This year my strategy is not adding any value - My Retirement Investing Today Current Low Charge Portfolio – December 2010

This blog is not trying to sell you anything which means that I can freely share with you both the positives and the negatives of my strategy. Today though is neither really a positive or negative experience with my year to date Personal Rate of Return sitting at 8.6%, compared with my Benchmark Portfolio which has returned 8.5%. Of course given that I spend significant time maintaining my strategic and tactical asset allocations many would argue that if I calculated the cost of my time then I would probably be behind compared to the benchmark portfolio which would probably cost a maximum 1 hour of time per annum with a rebalance at the start of every year. The only defence I have is that my portfolio has had to pay some fees (Equity ETF, Pension etc costs), even if I do try an minimise them, and also has paid some tax (cash is taxed at 20%).

The FTSE 100 cyclically adjusted PE ratio (CAPE or PE10) – December 2010

Today’s first chart shows that with the nominal FTSE 100 price moving from 5694.6 (01 November) to 5642.5 (01 December) over the month, a decrease of 0.9%, the cyclically adjusted PE ratio (PE10 or CAPE) has also fallen from 14.1 to 13.9. These calculations are based on using the Consumer Price Index (CPI) to correct for inflationary effects. If I was to use the Retail Prices Index the PE10 would be 13.6. This is still well below the FTSE 100 PE10 20 Percentile for this dataset of 16.8 while the 80 Percentile is 23.7. The long run average is 19.9 for the dataset shown in the chart. The correlation between the PE10 and the Real (inflation adjusted by the CPI) FTSE Price remains a strong 0.69. In comparison the standard PE ratio is sitting at 11.6, down from 14.5 last month.

When Money Dies and Gold Priced in British Pounds (GBP) – December 2010 Update

With us living in a world where:

- governments around the world are in an apparent race to devalue their currencies the most through various policies including Quantitative Easing (or as I like think of it, money printing) if you are in the US or UK;

- Central banks in countries like the UK are running crazily low interest policies while allowing inflation to run a ‘little’ allowing the reckless, including the government, to inflate some debt away while thinking they can keep it all in control;

- Europe is implicitly promising to bail out every dodgy Euro zone economy which in my opinion will soon see them also heading down the money printing route to buy government debt; and

- many developed countries are carrying so much debt that it seems inconceivable that they will ever repay it and instead will attempt to inflate away the debt (or maybe forcing bond holders to take a haircut);

I thought it best to start understanding what happens in an economy when inflation rips and disaster strikes. I have therefore started to read the book “When Money Dies – The Nightmare of the Weimar Hyper-Inflation” by Adam Fergusson. This book charts the collapse of the Weimar Republic’s Mark which in 1923 had an exchange rate to the dollar of 4,200,000,000,000 Marks. This was a time when the “Republic was all but reduced to a barter economy. Expensive cigars, artworks and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal, and a bottle of paraffin for a silk shirt.”

Is Brisbane Cooling – Australian Property Market – November 2010 Update

The Australian Bureau of Statistics (ABS) in November published both its House Price Index and its Average Weekly Earnings Index. Let’s therefore have a look if the country which both avoided recession and seems to have a Central Bank that is interested in controlling inflation but which to me looks like it has a bubble of a property market is still as bullish. I say has an interest in controlling inflation. The RBA has been steadily raising its cash target rate over the last year and a half to 4.75%. This is in stark contrast to the Bank of England’s 0.5% who as I’ve described before has no interest in sticking to their inflation remit with inflation now above target for about 40 of the last 50 months. Regular readers of course know that I keep a close eye on Australia as it is still a potential “retirement” location for me even if £1 today only buys a poorly $1.6199.

There’s still plenty of time for -60% – History of Severe Real S&P 500 Stock Bear Markets – November 2010 Update

I haven’t updated my History of Severe Real S&P500 Stock Bear Markets since August 2010. At that time QE Lite had only recently been announced. That strategy kept the dead US patient alive for 3 short months before the next load of stimulus, Money Printing 2 (sorry Quantitative Easing 2). Let’s put the $600 billion involved in QE2 into perspective. It’s the equivalent of $1,950 for every US man, woman and child. I was always taught “that nothing comes for free”. In parallel to this I also can’t help but think about Newton’s first law, “every action has an equal and opposite reaction”. As an Average Joe I’m just wondering what the penalty and opposite reaction will be. I guess time will tell but I still can’t help thinking it’s not going to be good.