investors between a rock and a hard place

[merluzzo]

As many, I am trying to make sense of what’s happening to inflation, markets, etc.

In my view what central banks (of USA, UK, EU) have been doing during the pandemic looks, sounds, and smells like monetisation of debt.

In theory, if central banks at some point sell government bonds back to investors and destroy the resulting money, monetisation of debt will be avoided. However, as far as I know, not a single government bond has been sold by central banks back to investors since the start of QE. Likely, they never will.

The fiscal stimulus paired with QE has dramatically increased broad money supply (not just base money) and I don’t see how inflation can be avoided. The fact that the government will not have to pay interest or repay principal on so much of its deficit is scary. What will stop them from spending more and more?

All else being equal, shares in aggregate could be expected to grow in line with inflation. But markets are clearly spooked by the prospect that the money printing will stop and interest rates will raise.

Is this rational and, if so, does it apply to all shares or only those with higher valuations?

One could try to play a timing game, whereby one holds cash as long as the inflation is still lowish and wait for the stock market to crash as a result of tightening expectations in order to buy cheap. I can see how this strategy could easily go wrong - inflation and cash are rarely gracious bed sharers.

Property at the moment seems to be even more expensive than shares, so what are we left with?

So called value shares are not cheap but they are perhaps less overvalued than growth ones. Non-US market are also arguably less overvalued, but once again, they are not cheap. So I am long UK, EU, EM, and Pacific shares, as long as global value ETFs.

But I would be lying if I said that I sleep comfortably at night...

[odysseus2000]

meriuzzo
But I would be lying if I said that I sleep comfortably at night...

As I see things, the markets look like traders markets with the shorts making out like bandits.

There is all manner of talking head commentary about value, where the money will go etc, potential bullish rally, as though investors/traders are thinking logically in a market with a strong emotional content.

I have no idea what happens, but if the markets do sell off I don't expect much to be spurred, but I am just not certain if all the money printing etc trumps all the bearish sentiment.

Normally in bear market one gets strong rallies that fail but none the less allow traders opportunities for profits and trapped longs to get out at slightly higher prices.

These kind of volatile market are when short term traders do very well.

Regards,

[absolutezero]

.

But I would be lying if I said that I sleep comfortably at night...

Therefore you have too much risk attached to your money.
You need to de-risk.

How? That's a personal thing.
Me? Just keep buying shares in decent, established, dividend paying companies and keep a good slug of cash for everyday expenses.

[dealtn]

meriuzzo
But I would be lying if I said that I sleep comfortably at night...

As I see things, the markets look like traders markets with the shorts making out like bandits.

There is all manner of talking head commentary about value, where the money will go etc, potential bullish rally, as though investors/traders are thinking logically in a market with a strong emotional content.

I have no idea what happens, but if the markets do sell off I don't expect much to be spurred, but I am just not certain if all the money printing etc trumps all the bearish sentiment.

Normally in bear market one gets strong rallies that fail but none the less allow traders opportunities for profits and trapped longs to get out at slightly higher prices.

These kind of volatile market are when short term traders do very well.

Regards,

Do shorts often make out like bandits then when you see the indices such as the FTSE-All Share up on all of a 1 month, 3 month, 6 month and 12 month timeframes?

I suspect you see what you want to see.

[odysseus2000]

dealtn
Do shorts often make out like bandits then when you see the indices such as the FTSE-All Share up on all of a 1 month, 3 month, 6 month and 12 month timeframes?

I suspect you see what you want to see.

Or, you trade what is volatile to the down side and that is most of the nasdaq tech business and crypto. Tesla has been a great short since mid april.

No one who likes to short and is any good at it is going to short stuff that is going up.

Prop traders who wanted to keep their jobs will have had to be short the equities that have gone down and their Profit and Loss will have had a very good 6 weeks.

Regards,

[dealtn]

dealtn
Do shorts often make out like bandits then when you see the indices such as the FTSE-All Share up on all of a 1 month, 3 month, 6 month and 12 month timeframes?

I suspect you see what you want to see.

Or, you trade what is volatile to the down side and that is most of the nasdaq tech business and crypto. Tesla has been a great short since mid april.

No one who likes to short and is any good at it is going to short stuff that is going up.

Prop traders who wanted to keep their jobs will have had to be short the equities that have gone down and their Profit and Loss will have had a very good 6 weeks.

Regards,

And the relevance of any of that to the OP and his question on "investors" is ... ?

[1nvest]

Sounds like you're on the right track for choice of assets, and just that you're perhaps uncomfortable with the weightings. Which is typically a reflection of over-concentration risk into single asset(s).

High inflation and when accumulating that's generally good, additional savings buys relatively more (lower prices for stocks/bonds). It's bad for those in drawdown, where valuation declines summed with withdrawals could lead to a critical situation.

For me, I have enough in inflation linked pensions to count as 'bonds', but I also have heirs that I would like to leave a inheritance to, so I'm converting non liquid bonds (pensions) to liquid holdings. In my case I prefer gold. So for example if a 20K/year inflation adjusted pension, age 60 and life expectancy 25 years = 20K x 25 = 500K value. With 20 years remaining, age 65 value = 20 x 20 = 400K. A difference of 100K ... filled with 100K of gold purchases. But all proportioned to desired weightings such as a third home value, a third stocks, a third 'gold' (pensions/bonds). US stocks fit well for me, £ home value, $ stock value, gold is a form of global currency. Asset diversity of land, stocks, commodity.

If high inflation hits then house prices tend to do well as a inflation hedge, as can gold (or the index linked pension payments rise in reflection of inflation). As can stocks do OK but with big dip/up type volatility (cost averaging type trading (rebalancing)). As part of home value I use some UK stocks as a part liquid proxy for rebalancing purposes as selling the extension to buy more stocks when house price gains > stock gains isn't viable. For income I use SWR as that provides a consistent inflation adjusted income. Was 4% SWR when I retired 16 years ago in my mid 40's, is now more like 2% relative to ongoing portfolio value. But I don't actually track precise figures, rather just draw/spend as/when needed.

With that asset allocation I might sleep well, however family life gets in the way of that and causes more anxiety driven sleepless nights.

[odysseus2000]

dealtn
And the relevance of any of that to the OP and his question on "investors" is ... ?

The opening post began with:

As many, I am trying to make sense of what’s happening to inflation, markets, etc.

My comment were addressed to this.

Regards,

[murraypaul]

So called value shares are not cheap but they are perhaps less overvalued than growth ones. Non-US market are also arguably less overvalued, but once again, they are not cheap. So I am long UK, EU, EM, and Pacific shares, as long as global value ETFs.

But I would be lying if I said that I sleep comfortably at night...

I think there is a different balance that each investor needs to find between expected return and comfort.
You don't have to be chasing the absolute maximum returns.

So for me, that means I don't want to be invested in the US, because it is dominated by some tech that I don't want to be involved in (not looking at you, Tesla), and don't want to be invested in emerging markets, as that is dominated by China, and so can not be relied upon to act as a free market.

So I've shrunk down to Europe (including the UK), as the place I'm most comfortable being invested in.
I know that this is likely to reduce my long term returns, but it increases my short term sleep.

[odysseus2000]

murraypaul
So I've shrunk down to Europe (including the UK), as the place I'm most comfortable being invested in.
I know that this is likely to reduce my long term returns, but it increases my short term sleep.

Interesting!

Europe is the area I worry most about with the North South divide and the Euro making life miserable for Italy and Greece.

Meanwhile France has now got the top spot for debt in a continent awash with debt.

The US maybe able to inflate its way out of its debt, but the system existing in the EU are designed to prevent this.

If I was invested heavily in Europe I would not sleep well.

Regards,

[merluzzo]

Thanks for all comments.

I agree that I should find a place where I am comfortable with the risk taken.

My problem is that I see inflation as a very real risk, so increasing my cash position does not necessarily cure my anxiety... Hence the feeling of being between a rock and a hard place.

1nvest, I too have a (small) inflation-linked pension and own property (including a rental one). Being 55, I apply similar calculations to determine pension value. Considering pension and property, I have approximately 50% of my assets invested in equities. I have an instinctive (and probably irrational) aversion for gold, as it does not produce an income stream and could be replaced by alternative ways of storing wealth.

Paul, I also have substantial exposure to UK and Europe. I feel relatively comfortable that UK shares are fairly valued, while I am not completely sure about Europe.

Forward PE ratio for Europe (EMU) is around 16, according to Yardeni Research. This is a bit expensive but nothing crazy. Of course fwPE relies on analysts' forecasts, that may be wrong.

I have not been able to find recent reliable calculations for the CAPE ratio of European shares..

My exposure is through VERX (Europe ex-UK ETF), by the way.

[Dod101]

Thanks for all comments.

I agree that I should find a place where I am comfortable with the risk taken.

My problem is that I see inflation as a very real risk, so increasing my cash position does not necessarily cure my anxiety... Hence the feeling of being between a rock and a hard place.

1nvest, I too have a (small) inflation-linked pension and own property (including a rental one). Being 55, I apply similar calculations to determine pension value. Considering pension and property, I have approximately 50% of my assets invested in equities. I have an instinctive (and probably irrational) aversion for gold, as it does not produce an income stream and could be replaced by alternative ways of storing wealth.

Paul, I also have substantial exposure to UK and Europe. I feel relatively comfortable that UK shares are fairly valued, while I am not completely sure about Europe.

Forward PE ratio for Europe (EMU) is around 16, according to Yardeni Research. This is a bit expensive but nothing crazy. Of course fwPE relies on analysts' forecasts, that may be wrong.

I have not been able to find recent reliable calculations for the CAPE ratio of European shares..

My exposure is through VERX (Europe ex-UK ETF), by the way.

Having come through (what I hope is the worst of) the Covid crisis I think you ought to stop worrying and get on with life. You have a good spread of investments, the weakness may be that you appear to have most of your shares invested in the UK and Europe. It depends on what shares you are invested in but to counter the sort of concerns you have (I had them as well at about the same age) I made sure that I had quite a few reliable (as much as they can be anyway) dividend paying shares in the basis that if all else went wrong at least I would have the dividend. That over some years has driven me to be probably quite a conservative investor, certainly not going for higher yields a la HYP, but being content with the likes of Unilever and Diageo. I also have a number of growth ITs.

I live off my share portfolio having no pension except the State pension, and nowadays have no other meaningful investments but it works fine. I more or less ignore all share investing theories and reports. I have never heard of Yardeni Research.

I invest from company up not say Europe down.

Dod

[Adamski]

Hi Merluzzo, inflation is increasing sharply across the developed world. It was not a normal recession. Demand was artificially supressed for a year with the lockdown. So as we come out, demand which has been pent up has been let loose. Demand for goods and services has dramatically outsripped supply leading to inflation.

Because of this value is beating growth this year. I am invested in mainly trackers and growth funds, and have underperformed the market YTD by 3.9% (as of today). In hindsight would have switched to value. Growth funds tech etc re hit by inflation as their valuations cannot be justified as based on future profits discounted. As interest rates go up the values go down, and hence the tech sell off particularly in the US and China. As for timing the market, I always seem to get it wrong, so just try to hold a balanced portfolio, and hope for the best! Cheers, Adam

[daducky]

Damned if know. I'm loosing money in scrapes with strategies e.g. stick on moderate passives such as vanguards ftse 100.acc of ftse 250 or us all sh which did well last year are turning smelly.
Last i saws lots of just nonVG opps so went ii this yr. And the markets gave a bit for banks and took.some back for metals, chips, breweries. Now i got fairly diverse array, all 1-2% -ve. I suppose i turn em all to cash until some trend consistency which might be never.

[GoSeigen]

As many, I am trying to make sense of what’s happening to inflation, markets, etc.

What you wrote makes a lot of sense. Investors worrying about inflation at this stage is bullish for the markets. They will go through a period of stressing about when policy will tighten, adjusting valuations back down every now and then. Eventually they will become used to it, then as policy tightens they will notice the sky doesn't fall and will become complacent thinking the market has a right to keep rising even with rising rates. That's when you need to get really leery about risk. It's still too early to worry IMO, the bull lumbers on.

GS

[Arborbridge]

I've been in the market contiuously since 1987. I've seen a few crashes and corrections and I always sleep easily at night. Looking back, those momentous events are just small negative blips on the road.

Things always come right: if they don't there will be much more to worry about than savings. There could litereally be blood on the streets.

Have faith and don't do any panic selling when the time comes. If you have a cash fund now, just drip it in over however many years makes you happy.


Arb

[1nvest]

shares in aggregate could be expected to grow in line with inflation.

Only subjectively might shares be considered a inflation hedge. Start of 2000 to end of 2020 and FT100 total return with dividends reinvested has risen from 3141 to 6175, a 1.96 times increase, whilst inflation has seen prices rise 1.78 times. A 10% total real return increase over 21 years. If you instead spent dividends then in inflation adjusted terms the portfolio value would be down 50%.

[Arborbridge]

shares in aggregate could be expected to grow in line with inflation.

Only subjectively might shares be considered a inflation hedge. Start of 2000 to end of 2020 and FT100 total return with dividends reinvested has risen from 3141 to 6175, a 1.96 times increase, whilst inflation has seen prices rise 1.78 times. A 10% total real return increase over 21 years. If you instead spent dividends then in inflation adjusted terms the portfolio value would be down 50%.

How does that compare with other things: gold, cash, bonds? Any idea?
People who are very risk averse and kept their cash in the usual banks and building societies - as many do - I would guess are far worse off. I have many elderly friends like that, but for us who are prepared to take more risk?
BTW, I don't want an answer about a fancy rebalancing scheme - I just wondered how the other main group of asset classes compared with equities, as I have no idea, although I should!


Arb.

[1nvest]

shares in aggregate could be expected to grow in line with inflation.

Only subjectively might shares be considered a inflation hedge. Start of 2000 to end of 2020 and FT100 total return with dividends reinvested has risen from 3141 to 6175, a 1.96 times increase, whilst inflation has seen prices rise 1.78 times. A 10% total real return increase over 21 years. If you instead spent dividends then in inflation adjusted terms the portfolio value would be down 50%.

How does that compare with other things: gold, cash, bonds? Any idea?
People who are very risk averse and kept their cash in the usual banks and building societies - as many do - I would guess are far worse off. I have many elderly friends like that, but for us who are prepared to take more risk?
BTW, I don't want an answer about a fancy rebalancing scheme - I just wondered how the other main group of asset classes compared with equities, as I have no idea, although I should!

Arb.

In nominal terms
Gold 7.6 times higher
10 year Gilt ladder not marked to market, just the rolling average of 10 year gilt yields effectively 2.63 times higher
Cash, I don't know, I'd guess perhaps 4% average pre 2008, 2% average since, broad average of perhaps 2.5%/year ... much the same as inflation for something like High Street Bank fixed income/term bonds.
So cash marginally worse than FT100 total returns, which in turn was marginally worse than 10 year gilts, and significantly worse than gold.

[1nvest]

Why has the FT100 been such a poor performer since 2000?

Well the FT100 pretty much compares to the FT All Share. The UK being a global hub also tends to reflect a world excluding US type holding. And world (exc. US) stocks in general have struggled ...

US $ based chart but converted to £ the alignment would remain similar.

Bonds tend to broadly compare, so given that the US is around half of total global stocks, 50/50 that with UK FT100 (as a proxy for World exc. US), 66% weighting into a all-world stock type holding, 33% bonds (10 year gilts for instance) ... so overall a third each FT100, US S&P500, 10 year gilts ... since 2000 has yielded 5.5% annualised real.

As a indicator of the comparison of that to a 67% all world/33% bond again US $ based total returns

For greater cost/tax efficiencies you might swap out US S&P500 holdings for Berkshire Hathaway, however despite being a conglomerate - akin to being a Investment Trust of sorts, it is still a single stock risk factor. But it pays no dividends, so no 15% US dividend withholding taxation involved (that otherwise on a 2% dividend = 0.3%/year cost), Nor are there any fund fees involved.

Comparison here

So if for instance you bought the Vanguard FT100 tracker with its 0.06% fees, held BRK-B shares for US exposure, used high street bank fixed income bonds as your bond holdings, then ongoing fund fees would be 0.02%/year that potentially reflected a 67/33 all-world/bonds portfolio that via other channels might involve higher costs and dividend taxation.

Rebalancing is overrated, only really needed if the weightings massively deviate away from desired levels. When accumulating you can simply just add savings into whichever asset is lagging its desired weighting. If in drawdown just sell down whichever asset is over weighted. If using a SWR style of withdrawals that provides a consistent inflation adjusted income then you might even draw money monthly. A account such as ii for instance provides a free trade each month so monthly withdrawals cost no more than if drawn as a larger sum once each year.