The FT has reported this morning that:
Neil Woodford, the UK's most high-profile fund manager, has said he believes stock markets around the world are in a “bubble” which when it bursts could prove “even bigger and more dangerous” than some of the worst market crashes in history.
The founder of Woodford Investment Management, which manages £15bn of assets, warned investors to be wary of “extreme and unsustainable valuations” in an interview with the Financial Times, likening the level of risk to the dotcom bubble of the early 2000s.
He is right, of course. Whether his resulting investment strategy is correct is another matter altogether. But he is absolutely correct in calling out a bubble. And sometime soon it will burst.
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I wonder if he’s ‘hedged’ bets on the bubble bursting and is saying this to help pop it. It could be a nice little earner for him.
@Claire,
If he really believes it – and why not? – he wouldn’t be doing his job if he hadn’t shorted the markets!
But as the saying goes: “The markets can stay irrational longer than you can stay solvent”!
He has no ide how long to short for
So rationally he has, he says, reprofiled his portfolio
Low interest rates and the use of QE to depress gilt and corporate bond yields was seen as a measure necessary to stave off deflation & recession post 2008. No doubt it has helped. A consequence of this however is to force investors out of fixed interest (why own a 25yr gilt yielding 2%) into other assets such as equities – this is what woodford is referring to when he mentions central bank action. Indeed McDonnell is citing low gilt yields as a reason to load up the national debt so Labour want to take advantage as well. QE is indeed an experiment and no one really understands what the long term consequences might be.
We know the losing term consequence
It’s ius increased money supply when the banks would not create it
And we also know that must now be recycled by re-regulating banks
Neil Woodford is right, but he’s also wrong.
Yes, there’s a huge bubble in asset prices and it will in all probability burst and it has the potential to make the dotcom bubble look like a party balloon bursting next to the Hindenburg.
Collapse is not inevitable except that the PTB, (Powers That Be; whether that’s Central Banks or governments if it’s even meaningful to differentiate)) are unlikely to take effective steps to prevent it.
The asset bubble is the direct result of quite deliberate steps which have been taken since 2007 to shore up a dysfunctional economic system which was in a crisis of its own making. The Bubble is in the top end of the market only. It is in property prices and stocks and other investment vehicles. (Including Bitcoin!) There is no bubble at the bottom of the market where economic pressures have been deflationary rather than inflationary. Hence the mystification of the central bankers that their rather limited metrics indicate that there is no,or not enough, inflation.
Share prices (in the ‘western’ stock markets) are at fantasy levels which bear no relation to the underlying assets. Simple example: take a car manufacturer. It has a notional value which is way above what it is worth in material terms and its future prospects given the revolution in electric powered vehicles means that all bets are off (or should be off) as to whether it will survive the next decade. Can Ford and General Motors actually get EVs off the assembly line and on to the roads profitably? The Chinese are streets ahead and without US government intervention they could put both the US giants out of business (possibly). General Motors was already bailed out once by Obama. In a free market it would be dead.
There is an air gap, between company values and their prices which has been produced by flooding QE cash into a market which didn’t know what to do with it and very low interest rates have led to further inflation of prices because it has been extremely profitable to borrow and ride the stock market inflation. If the bubble bursts much of the losses will be in defaults to the banks and they will go down like ninepins. (Except there aren’t nine of them, which is part of the problem)
The only way to prevent massive collapse is to support massive demand with ‘people’s QE’. There has to be money at the bottom of the food chain so that companies which are essentially Zombie companies can generate enough productive profit to get their valuations up towards there prices.
Some won’t make it.
Given that People’s QE is unlikely to happen Neil Woodford is correct in predicting catastrophic collapse of major economies and if he’s thinking Dotcom bubble he’s being very conservative in his estimation of the impact and subsequent destruction.
“Share prices (in the ‘western’ stock markets) are at fantasy levels which bear no relation to the underlying assets”.
I think we need to be careful in asserting that all equities are at fantasy levels. That said, industrial stocks (into which I guess GM falls, plus GE and , for example Siemens) face transition problems – in the case of GE (BMW, Daimler, VW ) EVs are correctly identified as the agents of change. In the case of GE and Siemens the move to renewables is removing the need for large steam-driven turbines. Both GE & Simenes have seen declining market valuations (ditto their customers). I do not dispute there will be a market shake out but it is likely to affect some company share prices more than others Those less affected will be the ones with strong balance sheets, modest market ratings & markets that are less affected by stock market crashes- & oddly such companies do exist.
Of course most quoted companies have real value
The issue is excessive valuation
“Of course most quoted companies have real value
The issue is excessive valuation”
And there’s a LOT of excess valuation, but as Mike says (or implies) it’s not evenly spread across the board. Not all companies are just aiming at short term gains. Some though are leveraged up to the ocksters.
Some companies are extremely vulnerable to collapse whereas others will ride the storm.
It’ll be one hell of a shake out when it starts and it will take out some household names (like …slop bucket)
It’s one thing to trade short term on movement in the markets and another entirely to get your head round the fundamentals and make good investment decisions for the longer term.
Warren Buffet is putting a lot of Berkshire money into Chinese battery factories apparently. He doesn’t always call it right, but he’s not done badly on his efforts so far. A great pity there isn’t any confidence in investing in British industries, but with the sort of policy realisation quotient Mike outlined in his demolition of The Industry ‘Strategy’ White Paper nobody with funds to invest could have much confidence hereabouts.
The clever (defensive) money has been sheltering for eighteen months or more . Plenty of scope for the ‘contrarians’ with patience though, if they have an appetite for risk and a head for research.
Whatever happens it will not be allowed to rein in rampant neo liberal capitaism
“not allowed” by whom?
The Illuninati?
“Whatever happens it will not be allowed to rein in rampant neo liberal capitaism”
You think?
Watch this space.
With just eat valued at £5.5 Billion (now in the Top 100 companies in UK)
Is this not mad?
Worth more than M&S
“Worth more than M&S”
M&S has been a crazy shambles for decades. I used to buy socks there. I wouldn’t cross the threshold these days and haven’t for years. They pissed off their customer base at least twenty years ago and haven’t found a new one.
Management failure. It’s always management that fails, but because management write the reports somebody else gets the blame. Even the customers. !!
Thatcherism failed because it never accepted responsibility, it always blamed somebody else.
The laissez-faire de-regulated right to blow asset bubbles like General Equilibrium Theory is rapidly becoming a “sell” market!
🙂
Unwinding QE is really the same as saying how does an economy surviving with artificially low interest rates cope when they normalise i.e where buyers and sellers meet without central bank intervention. The answer can only be painful. The UK’s cost of debt goes up, company profitability get squeezed, and disposable income is reduced. All of these are recessionary. The reality is central banks will remain involved for so long as markets have (relative) confidence in them there will be a run on the relevant currency and interest rates will spike up.
Thank god peoples QE is off the radar..Zimbabwe and Weimar Germany provide the history lesson of the carnage it can cause.
But QE will not be unwound
And People’s QE simply funds investment, which even those dens of he left called the IMF and OECD say we need
“Thank god peoples QE is off the radar..Zimbabwe and Weimar Germany provide the history lesson of the carnage it can cause.”
What utter bollox, David. You really don’t see it do you?
You cannot ‘unwind’ QE ( the wealthy do not part with money the only way to get it back is to inflate away the excess) you have to rebalance the economy to make up the damage and you can’t avoid the inflation which is inherent in that (it’s already built-in there) but the Central Banks seemingly can’t get their heads round that
We fix or we crash..
My money is on crash. Because..? . fixing means putting money into all the places its been removed from and taking from the people who’ve got used to being paid for doing nothing useful.
You can’t expect to reverse four decades of bullshit propaganda fast enough to avoid collapse.
You for one, David , wouldn’t buy the remedy. And you ain’t alone. I wonder how ald you are. I suspect mid thirties.
david
It is not really adequate to look at the Weimar Republic and Zimbabwe when attempting to criticise People’s QE. This argument is now so discredited. You need to look at context.
A people’s QE in the UK or USA would work because they are stable democracies with decent (but not perfect) economies, decent working relations with other countries (Trump is threatening that it seems in the US, and BREXIT in the UK………well………?) and half decent institutions – or at least those that can be reformed.
How can you say that of the inter war Germany and recent Zimbabwe? Both states became pariah nations to whom lending and investing became nigh impossible because of domestic policy (refusing to pay repatriations and brutal land reform for example).
Both nations printed money because they could not produce it digitally like we can now (the profusion of real bank notes in circulation just devalues the cash and cause hyper-inflation).
And both countries share the same error at different times in history: they practised producing helicopter money (just print it and throw it around everywhere and hope for the best).
People’s QE (PQE) is not like that david. PQE is aimed at certain key sectors of the economy that if stimulated will create jobs and wages plus other benefits (tax incomes, additional projects plus stimulating the release of complementary investment from the private sector).
It’s called PQE because all these things will benefit real people – lots of them. Because the real economy is made up of lots of people. Believe it or not. And it’s Us!
Equity markets present all the signs of being a bubble created, not by advances in the real economy, but by a toxic combination since the 2008 crash of:
1) Near zero or negative interest rates for a decade
2) Unprecedented impact of quantitative easing
3) Unfunded reductions in corporate tax rates ( gradually in UK from 28% in 2010, and now rapidly in the case of the US)
At this stage regulators should be leaning heavily against over-exuberance by progressively reversing QE on a large scale, and increasing corporation tax rates. Of course in practice they are doing the exact opposite, and US tax cuts, likely to be approved tonight, will simply pour petrol onto the flames.
As we all know, it matters not if all investors actually know this is a bubble, so long as they can continue to profit from blowing it up. (The housing bubble was widely acknowledged in 2005 but kept inflating until events triggered a collapse in 2007). The question is what might prick the equities bubble this time. Top candidates are :
1) Collapse of Bitcoin pyramid scheme
2) Britain crashes out of the EU without a trade deal
3) President Trump is impeached
At least one of these, if not all three, are increasingly likely in the next 18 months, so the chances of this bubble lasting beyond 2019 are very slim.
I am sorry but you are entirely wrong about the need to reverse QE, or to raise CT for revenue raising purposes (any increase would need to be balanced by cuts elsewhere to create progressivity). Reversing QE and taking more tax out of the economy now would just bring the crash forward
“1) Collapse of Bitcoin pyramid scheme” Not enough money in it yet to matter a toss.
“2) Britain crashes out of the EU without a trade deal” On the cards, must be already priced-in. Only a fantasist expects a deal.
“3) President Trump is impeached” Er so what? The only thing Donald Trump manages is his twitter account (and I’m not entirely convinced he’s even in charge of that)
US aggression against N.Korea might (and I stress only might) ruffle a few feathers when it gets physical. Which it will. US policy will tighten the economic screws until N Korea have no choices but to retaliate. But the market has either priced that in or is just ignoring it. It’s a long way from Wall St.
Collapse will be ‘pure’ finance. Loan defaults. From the bottom up – consumer debt against falling wages; or from the top down – corporate debt which the banks won’t roll-over. Or Both.
Something has to give. I’ll be surprised if the present fragile condition can be maintained throughout the whole of 2018, but…. the propaganda machine is well honed and firing on four cylinders.
With the bubble in the stock market being caused by greed and speculation… would it not be prudent for the government to introduce a stock market transaction tax.
A tiny percentage of any buying and / or selling transaction in the stock market would surely de-incentivise the greed and speculative behaviours of investors.
Yes
And in fact 5he tax rate should vary with volatility
You neglect to say “see my recommendations in ‘The Joy of Tax'” 😉
Does a stock market crash actually matter much for the real economy? When the dot-com-bubble burst in 2000 it wrote down the on-paper wealth of share holders but it didn’t disrupt production or consumption much did it? The 2008 crash was different because it entailed a credit crunch that actually caused people to lose their jobs/ take paycuts etc. Perhaps the problem now is more down to unsustainable credit expansion (car loans, mortgages, companies becoming more leveraged etc). That is bound to exhaust itself and when it does, it will cause the real economy to stall. That would have been a serious problem for the real economy even if the equity markets had foreseen it and priced it in, so avoiding the stock market crash that is being predicted here.
The 2000 crash was averted
Labour spent to make sure it was
Labour never get the credit they deserve for doing so
They continued for a year or two too long, but that’s not the point. They did avert a recession
John Chochrane wrote something saying that the 2000 tech bubble crash didn’t cause a bad recession because it just entailed an equity revaluation rather than a run on maturity-transforming credit. His point is that regulators should favour financing arrangements such as were used by tech companies in 2000 rather than those like Lehmans used in 2008 http://faculty.chicagobooth.edu/john.cochrane/research/papers/run_free.pdf . His argument seemed compelling to me but I’m happy to be put right on this.
It’s an argument
And it’s rechnically right because that is all that did happen
But then you have to ask why and the answer is Labour averted something worse, in my opinion, and it did it by spending
My suspicion is that the 2001 tech crash was not in the same order as the 2008 variant because essentially it was a sector of the market that was bubbling. A biggish sector, but it was new and speculative. If Bitcoin were to crash tomorrow (which it won’t – or at least not terminally) the effect would be a bit like the tech crash but smaller. A blip. Actually a ‘shake out’.
2008 was of a different order and when the excrement hits the extractor this coming time it will be bigger again because the underlying problems of 2008 (banks and financiers playing silly buggers) is as it was but with more heat behind it. (and the 2008 problems not yet all resolved; far from it) It’ll be a lulu. Because the authorities are pretending it’s not happening. They think ‘this time is different’. And it is. It’s a lot bigger.
To what extent the government response was instrumental in ameliorating the 2001 problem and response in Britain I wouldn’t like to guess (so am happy to accept Richard’s assessment that it was significant.) The only authority big enough to bail out 201? or 202? will be the IMF and it will change the whole financial world (if the crypto revolution hasn’t done it already). It’ll be Breton Woods scale rewriting the rules.
Well that’s what I’m hearing and it makes sense. It’s a long time in coming and the longer it takes the bigger it will be.
the BofE has just reassured the market that the banks are well stashed with cash to ride the storm. The fact they needed to say that almost certainly means they ain’t. They’ll be foreclosing left right and centre and making a crisis out of a drama. Nobody believes the BofE stress tests are worth the parer they are printed on, but they are happy to keep on pretending. What could possibly go wrong?
This time will not be different. It will be exactly the same but bigger.