We are off and running in 2015. The world events have taken center stage and we have all been spectators.
The major events have been:
- The shocking events in Paris and the apparently related events of Brussels. This has shocked the western media and placed a microscope on matters. It does appear that it is deliberately destructive and religiously motivated. The attack on people who are advocating free speech to a very small and targeted audience is simply wrong. Yes it may give offence to someone, however it is in a small newspaper bought by people who like that type of journalism. Frankly, there are lots of media that I won’t read because of the slant that the editor has. The equally distressing matter is the attack on persons at a supermarket who are probably of one religious faith (although not all were of one faith). This is simply wrong and undermining of a free society. It all must be put into perspective though. The numbers killed are small. In many countries it was thought of as a small group of crazies that all countries have. It simply did not have the impact in Asia that it had in the west, as many Asian countries have had similar attacks and have had to deal with it. I am very concerned that we will return to the crazy days of a police state where there is interference in everyone’s business.
- Let’s all make sure we don’t see “Reds under the bed“, and rush around in a state of paranoia. These people are bad and they are destructive. So are drugs and crazy drivers on the road and we have real issues like unemployment, youth suicide and drownings etc.
- Remember this is a very convenient time for politicians to distract the public’s attention from the issues they are not addressing i.e. the economy! The attacks were bad, but let’s not think that this group of disaffected people can hurt our strong democracies. We are better than that!
The Swiss Franc is unpegged.
I have watched this closely over the past week and this has been fascinating.
The simple fact is the ratio was wrong and the Swiss central Bank moved to remove the peg.
The peg at 1.2CHF to the euro was simply wrong for the performance of the two economies.
If it was right then when it became unpegged, there would have been no change (it would have remained at 1.2).
I have seen commentators making unbelievable comments about this matter.
Switzerland has no obligation to stay pegged to a group of countries that are managing their economies badly. Why should each person in Switzerland have to pay more tax so that its government can hold an exchange rate that is simply wrong? They shouldn’t.
It is wrong for the world not to give the EU the message that this soft stupid process of “print more money and all will be well“ policy has any merit.
The lack of any real policy, except the stupid left wing policies of increasing money supply is simply doomed to failure of catastrophic proportions.
Increasing money supply simply helps the speculators and allows the structural issues to remain. The average person is far worse off, and they will react in the future when they see the speculators have assets and wealth created with the cheap money that Central Banks have pumped into the market. I am expecting a reaction by the poor of significant proportions (yes, massive social disorder).
This is a very different story. China’s economic miracle is due to its massive surpluses, plus it has moved from a centrally controlled economy to a freer market economy. This means asset allocation is improved (whereas the West is becoming more Government dominated and the asset allocation driven by the market is reducing, hence the return from these assets is reducing). Asia makes goods and sells them to the world. It may not own the intellectual property (this may be owned by Apple or IBM etc.), but it does own production and has trade surpluses. It is true Asia is slowing a little, and will slow more. It does have massive reserves which other countries/regions do not have. Its markets are becoming more flexible/market driven, when the west is becoming more regulated and constipated.
Asia has moved to consumption, e.g. it is building apartments and luxury buildings at a great rate. There are lots of these being planned and built now and an oversupply and a “correction“ will occur.
The key for me is that they are producing goods and products that Europe and USA can make, but can’t do so at cost effective rates.
The major issues to think about now is have we digested the drop in Dairy income that has occurred over the last 9 months, and can we continue to have growth driven by central and local Government spending?
New Zealand has benefited from its dairy farmers increasing supply, and also the strong commodity price. The drop in Dairy price has been massive.
Most farms will have lost a minimum of 30% of net income, and some of the farms have lost 150% of net income, i.e. they have lost their last years profit and are in the RED!
This is simply a statement of fact. The big question is how will the banks deal with clients in this position? This hasn’t been determined yet, but we will see actions over the next 12 months. If prices improve, things will settle down. If not, expect a blood bath. The debt levels were too high, and as always the new entrants into the game will have the highest. They are the most vulnerable. They will be the ones the banks will deal with.
Note on my recent visit to China, I read an article stating that Chinese farmers are destocking due to low prices! They can’t make it work at these levels.
The increase in spending in local government is a major concern. No one really holds local officials accountable. The spending is out of control, and the outcomes are poor. This is a major issue for New Zealand’s economic performance. The ability to tax (rate) and to borrow is a real problem. There is no accountability, and this will cause problems for councils in the future.
If Auckland house prices plateau or reduce, then this will cause massive problems.
Watch immigration figures and policies, as any movement in this will have a massive effect.
We have seen the dramatic drop in the oil price and most producers are hurting badly. The worst thing about commodities is that the production is slow to start and very slow to stop. The issue is once you have built your mine, setup your dairy farm, you tend to keep on producing. If prices drop, the easiest thing is to produce more so that you can survive and your competitors go out of business, hence supply drops. The industries virtually never reduce supply in an orderly manner. Producers need to produce to pay bills. If income drops they produce more and prices drop more until someone fails.
Gold is not strictly a commodity. It is money.
We have seen gold end 2014 higher than it started 2014 in every currency other than the US$. Is this a sign?
It’s certainly a point that we should all factor into our thinking.
When commodities are falling and gold is rising that tells me the world believes there is massive uncertainty.
There is no question we have deflation in most assets.
Commodities are mainly down, but so is the real price of an equivalent cellphone, TV etc. The only reason that any prices are up is because the product we buy is 2 to 3 times better than before. It has more memory, more cameras etc. A ‘ like for like product ‘ is cheaper. A Chinese cell phone today is at least as good as your 3 year old Apple, and 10% of the price.
That is real deflation. The only thing we are seeing not reducing in NZ is middle-top end housing.
We should factor this into the equation. If the inflow of capital to top end housing stops, watch out for a problem. Look at our smaller cities and at how the market has moved without capital/migrant inflow. This will be how Auckland will be if our investors/migrants stop investing.
Where should you invest?
Well I hope the above has given you a big picture view.
It is my view, and there are many smarter people than myself in the market.
Use this as part of your research. I am not giving you advice.
I am giving you information on which you can make your decisions.
Be very careful though. Don’t just rely on those advisers who say give me all your money, I know what I am doing.
This is your hard earned money. Be smart with it.
If you think about it, there are countries that are making money and those who are not. Who should you reward with your investments?
- Every investment is about the future.
You take an action today expecting that action to make you better off in the future.
Most experienced investors accept that not all investments they make will make them better off, however, at the time you make the investment, you expect it to be successful i.e. a sensible investor will understand things don’t always work out as you wish.
- Key Point – Think about the big issues. – The world economy. Which countries will win, which will lose?
– Think about our economy and how we earn our way in the world.
Can we really have as many people in Banks, central and local governments earning these massive salaries? Seriously?
Can we really have every person in NZ having cell phones, 2 colour TV’s etc, even if they chose not to contribute to society?
– Is that shiny stuff that we put into Wedding rings and valuable pieces telling us something? Is it good to have some tangible metal?
The world is at a very interesting stage now. Think about the big things and make good decisions.
Don’t get blinded by a few years of good returns which have been based on an aggressive stance in a positive market. The market went up 18% last year, did your adviser pay you more than this?
The years since the bounce after the crash of 2008 have been good. Most fund managers have made good money from 2010 on. The issue now is can they make the same in the next year or two or should you become more active and take a greater interest in your assets?
Only you know that. You must look after your investments as you do your health, your relationships and other valuable assets.
Neglect them and you will lose them.
2015 has started with a bang. It will be a very interesting year.
The question is will you be ready for it?
Will you have done your homework and will you be ready for the next BANG?
Brent King is the Managing Director of King Capital & Investment Corporation Ltd, the owner of Sharechat, IRG, Moneyonline Ltd and Equity Investment Advisers Ltd.
This article is of general nature and does not constitute advice (except to seek advice).
If you wish to contact Mr. King, please email him on Brent.king@IRG.co.nz