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Mikhail Liebenstein

Are We On The Edge Of A Great Reversal?

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A great reversal is a point where on mass investors start to switch asset classes. In this case from Bonds and also property into shares.

My rationale is that the stock market has been doing rather well lately, and whilst this may be down to Sterling weakness, nonetheless the Sterling gains in the market are real money and firms earning in foreign currency will see their earnings boosted and so we'll see bigger dividends which again are real.

At the same time bonds are pricey (and will fall in value, i.e. Higher IRS) and property has no headroom to grow.

I think the momentum is with stocks now. The shift being from the rentier economy to the real economy.

Thoughts?

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I would not be surprised to see shares go to the moon, or the price of a loaf of bread, anything is possible under a monetary system where currency can be created at will, infinitely.

Edited by doomed

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A great reversal is a point where on mass investors start to switch asset classes. In this case from Bonds and also property into shares.

My rationale is that the stock market has been doing rather well lately, and whilst this may be down to Sterling weakness, nonetheless the Sterling gains in the market are real money and firms earning in foreign currency will see their earnings boosted and so we'll see bigger dividends which again are real.

At the same time bonds are pricey (and will fall in value, i.e. Higher IRS) and property has no headroom to grow.

I think the momentum is with stocks now. The shift being from the rentier economy to the real economy.

Thoughts?

The momentum has been with stocks since March 6 2009.

hhttps://www.google.co.uk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=dow+chart

https://www.google.co.uk/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=ftse+chart

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I agree that stocks are looking extremely overvalued at present, my holdings have gone up by over 20% this year. The problem is knowing when to bail out? Its only the dividends that are keeping me hanging on in there although I am gradually reducing my holdings.

Edited by dougless

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Stocks reflect the decline in value of money in a similar way to property prices responding to cheap credit. If you look at the amount of financial engineering that is required to shift German cars and the fact that Airbus is subsidised to the tune of $10Bn a year by the EU you can see that the plebs do not earn/have enough money to effectively pay for what they are consuming/using.

Loose the props and these industries will fail in the expensive west and will be replaced by lower priced but slightly inferior products from the east.

So we are on the edge of a great reversal, stocks will rise but be careful which ones you invest in.

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In the current environment I personally think it's impossible to predict how share prices will pan out, I've gone back and forth in my opinion on the subject a few times this year whilst deciding whether to buy some shares within a stocks and shares ISA or keep waiting in the hope there's a significant step down in price.

I don't have a vast amount in the ISA but it's a lot to me so I wanted to give it a lot of thought before deciding. In the end I came to the conclusion there's no way to anticipate how equities will perform over the next few years, especially given the backdrop of very low interest rates and QE, and that perhaps time in the market will end up being more productive than trying to time it. I'm up 4% so far but appreciate that could easily turn to 4% or more down in no time at all. For me the main attraction is the dividends so I've tried to focus on companies with a dividend yield slightly higher that the FTSE 100 average as well as those with a good track record of paying them out. I'm still learning a lot about investing and perhaps this will end up being a costly mistake, I suppose only time will tell.

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Sorry, but I can't see the average person with a heap of cash thinking of anything other than BTL for quite a while.

What's good is that barriers have been and are being put up with the stamp duty and the mortgage interest tax relief changes.

However, those barriers are only diverting BTL investors away from London and the South East, where stamp duty is high and you need high LTVs to squeeze out yield, out to cheaper properties in the rest of the country.

I'm fully expecting a London downturn to play out from now, but alongside that I think the rises outside the South East are unfortunately going to keep going and probably get worse as the BoE's war on savings forces people into property.

The 3% additional stamp duty was a great idea but it needs to be strengthened for lower value properties to prevent the above.

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Ive been buying the miners Anglo American,BHP,exchange traded funds GXG,SIL,KOL,NGE,SEA etc since earlier in the year (mostly March,NGE and SEA last month).Im also buying ETFs FCG and NORW next week.I think the deflation trade is over and inflation is growing,the US$ is in a bear market and the dollar index will fall to around 80.Commods and emerging markets are in a huge bull market because of this and that will continue.I expect the US markets to already be in a three year bear market,and that will speed up late next year into 18 and maybe even 19.At some point in 18 i expect to by buying TLT below 100 maybe.

Just my opinion,but very good year so far.The FTSE will do ok for now due to the miners,but i expect the overvalued deflation/dividend shares to be hit hard.

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A great reversal is a point where on mass investors start to switch asset classes. In this case from Bonds and also property into shares.

My rationale is that the stock market has been doing rather well lately, and whilst this may be down to Sterling weakness, nonetheless the Sterling gains in the market are real money and firms earning in foreign currency will see their earnings boosted and so we'll see bigger dividends which again are real.

At the same time bonds are pricey (and will fall in value, i.e. Higher IRS) and property has no headroom to grow.

I think the momentum is with stocks now. The shift being from the rentier economy to the real economy.

Thoughts?

Has the cheap money gone into shares? To arb the difference between low borrowing costs and dividend income. If so, should rates rise (as you suggest), won't positions be sold due to the higher borrowing costs wiping out the arb? Good luck with the UK's real economy doing well with interest rate rises, when the governbankment have stoked up so much household debt.

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I agree that stocks are looking extremely overvalued at present, my holdings have gone up by over 20% this year. The problem is knowing when to bail out? Its only the dividends that are keeping me hanging on in there although I am gradually reducing my holdings.

20% is nothing though if you look to history. They can easily double or triple, and then fall back 60%

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Has the cheap money gone into shares? <snip> Good luck with the UK's real economy doing well with interest rate rises, when the governbankment have stoked up so much household debt.

The thing is, by saying everything is over valued and will therefore fall in price, you are basically saying money is undervalued. Go long cash if you like, but I can't think of an asset class the supply of which can increase more quickly!

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Has the cheap money gone into shares? To arb the difference between low borrowing costs and dividend income. If so, should rates rise (as you suggest), won't positions be sold due to the higher borrowing costs wiping out the arb? Good luck with the UK's real economy doing well with interest rate rises, when the governbankment have stoked up so much household debt.

I think the cheap money has gone into US$ assets.T bills,shares,houses etc.It has mostly chased the deflation story.Im expecting that to reverse,the dollar to fall,and inflation expectations to rise.The end result is higher interest rates,but thats a long way out.The push will be fiscal.Governments will start to spend heavily as the only answer for them is to get inflation ahead of interest rates.That is the only way to start to solve the debt crisis public and private.Inflate it away.Bonds will be a terrible investment from here i expect.The big winners will be banks and insurers,commod,mining and energy companies,and Emerging markets.They are already undervalued,in bull markets and will be the main winners.

Of course along the line interest rates will rise,that is the end result.Worst places to invest,bonds,western property in bubble areas,overbought areas of the stockmarket (im thinking the likes of Associated British Foods,Unilever etc who are going to see input costs outrun prices).

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At the same time bonds are pricey (and will fall in value, i.e. Higher IRS) and property has no headroom to grow.

I think the momentum is with stocks now. The shift being from the rentier economy to the real economy.

Thoughts?

All these thoughts relate to the UK:

BoE QE for corporate bonds has barely begun. I think we will see uncovered reverse auctions for corporate bonds as we have seen for long dated gilts with a similar vicious circle of falling yields and higher offer prices.

It has been commented on here many times that some companies are issuing bonds to buy back shares and trigger executive bonuses.

I think the FTSE will undergo a short-term fall followed by a two-year suppression in rise when Article 50 is invoked. Not because of the invocation itself, which is a certainty, but because it will be accompanied by a display of political brinkmanship, willy-waving and lack of competence that will make any sort of planning beyond two years for businesses extremely difficult. Personally I believe the UK will remain in the EEA, but I believe also that this outcome will be arrived at after the maximum period of the aforementioned political brinkmanship, willy-waving and lack of competence, and consequent uncertainty for businesses.

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The only fiscal stuff govs can get away with is infrastructure.

National govs are going to have to cut back on people and unfunded public sector pensions.

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BTL has not been a cash purchase. Purely leveraged. Its an insane risk.

Yep, but until the masses see BTL investors getting hit by losses, there will still be demand for BTL as an alternative to saving.

Thankfully high-leverage BTL is being body-checked, but I think that just redirects demand into conservatively-leveraged BTL, say 50% LTV and below.

For those that don't have enough cash to buy a whole property on those terms, there are collective investment vehicles.

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@Mikhail I also share your rationale and have been advised similarly by an investment advisory service recently. Clearly smart money is moving from property maybe because it us at its peak for returns. There are now far better tax incentives for small investors in stocks and shares thanks to the previous chancellor and I expect more to come of the same in the coming budget.

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The only great reversal I see happening is the move from the political centre ground to the extremes once again.

Corbyn is back at the helm of Labour...this time with a bigger mandate...Blairites banished for at least a generation.

Mondeo man lost his job and now has 3 zero hour contract jobs.

May is taking the conservatives further right.

Brexit was an example of the disgruntled little people just throwing a spanner in the works of the comfy political scene.

No more of the same...and why not when we see politicians and the press barrons (who are supposed to expose them) both dodging taxes in the same ways...probably discussed at their pyjama parties!

This is why I see Trump winning in November...Clinton represents that comfy liberal elite.

These exteme areas of the political spectrum is where I see the younger people drawn to...boomers and older X's left in the centre.

These are generation seismic shifts and the economy "chips" will fall IAW with these changes.

I am afraid that it aint going to be pretty over the next decade.

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I am afraid that it aint going to be pretty over the next decade.

The last decades been triffic for the working classes, priced out of housing, in debt up to the eyeballs for an education, jobs exported, competing with low skilled immigrants from 2nd/3rd world nations, wages stagnant.

It really can't get much worse but if you say things are going to get worse as the downtrodden start to be represented, then it must be true!

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Thoughts?

I think you meant "Great Rotation". This has been expected for quite a few years but doesn't seem to happen.

The "It's different this time" is that the price of property and bonds has reached extreme highs whereas equities are just doing their usual volatility mood swings but the yields are not actually that bad, even as the market reach previous highs.

Maybe earnings will collapse killing off the yield, maybe they won't.

Now for my personal views....

1. Bonds/property have been seen as safe. They won't be for long

2. Equities have been seen as risky (they are). The desperate search for yield will overcome this as they are now the least bad option.

3. Pension rules have changed dramatically. The tax advantages blow away the tax/leverage advantages that BTL provided. e.g. I can turn every £10 net into £60 net with ~no investment risk. (based on 65% EMTR, 25% tax-free withdrawal). Critically, you can get the money out from age 55 without the need for an annuity. If I want investment risk, the returns can go up at a long term average of 3-5% (but at a cost of principal risk/volatility).

4. BTL is under attack from HMRC. Pensions wrapper cannot contain BTL but do allow just about anything else.

5. The size of the bond market greatly exceeds the stock market. Even a "small rotation" would cause a massive boom.

So based on that I've moved £250K into equities. If it halves, I can cope with it. If it doubles, I retire early, if it produces 3-5% for the next 10 years, I retire early.

If I would have leveraged into BTL now, I would expect to lose the lot and be a forced seller of my main residence as well to cover the future losses.

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FTSE 100 again ascending new heights of 7310 today. Houses stuttering at best. So I guess The Great Rotation still on. Still have a problem with the price to earnings of 33 on the FTSE 100, but hey we are living in lala land so what the heck.

Edited by crashmonitor

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14 minutes ago, crashmonitor said:

FTSE 100 again ascending new heights of 7310 today. Houses stuttering at best. So I guess The Great Rotation still on. Still have a problem with the price to earnings of 33 on the FTSE 100, but hey we are living in lala land so what the heck.

It's all about the man with the pumpkin-coloured face and straw hair. Great rotation? More like the greatest short.

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On 9/26/2016 at 8:28 AM, VeryMeanReversion said:

I think you meant "Great Rotation". This has been expected for quite a few years but doesn't seem to happen.

The "It's different this time" is that the price of property and bonds has reached extreme highs whereas equities are just doing their usual volatility mood swings but the yields are not actually that bad, even as the market reach previous highs.

Maybe earnings will collapse killing off the yield, maybe they won't.

Now for my personal views....

1. Bonds/property have been seen as safe. They won't be for long

2. Equities have been seen as risky (they are). The desperate search for yield will overcome this as they are now the least bad option.

3. Pension rules have changed dramatically. The tax advantages blow away the tax/leverage advantages that BTL provided. e.g. I can turn every £10 net into £60 net with ~no investment risk. (based on 65% EMTR, 25% tax-free withdrawal). Critically, you can get the money out from age 55 without the need for an annuity. If I want investment risk, the returns can go up at a long term average of 3-5% (but at a cost of principal risk/volatility).

4. BTL is under attack from HMRC. Pensions wrapper cannot contain BTL but do allow just about anything else.

5. The size of the bond market greatly exceeds the stock market. Even a "small rotation" would cause a massive boom.

So based on that I've moved £250K into equities. If it halves, I can cope with it. If it doubles, I retire early, if it produces 3-5% for the next 10 years, I retire early.

If I would have leveraged into BTL now, I would expect to lose the lot and be a forced seller of my main residence as well to cover the future losses.

Do you own any gold miners?.I never sell my dividend equity portfolio.Iv built it up over 25 years always buying quality companies when they were hated.Dividend yield is now 23% a year on original capital,and thats not compounded.I have been letting the dividends build up as cash lately though in case of a sell off.I hadnt had gold miners since 2010,but i bought some in late november/december (and some uranium stocks) as a hedge.

Like you i think leveraged BTL will end up costing a lot of people their main home as well.

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On 9/24/2016 at 11:22 AM, Mikhail Liebenstein said:

A great reversal is a point where on mass investors start to switch asset classes. In this case from Bonds and also property into shares.

My rationale is that the stock market has been doing rather well lately, and whilst this may be down to Sterling weakness, nonetheless the Sterling gains in the market are real money and firms earning in foreign currency will see their earnings boosted and so we'll see bigger dividends which again are real.

At the same time bonds are pricey (and will fall in value, i.e. Higher IRS) and property has no headroom to grow.

I think the momentum is with stocks now. The shift being from the rentier economy to the real economy.

Thoughts?

 

If you are talking about FTSE100 (?) then whilst some of it may be down to ££ weakness relative to $$ it is also down to the reversal in oil & commodity prices since Jan/Feb 2016. So it may give the impression of being 'over valued' but in fact that is an illusion due to the commodity sell off in 2015 & subsequent bounce back.

You mention 'money' as 'cash' in response to Democorruptcy. But you yourself are in effect saying the price of 'money' i.e. interest rates will rise, so you appear to be in agreement. 

Other posters have made unqualified statements such as 'I agree stocks are extremely overvalued at present' but without a metric that is meaningless. FTSE 100 for instance clearly isn't 'overvalued' on a p/e or CAPE basis (of course that doesn't mean it cannot fall). In fact you could make the case FTSE100 was cheap 12 months ago & has subsequently risen to a more 'normal' mid-teens p/e valuation, following the rebound in the oil price.

Similarly you could argue S&P 500 is overvalued (p/e, CAPE, book etc) but again that doesn't mean it must crash. If the long run discount rate remains lower than normal, these valuations may continue for longer, perhaps much longer. 

On balance FTSE 100 looks like a buy/hold, unless rates rise significantly/durably, earnings fall significantly, or ££ strengthens significantly v $$

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