The Three Peaks

What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun. This is taken from Ecclesiastes 1:4-11.

Many investors will be watching the world stock-markets tumbling and fearing for their financial future. This is a natural and understandable reaction. Look, however, at the graph below and you will see that this violent correction, if it is going to continue as such, is becoming a regular occurrence. As Saltydog subscribers however, I hope you have followed the “Tugboat” portfolio risk pie-chart and are actually sitting comfortably, with the majority of your portfolio invested in cash and the slow property funds. This, provided the property funds continue to perform as they have over the last eighteen months, would seem to be as safe a place as any at the moment.

Three Peaks

The big question is, will this correction take the FTSE 100 back down to the 4000 level over the next couple of years as the previous corrections did? There would seem to be a number of reasons to suggest that this could be the case.

  • China`s economy has hit a brick wall and its currency has recently been devalued. Its housing market is also undergoing a rapid devaluation and all of this affects the wealth of its citizens.
  • The Emerging markets of the developing world cling to the coat-tails of China and will fall in tandem.
  • Commodity prices, which rely to a large extent on the health of the Chinese economy, have understandably collapsed. This has a knock-on effect on the wealth of the commodity producing countries. (Australia, Brazil and Canada to name three).
  • The oil price is the purest barometer of world growth as it is the fuel that drives most of the world`s industry and production. Brent Crude, the global bench-mark, has fallen in the past two years from 120 dollars a barrel to close to 44 dollars a barrel.
  • Central Banks will struggle to control the value of their individual currencies as they lift the interest rates at which they are prepared to lend to each other.
  • The European Union is under considerable stress, even after it has kicked the Greek can down the road yet again. There is no real sign that there is an economical solution to the trials of the Euro.
  • The UK stock market is in its 77th month of a bull market. There is only one other occasion in history that the market has risen for longer, and that was in the lead up to the Great Crash in 1929.
  • Finally, both the UK and the USA stock markets are greatly over-valued, probably as a result of the Quantitive Easing that has been taking place and the low interest rates in the domestic markets. Both of which are changing as Q.E. ceases and interest rates rise.

There is not much to like in the above, and you would think that a correction is well overdue. The question is only how large and only time will reveal that?

Jesse Livermore said “The public ought always to keep in mind the elements of stock trading. When a market is going up no explanation is needed as to why it is going up. It takes continuous buying to make a market keep on going up. As long as it does so, it is a pretty safe proposition to trail along with it. But if after a long and steady rise a market turns and gradually begins to go down , with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should one ask for explanations.”