We’ve survived the first half of 2019 and it’s a sensible time to review progress – or lack of. My tax return (2018-19) is almost complete, and HMRC is demanding its first quota for the coming tax year by the end of this month. I have done some back-of-the-envelope sums and have a fairly clear idea of how much cash I have. What to do with it is my next step.
Charts are very visual things, pictures really, and one’s reaction is very different to text. But charts where each candle is six months’ worth of data are not available for the asset classes discussed here; so for long-term charts, my choices tend to be limited to monthly, quarterly or annual candles. They’ll do.
I’ve chosen four key UK-centric assets to fathom what might happen between now and Christmas. This year the FTSE 100 index has spent all six months recovering from sharp losses in the fourth quarter of 2018. So far, so good, but hardly an exceptional performance. What is important is that we are back above the watershed 7000 level and while we hold above here I’d allow for a series of slow, small moves between here and the record high at 7900. Keep in mind that the index is on the expensive end of the scale, hence investors’ caution.
My next chart clearly shows that the secular trend in benchmark 10-year gilt yields, on an incredibly steady downward path – regardless of the Bank of England and the vagaries of economic policy. These too are trading at extremes, reflecting the global trend to lower interest rates and subdued inflation. The problem for borrowers is no inflation doesn’t shrink debt as it would when it’s high. It’s also linked to poor wage growth and this combination leads to cooler animal spirits. I expect gilt rates to hit new record lows, and consequently gilt prices to set new record highs, by the year-end.
Another delicious secular chart for you of US dollars per pound sterling – starting since the foreign exchange market was first floated. You can see that cable had started slipping sharply well before David Cameron announced in February 2016 that the Brexit referendum would be held on 23 June. We are close to two standard deviations below the mean regression since 1981, struggling to gain a foothold since September 2016. What we can say is that it’s cheap, that both observed and implied volatility are very close to all-time lows, that volume has been low because of this, and that it’s certainly not a market in freefall or panicking. I suggest more of the same rather dull performance – deal or no-deal with the EU.
Gold, as I’m sure you know, since the Great Depression was exchangeable at the US Federal Reserve at $35 an ounce. Then things went pear-shaped under President Nixon who, in 1971, cut this facility, ending the Bretton Woods System; that’s why cable’s chart starts in 1971. The precious metal became severely overvalued following the great financial crash of 2008, caught up in a generalised commodity boom. Holding in a 1.6 standard deviation for six years, steady as she goes, so why rock the boat?
