The UK Sunday business pages are all studiously upbeat about the outlook for equities . Where once the analysis was all doom and gloom now its sunshine and roses. It can't be the weather that's making all the financial pundits happy so it must be the sight of Britain's venal politicians getting their come uppance over fraudulent expense claims.
I mused some time ago that the rise in equities might be down to the huge wave of liquidity that just about all governments are injecting into the system. After all, those billions of taxpayers dollars have got to find a useful home somewhere . Where after the post-Lehman collapse in prices could be better than the equity market ? Just about everyone apart from the shorts benefits. Banking shares soar reducing their huge capital raising requirement . At the same time long only investment houses and pension funds see the damage wrought to their portfolios in 2008 being rapidly repaired. Retail investors are happy that their portfolios are turning to the upside. Indeed, for long only houses taking a five year view equities with low debt levels and strong cash flows probably provide some form of inflation hedge even if the economy is zero growth . Having said that quite why banking and retail is leading the charge escapes me as the latest data still shows weakness:.
April US credit card defaults rose to record highs - Citibanks delinquency rate in April was 10.2%
- US industrial production fell 0.5% in April after the 1.7% fall in March. Shockingly capacity utilization is now 69.1% implying that any investment in facility expansion will be sometime acoming.When factories are producing too many goods pricing power disappears - FIAT take note.
- Hotel occupancy levels in the US are approaching levels last seen in 1981 and stand at 53.6% on an average room rate of $97.58 down 14% and 10% respectively from year ago levels.
Taking the above into account it seems to me that :
1) it's too early to get steamed up about inflation with factory utilization running below 70% and stockpiles in steel and other commodities rising . Europe seems to be heading towards deflation with a 2.5% fall in eurozone GDP in Q1 with Germany tumbling 3.5% a worse number than the debt ridden UK's 1.9%. You can criticise the Brits for being overleveraged but it was the Germans and French who sold to them and who are now discovering just how important the anglo-saxon markets were.
2) savings rates are on the rise with the UK lvel going from -1.2% to nearly 5% today. History teaches that these levels will probably come close to doubling over the next two years further weakening consumer demand .
3) Banks and governments are hoping that they will be allowed to repair their balance sheets over a five year period as consumer loans are sliced back and personal savings rates move towards a 10% level in the anglo-saxon world.
4) the world is entering a period of slower and lower growth. In this new world there will be fewer airlines,car makers,banks,insurance companies,and small retail chains.
I'll buy selectively when we get a good setback towards 4000 on the FTSE .