Stockpickers and indexers alike – aren’t you a little bit fearful…?

Think back to 1999 – World + dog was going to make a shedload of cash on the stock market. No idea was too barmy to fly. Videologic – to become Imagination tech. Rage software – to become nothing. In the US Webvan – the idea was good, the time was wrong πŸ˜‰

Martha Lane-Fox, founder of and now in the House of Lords
Martha Lane-Fox, founder of and now in the House of Lords and closer to home,, in a last hurrah before the dotcom era imploded as the dream died. We were all going to be rich, you, me, and the taxi-drivers of Britain. We bought high, on the greater fool theory. Then somebody turned the lights on, and we were that greater fool.

Go on, admit it - just a teeny bit fearful?
Go on, admit it – just a teeny bit fearful?

The party was great, but the hangover stank. Every stock market rally carries with it the seeds of its own decay. We had seven years of relative plenty since the year 2000, despite the lean years soaking that I and many dotcom investors had – the general public had a blast. remember the Goldilocks economy?

As I have said before Mr deputy Speaker: No return to boom and bust

UK Prime Minister Gordon Brown, 2006

Since the seven fat years the Great British Public have had seven lean years, and we can survey the twisted wreckage of the 99%’s hopes of a middle class life. The feeling now is very different to that Millennium eve – there was hope and opportunity, Stuff was getting cheaper and we hadn’t yet opened our eyes to the driving forces, that were going to wash in and suck the middle-class jobs out of the developed world. Now we can see that power-shift from labour to capital written large across the economy. Allister Heath of City AM tells us we’ve never had it so good:

OK, we have a cost of living crisis – but life is so much better now

To most people, the UK’s 6pc or so national pay cut to date remains a price worth paying for having access to the convenience, goods, services and jobs delivered by the economy of 2014

Hmm, Allister, exactly what part of cost-of-living crisis do you not get? Allow me to remind you of Maslow’s hierarchy of needs


the clue is in security of body and employment – the cost of housing is being pushed up and some people seem to have trouble affording to buy food. Your consumer goods and iPads are up in the esteem section – you need a roof over your head and ideally a job before the convenience, goods, services and jobs delivered by the economy of 2014 become worth having. The sex and family part also seems hard in the first years of the century too, at any rate for those who want to have children, which seems to be increasingly out of kilter with the rest of life. That’s not to say I particularly want to pay over the odds for other people’s lifestyle choices, but I don’t think making such a common life aim harder than it has to be is a great step forward in the pursuit of human happiness. In a conclusion that rivals Marie Antoinette

The digital revolution is creating a lot of free value that is accruing to consumers, making them better off, but that isn’t appearing anywhere in the official GDP, productivity or real wages statistics, despite the best efforts of our number crunchers. In fact, new technologies are often having the opposite impact: in some cases, they are actually reducing reported output and thus purporting to show that we have become poorer, even though almost everybody is in fact being made better off.

The ‘let them eat cake’ approach of denying that shit is happening because you can now afford to pave your rented flat with cheap TVs seems flippant.

Now you can make a good case that current valuations of the FTSE100 aren’t that high – after all, fourteen harsh years of inflation have rolled by, and the Bank of England tells me that 6933 (estimated) December high-water mark would be 10174 now. So we are a long way off the peak in real terms. But there’s the whole animal spirits thing that is going to hit a bump in the road here and in the US.

When we look at the big picture from 1985 it’s clear that the engine of capitalism turned over and misfired twice- once in 2000 and again in 2007. And it has slowed, at least in its FTSE100 manifestation – look at the way all the action is in the 1985-2000 part. So the question is whether industrial capitalism is running into resource limits, be they natural, or simply that the power shift from labour to capital is now starving the engine of fuel – after all, somebody has to be buying all the value. I don’t know who that somebody is going to be in the years to come. That’s the bit that Allister is missing – it’s all very well producing all those iPods but they can’t all be bought on ever-extended credit. Where are the firm foundations to this – is the final dream of Reagonomics coming to pass? It appears that two thirds of the income tax revenue comes from about a third of the taxpayers in the UK. Perhaps the 33% has reached critical mass, and can keep the engines running while the 66% peck from the swarf that trickles down.

Maybe this is how the 66% will realise Keynes' 1930s vision of Economic Possibilities for our Grandchildren
Maybe this is how the 66% will realise Keynes’ 1930s vision of Economic Possibilities for our Grandchildren

I got no idea of where to now. It wouldn’t surprise me to hear the resounding bang of yet another misfire as the engine demands more than it can be supplied with. there will be opportunities there. Or maybe there will be another party like it’s 1999 all over again. Or perhaps we are at a paradigm shift, when people will recognise what Enough looks like, and eschew consumerism in search of value.

Once again I heard the Last Post sounded for Keynes Economic Possibilities for our Grandchildren – where increased automation would lead to a world where the four-hour work-week was a reality. The closest we seem to have got is the TV show Portlandia. (Hat tip to Mr Money Mustache – I’ve never seen the show. Or Portland itself)

Whats’ actually wrong with young people going somewhere to retire? Previous generations had this as dropping out, or bohemian living. It doesn’t seem so easy now[ref]Obviously I’ve done it. But a) I’m not young, with the peculiar fire of creativity and single-mindedness that burns brightly in one’s twenties. And b) I’ve done my time serving The Man for thirty years…[/ref]. Tim Worstall tells me I got it all wrong, that we live in that City-AM world where everything is hunky-dory and Keynes got his Economic Possibilities. We just can’t see it, like all that digital value that consumers got, at the price of decent jobs… And other stuff down the bottom end of the pyramid, like, er, food

food banks
food banks

Our Tim has an fairly hard-line answer to that too. I think I might find a few people that may disagree with the ‘let them eat cake’ version of how it all panned out πŸ˜‰ Somewhere there’s the sound of the engine of capitalism running low and lean under the load. I suspect I hear the pinking that precedes another misfire – I’m a little bit fearful. But it’s just a number, and the high-water mark is a long way off in real terms. Maybe it is just the echo of the dot-com bust and the seven years of plenty and the seven lean years that ensued πŸ˜‰


7 thoughts on “Stockpickers and indexers alike – aren’t you a little bit fearful…?”

  1. Indexer here, and not too worried about the high level of FTSE. Have you seen RIT’s article from November, when FTSE was only slightly below current levels? Your chart covers periods of significant inflation, as you mention. The CAPE is reasonable, perhaps a tad on the high side.

    Also, if you believe there’s a power shift from labour to capital, surely it makes sense to get acquiring some capital, such as stocks? Incidentally, I agree this is a general trend, but I think it’s slower and less of a problem than you imply. In the long run it’s somewhat self correcting (lower incomes pull down prices, which in turn pull down capital values). This only partially works, as inequality is increasing, but the tax system is capable of picking up some of the slack as well: capital gains, inheritance and property taxes. Popular will is likely to shift in this direction; remains to be seen if political action will follow (given vested interests).

    Speaking of vested interests, the property madness you mention is also true, and something I feel as a indentured member of generation rent. I take solace in thinking how mental current valuations are and all the downsides I’m avoiding. Great article from Jim Collins on this: Why your house is a terrible investment.

    To summarise: UK property is overpriced, bonds are bad value, cash has next to no real return. Shares look the most sensible bet to me as things stand. OK, FTSE valuations aren’t stellar, but aren’t terrible either. Bargains to be had abroad due to relatively strong pound as well. Happy hunting!


  2. Nobody can know where the markets are heading next. Yes, they are now approaching levels last seen in 2000 but in my opinion, the markets are by no means overpriced – maybe if the FTSE was around 9,000 then I might be thinking about taking a little profit.

    For the time being, I will keep dripping any excess dosh into higher yielding equities and reinvesting any dividends I do not require for paying the bills and putting food on the table.

    Jesse Livermore, who wrote over 70 years ago β€œAfter spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

    Keep it simple!


  3. The markets do indeed look a little peaky as does property in the UK (especially London where I live). Being old enough to remember booms, yuppies, and subsequent busts and recessions, I too get slightly nervous. However, as a committed passive-ist investor, I’ll just keep my eyes closed and buying monthly πŸ™‚

    There’s something too about the cost of living – it absolutely is rising in the things that matter: food, energy, housing and probably falling in the things that don’t: gadgets, clothing, etc. But if the “basket” of goods and services contain these things then it’s likely to skew the figures down.

    The other trend, that I alluded to in a recent rant on my blog, is the trend to replace people with technology (self-service checkouts being a particular dislike of mine). This isn’t strictly a pure shift from labour to capital because there’s something in between. It’s the shift from low-wage undifferentiated workers to high-skilled (sometimes!) IT and Technology workers. I have worked for companies where a simple paper-based process would have worked much much better than the complex IT system they were trying to implement.

    Maybe, like the hated automated call systems the customer will speak out and take their business elsewhere, eg FirstDirect has always used real people to deal with calls and they consistently receive good customer ratings.


  4. @Rob – I agree, absolutely, if the winning side is capital, then get some. In doing so, however, one does also become some small part of the problem πŸ˜‰ The strengthening pound will help us get better value abroad, too.

    @diy investor – I like the Livermore quote – my results improved no end when I can to the conclusion – never sell. Which also makes me more careful in buying. Mind you, it didn’t all end well for Jesse, ISTR!

    @mistersquirrel – there does seem something odd in the CPI stats. I’d have thought they would be made a a representative sample of what Brits buy, and food and housing is hard to do without. However, it appears from the ONS that housing is missing from the CPI – for that you need the CPIH.

    That tech replacement works okay if everything runs smoothly – but they turn exception handling into a world of hurt. My mother ranted about Amazon recently, I didn’t have the heart to tell her than Amazon really doesn’t give a toss. It’s part of the tragedy of the human experience, that we live in a world indifferent to our cares, but technology can deliver that message really well. Under the money Tree was of your opinion in buy from renowned retailers so the pushback is out there!


  5. Yes thanks very much ermine, I’ve been trying to get in the purchase mindset as the last sands of this years ISA run out, didn’t need someone pointing to the shark fins just as I’ve got my cozzy on.

    Things seem to be very polarised, it’s very subdued in my neighbourhood, lots of bank cards being declined at Aldi. However friends working in tech are spendy spendy, especially it seems in the US. Party like it’s 1999?

    I think I feel a rebalance coming on, portfolio and macro.


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