‘It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March’
Mario Draghi, 21 January 2015
Clearly the recent market activity has rattled Mario I’ll-do-whatever-it-takes Draghi’s cage. He is already signalling the possibility of more QE and interest rates moving further into negative territory.
The fact QE does not work — as proven over the past seven years in the US, Japan, China and Europe — seems to be an easily dismissed detail to be ignored.
Michael Spence (Nobel Prize winning economist) and Kevin Warsh (a former governor of the US Federal Reserve) co-authored Growing Global: Lessons for the New Enterprise. The book was released in November 2015.
This is their take on QE (emphasis is mine):
‘QE is unlike the normal conduct of monetary policy. It appears to be qualitatively and quantitatively different. In our judgment, QE may well redirect flows from the real economy to financial assets differently than the normal conduct of monetary policy….We believe the novel, long-term use of extraordinary monetary policy systematically biases decision-makers toward financial assets and away from real assets.’
In other words QE does a whole lot of good for financial assets (Wall Street) but precious little for the real economy.
Perhaps that’s Draghi’s real intent…to prop up his wealthy autocratic mates.
However QE — like any drug — needs to be administered in ever-increasing doses to have the same effect. Eventually the increased dosage does more harm than good.
In my opinion this is where we are at today. The system is toxic and at the point of rejecting the very medicine that was supposed to cure it.
Making sense of all the complexities can be fatiguing for the average person. This does that, which causes outcome C, which in turn triggers another set of circumstances. And just when you think you have it figured out, someone comes along and tells you something that turns your thoughts upside down.
On 30 April 2015 my advisory newsletter Gowdie Family Wealth was about keeping it simple.
We do not have to know everything to make informed decisions. We just have to keep to the basics.
This newsletter attracted a larger than usual feedback…all positive.
Sentiment like ‘thanks for clarifying what we should be doing’ ran through the reader comments.
We have entered a period of volatility that may be the beginning of something much more sinister…an unwinding of the artificial supports in the global economy and financial markets.
Whether that’s the case, only time will tell. But it will happen and having a clear strategy on how best to protect your capital will enable you to keep your head while others are losing theirs.
I’m going to share that 30 April 2015 newsletter with you now (below).
Keep it Simple
‘Life is simple but we insist on making it complicated’
Perhaps its my age that draws me to the simpler things in life. The pleasure of walking on the beach with my wife. A coffee shared with family and friends. No desire whatsoever to upgrade to the latest mobile phone. Happy to drive my 10 year old car from A to B.
The less moving parts in my life the better.
The same philosophy underpins my attitude towards investing and assessing risks. Keep it simple, stupid.
In the money world, life can become very confusing if you delve into the detail.
Individual markets — shares, property, bonds, commodities, currencies and derivatives — each have their own unique dynamics and subtleties that can trap even the best and brightest, let alone the enthusiastic novice.
Knowing how markets function is one thing. Then you have to understand the investment vehicle or product you’ve chosen to give you exposure to these markets — managed fund, superannuation fund (self-managed, public or corporate), hedge fund, direct share investing, individual property holding, listed investment company etc.
Each vehicle or product has its own risk, reward, liquidity, cost, taxation and regulatory issues to be considered and comprehended.
Overarching all of the market and product complexities are the layers of economic influences that can impact (positively or negatively) the various markets — QE, interest rate policies, currency manipulations, employment data, terms of trade and debt levels.
With so many moving parts in the investment world, it’s easy to understand why the majority just get swept along with whatever the crowd is doing.
Very few people do the research necessary to make truly considered decisions on their investment selections. If a particular market is running hot, the herd rushes into the trend ably assisted by a broker, agent, planner or consultant. Most people take the default option with superannuation.
A financial planner produces a Statement of Advice with research reports on the recommended investment funds — which coincidently just happen to be the very funds that belong to their institutional master.
While these ‘let us take the worry out of investing for you’ strategies appear to simplify the investment approach, they actually make it more complex. They throw a layer of advice into the mix – not to mention the issue of who to trust.
There’s a difference between a simple strategy borne from ignorance and one developed with information. The one borne from ignorance is almost certain to contain nasty surprises. The one developed with information has a slightly better chance of minimising shocks and providing you with the opportunity for long term capital preservation.
The George Soros’s and Warren Buffett’s of the world truly know how to join the dots. For the other 99.99% of us we should recognise our limitations and play a low percentage game.
Sure it can be boring and dull, but these emotions are preferable to the ones experienced due to significant losses.
My ‘keep it simple’ approach (one that I acknowledge could be wrong in this new world of open market manipulation) is distilled into a few basic principles:
- There is no new way to go broke. It is always too much debt. Every period of excess debt in history has ended badly. Relying on history rather than rhetoric from self-interested parties (central bankers, IMF, politicians and the investment industry) gives me a higher percentage of being right.
- There is a world of difference between value and price. Knowing value enables us to determine what price we are prepared to pay for an asset/commodity/goods or services. People apply this simple principle to nearly every retail purchase they make, but do the complete opposite when investing. Common sense should tell you that the higher prices go away from the value line, the less attractive the investment becomes.
- Understand the product or vehicle you are investing in. Make sure the strategy is transparent and risk is readily identifiable. The most common refrain from investors after a failed investment is: ‘if only I’d known that could happen, I would not have invested in XYZ product’.
- Reduce costs to a bare minimum. Recent reports of ANZ financial planning charging clients for a so-called ‘premium’ service is indicative of the industry’s over-charging and under-servicing culture. In the investment industry there layers of fees — management, administration, asset consultancy, trustees, and advisers — each one of these is clipping your ticket.
- Over 80% of professional (high-cost) managers fail to outperform the relevant index over the long term. You can go with the odds and invest in low cost Exchange Traded Index Funds.
- Trading is a mug’s game. High cost, high turnover, high maintenance and low returns is how I would sum up the experience of most traders.
- The longer a trend, the greater the chance it is going to reverse. Most people see an established trend and assume it’ll deliver more of the same. When an established trend line starts to ‘elbow’ (turn up) be very careful — it’s a sure sign the crowd is getting in and you should be looking at the exit.
If in doubt, opt out. Better to err on the side of caution. It was Donald Trump who said some of his best investments were the ones he didn’t make.
The reason I prefaced these principles with an acknowledgment they ‘could be wrong’ is based on the simple observation of philosopher Rene Descartes, that ‘doubt is the origin of wisdom’.
Questioning assumptions. Not taking anything for granted. Asking ‘why?’ Reading alternative opinions. These are all critical tools for checking the robustness of your views.
Whenever you are making simple assessments based on complex situations there’s always plenty of room for doubt.
Believe me I’ve agonised over whether this time is really different. Central bankers have shown us they are prepared to go to extraordinary (and previously unimagined) lengths to keep the global growth machine turning over.
It would not surprise me if they have more tricks we never thought possible up their sleeves.
As the deflationary forces of the Great Credit Contraction exert more pressure on the economy, the more desperate the central banker reactions will be.
Even though these doubts are a constant companion I cannot escape the simple logic that if it looks like a duck, walks like a duck and quack likes a duck, then it must be a duck.
This is a debt crisis without peer. Attempting to cure it with more debt reminds me of Einstein’s definition of insanity — ‘doing the same thing over and over again and expecting different results’.
History and Einstein together with my own experiences and instincts provide reassurance the basic principles are still valid today.
Keeping it simple in a complex world is not easy. But until the laws of reversion to the mean and gravity are repealed, the basics are our best guide to survive this period of lunacy with our capital intact.
Editor, Markets and Money