St. James International · Further Readings


TO BIG TO BAIL

This is the time of year for reviews…..BUT do you want to read another review and all the charts and graphs. What is the relevance? Is a review not just like a balance sheet? Out of date by the time it is published.

What did happen in 2013? Maybe it is what didn`t happen in 2013 that is important for 2014. The Federal Reserve Bank of New York, The Bank of England and the European Central Bank did not allow interest rates to rise. By manipulating interest rates at almost zero levels investors have been forced to seek a return on their money by purchasing equities. The rise in stock market prices is less to do with any underlying value from strong economic prospects than with the lack of value in the cash markets. The US Government and the UK Government being obsessed with house ownership will claim that lower interest rates allow citizens to purchase their own properties and that this will in turn boost housing markets and construction and therefore the economy generally.

Watch out in 2014 for another housing bubble to burst.

The rise in share prices means a decline in yields to investors. Therefore we are approaching a point where equity markets no longer represent good value.

Something else that didn`t happen in 2013 was the support by the banking system for small businesses. The whole point of governments recapitalizing banks, after the banks had foolishly wasted their own capital as well as their depositors funds, was to strengthen the economic base. All that has happened is that the banks circulate this extra capital amongst themselves and show no sign of supporting the economy via corporate lending. They are still more concerned with trading derivatives and investing in dubious financial assets of uncertain value.

Of course, governments do not monitor the banks because they rely on them to act as policemen with regard to money laundering by criminals and terrorists. 2013 saw a lot of sanctimonious hand-wringing by self-righteous international organisations on the subject of money laundering. The politicians have no desire to, and lack the means to, impose sanctions on criminals and terrorists and prefer the banks to do the job for them. The price of this is for the banking regulators to turn a blind eye to the banks` persistent failures to stimulate industry. Occasionally governments attack the banks about money laundering in order to persuade the press and the electorate that they are serious.

So, when the same symptoms appear in 2014/2015 that we saw in 2008/2009 will governments protect the banks` shareholders? These shareholders are the people who invest in equities knowing that the value of their holdings may go down as well as up! It is the depositors who should be protected, not the shareholders. This time around let us hope that the financial press and managers of collective investment vehicles will raise their voices along with the politicians who do not harbor ambitions to sit on the board of a bank or act as consultants to a bank.

This time the banks are too big to bail, not too big to fail.

Where does this leave the investor in 2014? With red flags raised above banks, property and equities it is time to look at the physical assets that might benefit. Commodities, both food and metals, are the beneficiaries of the movement of capital away from the sectors with a declining return.

The message to investors is make sure your adviser continues to advise you.



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