biggest bubble is about to burst
DESCRIPTION
The biggest bubble that is about to burst considers the bubble is risk aversion. Bonds is taking more money now that has been seen since 2007 however this doesn't reflect the reality of what is happening. Investors are like sheep and need to leave the party.TRANSCRIPT
We don’t get sucked into bubbles – do we?
“The biggest bubble since the TNT bubble WILL BURST”
The Biggest Bubble is about to burst
There is a big bubble in investments and investors are doing nothing
We know the party is over
We know the bubble will burst
The only thing we don’t know is when
Introduction
Of course rational investors don’t create bubbles:
Tulip Mania 1636 – 1637 Wall Street 1927 – 1929 Japan 1982 – 1989 Dot Com 1997 – 2000 US Housing Market – 2007 – 2008
“At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble”
Investors are swayed by recent events i.e. investors are not rational and make decisions based on biases, not logic……
Why bubbles?
Why bubbles?
Over optimism – people believe they are better than they really are
Illusion of control – people believe they will know when to get out
Self serving bias – people believe what they want to believe
Inattentional blindness – people don’t pay attention to what they are not looking for
Blindness
Investors have risk aversion, everything we are told tells us that cash and bonds are safe assets
We are told that equities over the last ten years have underperformed equities
Retirement forces us to move to safe assets where there is no risk
The Facts
Bubbles are a by product of human behaviour, they have the same pattern Change in circumstance – internet creation
Credit creation – finance available
Euphoric – mania
Financial distress
Revulsion
They will continue to happen because its who we are…
The Facts
FT Money – investors are in no hurry to rotate from bonds to equities
You Gov Survey shows 71% of those asked wouldn’t be prepared to take any risk with their money
Bonds have delivered over the last ten years but growth does not correspond to the gilt yield, it will correct
The Facts
Actual returns over last ten years – FTSE All Share 132%, Gilt Bonds 49% and Gilts 56% - have bonds out performed equities?
Difference is that equities have been more volatile than bonds but that could change
Cash is DEAD and there is no life support machine for some time to come
The Facts
Cash:
Between 1992 and 1997 inflation was 14.9%, the Halifax Liquid Gold account paid 16.4%
Between 2007 and 2012 inflation was 16.5%, the Halifax Liquid Gold account paid 0.8%
Interest paid to savers fell by £5 billion in the last five years and will keep on falling
Interest rates are unlikely to change until 2017 and the banks will not be in a hurry to pass those increases to savers, so savers have to accept a long period of poor rates
The new BoE Governor has clearly indicated his focus is on growth and not inflation, inflation is only going one way
Cash can no long be seen to deliver income and inflation protection
Inflation, inflation, inflation
Maybe 30 years ago we reached retirement and died, this is now unlikely to happen
Average person will live twenty plus years in retirement
Investors need to stop being sheep
Retirement, Retirement, Retirement
2012 equity funds suffered outflows of Eur 6.8 billion
Bond funds took Eur 176.5 billion in 2012, highest level since 2007
In fact bond funds captured 10 times the inflows in 2012 than they did between 2007 and 2011 combined
Be a contrarian investor
THE PARTY IS OVER – but investors are reluctant to leave
Investors are fearful to leave the bubble they are sitting in – the bubble is one of risk aversion
Its not if, its when the bubble bursts and it will be messy
Be a contrarian investor
Investors have to accept they are all ready taking a risk with their money
Crucial that assets are diversified
Important that investors don’t follow the herd and look harder and deeper to get growth and income
Investors need to accept changes to retirement and that investing is a lifetime option
How to react
Research, research, research i.e. investors shouldn’t just accept an investment, they should break it before they invest in it
Consider globally away from the noise – consider changes to political landscape in Japan, what does that mean are there opportunities. If global bonds are dead where are there options for bond investments. Emerging markets is China really dead or is there more to come. Resources what will be the winners for example agriculture etc etc etc
And finally be contrarian, be brave and hold your nerve
How to react