focused on commodities.

Now is a good time to hold cash. Readers may want to investigate the Sage of Omaha’s $100 billion dollar problem.  Cash has something called option value because it gives the option to invest the cash when valuations on shares are better.

15/05/2012    Astra Zeneca

(income category)

Performance + 100.5% including dividends. Over the past two months the share price has declined by 16.1% due to negative news flow about the drug pipeline. Now is a good time to buy more. Dividends have gone up during this time and the yield is currently a very good 4.8%.

Accumulate 

28/11/2015     My SIPP Conundrum

CF Woodford Equity Income fund (accumulation)

(income category)

Performance + 10%.

Long term the fund price is still in a up trend.

Hold

Woodford Patient Capital Trust

(growth category)

Performance 0%

Patience is required with this one. No change in price over that time but it has a bright future as we progress through the long term credit cycle.

Hold

J O Hambro Japan Dividend Growth

(income category)

Performance + 47% including dividends. The investment case remains the same.

Accumulate

Fidelity Asian Dividend (accumulation)

(income category)

+ 54% including dividends.  As above.

Accumulate

BlackRock Commodities Income Investment Trust

(commodities category)

Performance + 28% (including dividends)

still in an uptrend.  The category is also underweight compared to the income and growth categories.

Accumulate

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