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Not such a dynamic outlook...

Tuesday 13 November 2007 03:15PM

First an apology. The past few weeks have been so busy, first with the Independent Investor conference, and then with the setting up of the investment company that is my new day job, that communication with the rest of the world, including followers of Independent Investor, has unfortunately (but temporarily) had to take a back seat. Such are the perils of career adjustment.

I will have more to say about the new investment company in due course, but a normal service of the Editor's Letter is resuming. In the Latest Articles list below you will find links to the various published newspaper columns that I have written over the course of the past few weeks, all of which are accessible from the Independent Investor website. I am happy to say that my general stance over the summer, to the effect that the stock market was not going to crash because of the credit crunch, has so far been borne out.
 
Most equity markets have rallied strongly and some personal favourites of mine (such as the Brazilian stock market, which has been up by a third or so) have produced spectacular recoveries from their lows in the summer. My view about the credit crunch is not that it is unimportant - clearly it is anything but - but that the crisis of confidence and liquidity that is part of it is not inherently a permanent problem, however alarming it may seem at the time.
 
One thing that I have noticed is that the bankers whom I know well, being right at the centre of the storm, are in general even more alarmed about the future than those looking at the situation from outside. It is their jobs, bonuses and careers after all that are now at risk, as the recent high level departures at Merrill Lynch and Citigroup have demonstrated. The scale of the losses at these two banks, and the scale of the risk-taking that they represent, are genuinely shocking, even to those of us who thought we had seen the folly of bank herding all before.  

It is clear that we have not reached the end of the bad news from the banking sector. The most recent Financial Stability Report from the Bank of England was one of the most gloomy I can remember, and there are obviously still further writedowns and losses to come out. I remember reading somewhere that the combined losses of the big banks in the 1980s Third World debt crisis exceeded their combined profits for the previous decade. This time round we could be looking at something almost as bad.      

Without wishing to be complacent about the scale of the fallout, there are times however when ignorance as an investor can also be bliss. It is true that we have still to see the economic consequences of the slowdown that contracting credit must produce, but I have yet to be convinced that the impact will necessarily be as bad as many think. Investors in general pay a heavy price for underestimating the resilience of the American economy. The sub-prime crisis and the deeper slump in the housing market will not on its own bring the country to its knees, as it well might do in other less robust economies (eg Spain).
 
At the same time there is no doubt that the  bull market is becoming overextended and long in the tooth. My view for some time has been that this would not be the year that it finally ran out of steam. I would not be at all surprised if there is at least one more leg of the current bull market in risk assets to come, with emerging markets again to the fore. However, as at the time of writing, there is no doubt that the market recovery looks increasingly fragile on technical grounds, so a degree of caution is certainly now called for.  

I would be being disingenuous if I did not report that some of the fund managers whose opinions I respect most are more cautious than they have been for some while. I hope to add one or two examples to the website in the next few days. My old friend Sandy Nairn, for example, who learnt his trade working for Sir John Templeton, reckons that we are overdue an old-fashioned bear market, one that would take the market down by say 20% before reverting to the next bullish phase of the cycle.
 
The problem today is that policymakers seem to have become scared of even the mildest correction in stock markets, to the extent that the market seems now to be driving interest rate policy, rather than the other way round. The Federal Reserve cuts interest rates at the first sign of a market setback. It cannot complain if the result is the indifference to risk that has characterised the behaviour of both investors and the banking community (though the latter should of course know better).  
 
I am wary however of those who predict that the dollar will tumble further - there are so many dollar bears that we must be close to a temporary turning point at least.  That may also put a temporary lid on the surging gold price, but I remain in the camp of those who think that commodities are on a long term upward trend. (It so happens that the new investment company I am helping to set up expects to profit from the coming boom in soft commodities, so I may be biased there).
 
While the risk of a catastrophic collapse is not high in the short term, in my view, we are entering tricky territory. With my own money, I have adopted a kind  of barbell strategy, with a chunk in high yielding defensive assets and the rest in instruments that are geared to the bull market continuing, but can be readily realisable if things turn down. Exchange-traded funds, though they upset the sensitivities of Jack Bogle, are a very flexible and useful instrument in this respect.
 
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Another item of news to report is that The Alpha Society, a private forum for professional and wealthy private investors, will be up and running from the New Year. The plan is to hold a series of regular monthly meetings at which I will interview and then chair a debate about the current investment views of a number of leading professional investors from both sides of the Atlantic.
 
Membership is by annual subscription or invitation only (subscriptions will be tax deductible for professionals). My colleague Julian Simmonds, the Commercial Director of Independent Investor, is working on plans to make a summary of these events available for free to readers of Independent Investor as well. It may be possible for some investors to persuade a professional investment organisation to underwrite their participation. 
 
In any event I am confident that the series of monthly meetings, which build on the success of our past two conferences, will prove popular. We are in the process of finalising the programme for 2008, but those who have accepted an invitation to speak include regular contacts of mine such as Ken Fisher, Anthony Bolton, Jim Slater and John Kay, subject only to timetabling, so I think I can safely say that the quality of contribution will be high.

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