Blowing Bubbles

Well, I’ve managed to survive another Christmas silly season where I managed to disregard most of the lessons in good decision making that I’ve taken care to explain in a series of blogs over the past year.

The first ever blog I posted was about the benefits of delaying gratification, but as I’ve added about seven pounds in weight in the past three weeks, it’s safe to say that I have ignored that one.

In February I wrote a post called ‘making your mind up’ that explained a whole range of emotional biases that affect our ability to act rationally and make informed decisions. But then I received a present for Christmas that demonstrates one life choice that is anything but informed – I got a ticket to see my team, West Ham, play Arsenal in the league.

There aren’t many choices that you make at primary school, that convention states you cannot change for life, but your choice of football team is one of them. And remarkably, since then, the only time my loyalty was sorely tested was when as a nine year old I suffered at school the Monday after a 6-1 drubbing by the same Arsenal. Arsenal fans can view the carnage here.

Fortunately, for the current game the West Ham team are a little more robust – and were even above Arsenal in the league….at the start of the game. And the cost for a front row seat in a tired East Stand? £75.

Now £75 is what you’d pay to see the latest West End musical, but at a football match you are expected to do the singing yourself. You also don’t know whether you are paying to see a comedy, tragedy or thriller.

As it turned out, one of the linesmen was a comic, West Ham’s early disallowed goal a tragedy and the game a thriller as we lost 1-2 to the old foe. But then, I am demonstrating those biases again.. time to get back to the day job.

 

 

Central Banks Blowing Bubbles

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Being in the front row at West Ham I got to see the bubble making machine in all its glory.

On a more serious note the Central Banks around the world have their own more serious version called QE (quantitative easing) or simply ‘money printing’.

QE  by certain central banks began in earnest in the teeth of the financial crisis and you might think that printing money, albeit digitally, out of thin air would be very damaging to the credibility of the money in all our pockets.

And normally it would, but in this case the central banks were using the created money to buy assets, especially their own government bonds in order to bring stability and order to markets.

At the height of the crisis it also became clear that many leading financial institutions were under threat and that they could not be dismantled in an orderly fashion and the existence of QE money provided reassurance these institutions would not fail and their underlying assets could be supported.

It was the right decision, but we must remember that it was a right decision after some very poor ones by the same central banks that encouraged the excesses in the first place.

But it is one thing to print money to bring temporary support for asset prices, it is quite another to pursue the same policy further to raise the price of all asset classes, including equities, in the belief that this will encourage self-fulfilling economic activity.

This is the opposite of the normal relationship and the problem was eloquently described by Jim Grant, a financial journalist, who I have followed for almost thrity years. In a recent speech he explained, ‘we have entertained the fantasy that high asset prices made for prosperity, rather than the other way around’.

And this is where we are now. By historical measures both government bonds and equities are very expensive and although in the leading economies they are relatively stable there are signs of fissures elsewhere – especially in certain currencies and commodities.

I see the message repeated often in the world of financial advice that stability, as measured by volatility, means low risk – but that can change and change abruptly. And a general lack of understanding of the limitations of this methodology is partly why banks got in such a mess in the first place.

What this means is that, when working with clients, extra care must be taken with the level of risk being undertaken – whether looking at a client’s own attitude to risk or the risk inherent in certain assets and products.

And with the new pension rules due this year and an accompanying list of new product offerings including peer-to-peer loans, I will certainly aim to keep our clients as informed as possible.

While a prosperous New Year is great, we are after a prosperous long term.

 

Please remember:

• past performance is no guide or guarantee of future returns;
• the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing