Investment horizons and the paradigm for 2011 onwards.

Oh Dear! What a pompous title!

One of the things that upsets me continually is the sort of editorial comment that pushes a particular line as indisputable fact and makes no attempt at balanced debate. Recently I got an advertising supplement for "Money Week" that was well beyond laughable in its doom-laden predictions that we would all be in mud huts by the end of next year. As good fortune would have it, it was so silly and badly written that it would be very unlikely to be taken seriously by anyone and perhaps more likely to lead to cancelled subscriptions than new ones - so perhaps little harm done. This sort of comic and the less creditable discussion fora are being clogged up by extremist bears, which makes rational discussion rarer and rarer. In the interests of fairness however (see - I am trying!) I must add that they do get equally clogged by silly rampers in the good times. Bubble or bust? Didn't anyone point out that investment horizons tend to be between the two and that trend growth is positive in most time scales. Roubini is a clever man, but I think he regards his Black Swans as hybridised Golden Geese that sell books rather than more simple birds. I think the markets have had enough avian flu for one decade in any case.

Time to be concerned when you get this sort of drivel...

http://www.telegraph.co.uk/finance/personalfinance/investing/8202251/Investors-told-forget-savings-accounts-think-of-shares.html

I tend to read the online versions of newspapers, partly because it avoids the inanities that are used to fill in the gaps in "rolling news" and partly because the content is cross-linked more easily. In the case in point, this was the main "story" for about 12 hours overnight. If one reads it, there is little or no attribution of this startling hypothesis other than the usual rent-a-quote stuff from third-line investment firms grateful to get their name printed in The Beano. Just step back and think about this - the nation's one remaining newspaper of record since Murdoch destroyed the Times TELLS YOU - not suggests, not comments - that  "Investors told forget savings accounts, think of shares". To add insult to injury we are then told "experts said". Do these "journalists" have an IQ above room temperature? and are there competent editors in place to send them to cover fish prices in Grimsby until they learn their art?

2010 has generally been a year of Central Banks and Governments trying desperately to force interest rates lower, mainly by Quantitative Easing. Many nations, particularly the US, have spectacularly ignored Gresham's Law and tried to beggar their neighbours by devaluing their currencies. In the Antipodes and Far East we have seen the reverse happening, especially where a currency, such as the Australian Dollar is effectively commodity-backed. Towards the end of the year we have seen the Euro-bloc shaken as the inherent contradictions unwind. Much hysteria has been generated, but my feeling is that Germany, France and Benelux - the real core of the EU - have invested too much, and not just financially, to see the project fail. My feeling is that the PIIGS are more likely to be booted out than the core countries secede from the project. I do, however, think it is a close call and I would avoid exposure to this game until things are clearer.

For most of 2010 I have propounded the view that where equity markets are concerned, the "nowhere else to go" argument was the best I could come up with. We have seen layoffs and cost-cutting used to engineer much dubious bottom-line improvement, especially on Wall Street, and a yield of between 3-4% has been achievable in most markets. Compared to falling Bond Yields this was a no-brainer. I suspect things might be different in 2011. QE has planted the seeds of inflation in many economies and the USA, UK and Eurozone are all massaging their figures to try not to show it. Low rates are a key factor in the beggar-my-neighbour policies, but unsustainable in the context of a massive surge in money supply. Rates will undoubtedly rise considerably in 2011 and an outflow from equity markets may take place, particularly if fiscal tightening hits the "consumer" - an indicator I have always had little faith in as a serious economic measure (I think the "producer" is the one to watch!).

For a saver (and an ISA saver in the UK only has a 5 year maturity minimum) or investor, I would think that Corporate Bond yields are going to become very attractive relative to other asset classes.

Currency levels will take an unwontedly important place in the decision-making process. Not only do I think the US market may turn out to be one of the weakest, but with Moodys looking at stripping the US of its AAA+ status and an avowed policy to devalue the dollar, I fear the potential collapse in the US Dollar would more than outweigh yield considerations. I would avoid all US or Dollar-denominated investments in 2011.

I further think that Gold and Silver bugs will be in for a shock in 2011. The two factors driving the bubble - low interest rates and Far Eastern demand could evaporate in a moment as rates move up and India and China tighten even further. Yes - the "survivalists" will always argue for Gold, but those of us with waistcoats whose arms do not fasten behind our backs will, I think, see it otherwise.

As I look forward to 2011 as ever - Dum Spiro Spero