As I write this the FTSE 100 is floating at about 6000.
Why is that? Throughout 2006 and 2007 the market averaged 6162 in my calculation - based on FTSE stats. During most of that period most people believed 'we'd never had it so good'. And now we know that was not true. We know our banks are in crisis. We know there is a consumer down turn. We know there will be low or nil growth in real terms. We know that unemployment is likely to rise. We know that the financial sector is going to shed people and they, supposedly, have been driving our economy.
But the FTSE remains almost unaffected. Is that rational? No, of course it isn't.
There are three explanations:
1) The index is wrong (this is plausible - it is regularly revised to only include winners, so giving a false impression of what is really happening);
2) Institutional investors remain committed to stock markets because this is what they've always done and most young people in the City (those sub 40) know nothing else - which says nothing has been learned about herd effects as yet, despite the damage they have already caused;
3) We've set up an unsustainable savings structure for pensions and other purposes which means money has to be placed solely in derivative financial products (and even shares are that) and that there is no way funds can actually be used to invest in real economic activity - meaning financial markets are unrelated to that reality.
I suspect all three explanations are right, in part.
I have pulled everything I have in pensions and the like out of the stock markets. Like banks and housing, there's only one way they can go now. And sometime soon a FTSE 100 index at 6000 is going to appear as mad a reflection of economic reality as banks offering 125% mortgages.
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The FTSE excluding the mining and oil stocks would actually be at around 4600. The banks only represent 15% of the index now.
In this day and age, one has to be extremely careful giving bad investment advice as one has to be regulated by the FSA to do so.
Ali
Extracting data is not the point: it’s the index that is reported, not bits of it.
And I was not giving advice: I was commenting in a public medium: that does not constitute investment advice.
Richard
“I have pulled everything I have in pensions and the like out of the stock markets. Like banks and housing, there’s only one way they can go now. And sometime soon a FTSE 100 index at 6000 is going to appear as mad a reflection of economic reality as banks offering 125% mortgages.”
Surely you weren’t selling all your precious holdings based on a “reported index ” ? Surely one would sell everything based on the facts ?
The facts are that the FTSE 100 index is at 6000 because of mining and exploration.
Anyone who is interested in this site on the real performance of stocks should look at the DAX index.
No of course I wouldn’t make any decision based solely on an index.
But the fact is that many do.
That’s the point I was making – and that is wholly irrational, on which we are agreed.
What on earth is going on here ? Your whole argument for selling and “mad reflection of economic reality” is based on the FTSE 100 being at 6000.
The fact is that the FTSE 100 is no longer ( and has not been for a long time) a true and fair reflection of the stockmarket or the economy. Therefore if you are selling investments based on the levels of the FTSE 100, you are making a big mistake.
By all means , sell everything. But understand that if your selling is predicated on the FTSE 100 index, you are in effect selling Mining and Oil stocks not anything to do with financials or housing.
Wether people ( like you ) are making a mistake of seeing an index at an “artificially” high level is not the point. For right or for wrong, stockmarkets are now global and the FTSE 100 has long lost its position as a blue chip index representing British companies and the British economy.
What I am basically saying, very politely, is that you are wrong in all your assumptions. Sell your investments but it has nothing to do with the FTSE 100. Wether it should, is another argument.
Ali
Get my point – I am saying this index is wrong!!!
And if we’re both right – then tell me why it is the case that it is announced on news bulletins every hour in the UK as if the major indicator of our economic well being, when it isn’t?
In that case of course this is not the reason to sell by itslef – except that when people realsie they have been conned, again, they will react en masse and seek to sell.
And my other point is this – the City itself does not understand what you, or I, are saying. And that’s also massively worrying.
Richard
What on earth are you saying????
1 The index is not “wrong”. You and others just don’t seem to know about its constituents. And if you need to know, just like going to a doctor, your friendly stockbroker should tell you.
2 No one has been conned by anyone. If you are unhappy about the news service, complain to them. This really is an amazing statement to make. All the information is out there for all and sundry to see. How is anyone conning anyone ? If I may say so, you have an obligation to know about taxation and therefore you have an obligation to know about investments you make. No good complaining about a con.
3 I work in the city and I understand full well what is and has been going on. There is no conspiracy.
4 Don’t get fooled by the notion that everyone out there is losing money. They are not. In fact some hedge funds are doing unbelievably well and if you / I had invested our money in them, we would be very very happy. Again, know your investments, know your fund managers !
5 Anyone who has bought resources / oil stocks and sold their financials / housing stocks has become very very rich. And there are lots of them around but they generally shut their mouths whilst the rest of the world is doing badly.
6 If you don’t believe me, look at a hedge fund called Paulson and see their performance.
Ali
Now it is clear. You are one of those who can’t see the wood for the trees
Of course the index is misleading – you say so yourself, and then defend it because it suits your purposes to hide what is really going on
You are part of the problem, not part of the solution
The solution is to break this myth that anything related to this activity is to do with wealth creation. We even have to break the idea that it is a zero sum game. The remuneration of those who partake in the game ensures that cannot be the case.
And I reiterate my point: the index as a whole will fall.
Richard
There are just no words to describe how ridiculous you sound. I just wish someone actually read this site and could pull you up on this nonsense.
I have never said the index is misleading. It is only misleading to you because you had an idea in your mind that it constituted something that it doesn’t.
The index by definition cannot be lie or be misleading. It is a reflection of its constituents. It is a mathematical figure derived from its components.
you seem to have absolutely no knowledge of the stockmarket. I am perfectly capable of working in the city and seeing it failings and successes. My career choice does not always mean that I am incapable of rational arguments against it. Thats called discrimination. By the same token, do we just completely ignore your views on tax because you are “pro-tax” ?
What you are saying is complete rubbish from someone with no experience or knowledge. The city has many many failings but the index is not one of them.
If you think the index will fall, that is your right and opinion. But be sure to understand that you are taking a view on a commodity bubble rather than a financials/housing one.
My last hope was that you have been at times capable of admitting someone else’s point but this debate has proved beyond all doubt that this site is a monologue.
If you get just one person of professional repute to agree with you on this debate, I will be amazed.
Ali
I fully understand indices. I know that they reflect the assumptions that are made in their creation – in this case that the index must represent success. That is why it is misleading.
You have said it does not reflect fairly what is happening in the market – I read that as a statement that it is misleading. It is.
And the fact that I do not work in the City does not mean I cannot offer opinion on it. Indeed, it may qualify me to do so. For unlike tax, where it is apparent that training and experience are needed to see what is happening, it is apparent that the City requires no such attributes as the sub-prime market has shown. It simply behaves as a herd, following trends which it does not udnertsnad and which provide destructive feedback loops. Anyone with ability outside the City could see that the sub-prime disaster was waiting to happen. Those in it did not. Do you really hink that means we should respect your opinion?
Do we think that people still sell tracker funds means we should presume there is knowledge of indices in the City, or amongst consumers?
Do you really think the fact that the City talks constantly about index movemnts and does nothing to stop that discussion shows ability on its part, or understanding?
But in case you doubt that I and other Cassnadras have credibility have you read the likes of Martin Wolf of late on issues such as this?
The fact that you do not agree with me is of absolutely no consequence to me. And yes, this is a monologue. That’s what blogs are. Haven’t you noticed? And in this case it is a monologue that is offering a deeply rational, wholly reasoned alternative view of finance.
Your failure is to answer my criticisms except by saying I do not know what I am talking about. My answer is to pose more qesutions that justify my suggestion that the index is a marketing charade to drum up investment in the market. And at no point have you even sought to engage with that question.
If you had any credibility you would. But as I said before, you can see the trees not the wood and so I suspect you cannot, relying instead solely on abuse to maintain your case.
That doesn’t work. Try arguing for a change.
Richard
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