Gold as an investment

Weekend reading: Bonfire of the vanities

Sep 23, 2022

What caught my eye this week.

The Litquidity video below is in horribly bad taste. I believe the Normandy landing scene in Saving Private Ryan is a truth-bomb for humanity. Every Twitter keyboard warrior should watch it a dozen times before venturing more views on Ukraine, Russia, and NATO.

On the other hand even my saintly co-blogger The Accumulator found it funny.

And as the ‘boomer PM’ you’ll spot 59 seconds in, I found it cathartic:

Saving Capital Markets – coming soon to a theater near you

— litquidity (@litcapital) May 11, 2022

(Follow those links to watch the video if you can’t see it embedded here.)

Talking of The Accumulator, he’s been even more of a rubbish trench buddy than usual in 2022.

Don’t get me wrong, he’s exactly the sort of comrade-in-arms you should really want.

The Accumulator ignores the market. Doesn’t sell. Barely knows whether shares are trading today.

But for an active investing junkie like me, his ignorance of the gyrations can be infuriating.

The Accumulator hasn’t even been spooked by his starting FIRE a year ago.

Sequence of returns risk might as well be a 1970s prog rock band for all he cares.

Pump up the volume

Besides his eternally doughty disinterest in short-term market movements, the other reason for The Accumulator’s stoicism is probably that he’s a British investor.

Because one thing missing from Litquidity’s meme-fest video is the weakness of the pound1.

More than 60% of a global tracker is in US assets. So UK investors have been cushioned from some of the slide that kicked off six months ago – even if their portfolios are free of home bias.

Here’s a chart crime graph plotting USD/GBP against UK and US flavours of Vanguard’s global tracker fund (as of my writing this on Thursday afternoon):

As you can see, UK investors in Vanguard’s All-World tracker (yellow) have been superficially spared much of the pain, thanks to sterling’s fall.

I say ‘superficially spared’ because our spending power really has shrunk – compared to our American cousins – over the period. We’re poorer on the global stage.

The cost of living crisis will be made worse by our weaker currency.

But I’d still take superficially over definitely any day.

Always on my mind

Where I do see many Monevator readers getting angst-y is with their bond portfolios.

UK government bonds are sterling-based, obviously. No cushioning here as yields have risen with higher inflation and rate expectations.

Further, investment grade and higher-yield bonds losses have lately been compounded by recession worries. (An economic downturn is bad news for indebted companies.)

Below we can see how bonds have sold off this year:

Prior to a sharp bounce this week, the picture was even worse. And people really hate seeing their bonds go down. Much more so than stocks.

Understandable. For years no long-term investor has bought bonds expecting much in the way of a return (even though that’s actually what they got, at least until recently).

Rather, bonds were for buoyancy in the bad times. Yet now they’ve been taking on water – just when we’d want them to float.

Unfortunately this was pretty inevitable.

Global yields hit multi-century lows after the financial crisis. Sooner or later they were likely to rise.

The snag was everyone who ever said ‘sooner’ was wrong – up until the past six months. Now we have to pay the piper.

Worse, the same issues roiling the bond market are also what’s pulling at least some of the strings of the stock market. Hence shares and bonds falling together.

The good news is lower bond prices mean higher yields, and hence higher future returns.

That’s little comfort if you already own a bunch down big. But the declines are starting to make government bonds half-attractive again, and reinvesting your bond income will help eventually.

All presuming, of course, that central banks get inflation back under control.

You win again

Anyway if your biggest problem in 2022 is that your bond fund has fallen, pat yourself on the back.

It suggests you’ve probably been doing everything right.

Because nearly everything riskier you could have bought has gone down – bar some value, commodity, and energy plays.

The video above wasn’t exaggerating.

Please note: nobody need hurry to the comments to tell me I’m overreacting and everything is calm in their mill pond.

If you’re a passive investor feeling unruffled, I get it. That’s the whole counterpoint to this article!

In contrast every active investor I know – including the UK-based ones who invariably fish in the mid and small cap arena – has been dragged through a hedge backwards.

(Important exception being the faultless Monevator house troll who will tell us in the comments he sold everything and put it all into shares of BP on 3 January and who can doubt him?)

For most of 2020, picking stocks was like shooting fish in a barrel.

In 2022 it’s been like being the barrel.

It’s a sin

The sell-off began with the raciest growth stocks, as I flagged up in December. Even the best of these have continued to fall.

Many of the highest-fliers are now priced below where they started 2020 – despite having doubled or tripled their revenues over the past couple of years.

Winning the pandemic turned out to be a curse:

Source: AWOCS

More recently the tech behemoths were pulled into the vortex. Apple, Amazon, Google and Facebook – the engines of global markets for a decade – are down around 20-30% or more.2

Cryptocurrencies have been hit for six. A leading (so-called) ‘stablecoin’ came apart, evaporating billions. (See the links in Crypt-o-Crypto below).

As for the frothiest shares – almost anything floated via a ‘SPAC’ in the mania of 2021 – it’s becoming a case of “dude where’s my decimal point?”

Falls of 80-90% are widespread.

The blue chip Nasdaq 100 was down nearly 30% by the worst of the midweek sell-off. The US SP 500 was only a few tenths of a percent from the definition of a bear market, at least until stocks bounced on Friday.

Unusually though, UK large caps have held firm.

The FTSE 100 comprises long-despised value dinosaurs. Having survived the growth investing meteor strike – for now – they’re finally having their moment.

Stand by me

As the self-styled Tom Hanks wannabe on this metaphorical battlefield, I’d love to say I saw all this coming and I dodged all the pain.

Unfortunately like him I’m here getting shot up too.

By luck or judgement I got some things right. I saw the big and little clouds in 2021. I later sensed regime change and took fairly decisive action (not least with an eye on my interest-only mortgage.)

But as usual I also started buying apparent bargains too early.

Some of the cheap growth stocks I picked up in what I thought were the Christmas sales have since been cut in half or worse.

I almost always buy too soon. But I usually also buy ‘too good’ – I invest in higher-quality defensive companies at the bottom of bear markets.

In time they bounce, but they are far outpaced as the riskiest firms left for dead rise like a phoenix.

It’s hard to avoid fighting the last war as an investor.

So this time I deliberately looked to buy back into fallen angels like Shopify and PayPal and Square, after what seemed like decent declines.

Yet they just kept spiraling down.

Never gonna give you up

I blame the autocrats.

In late 2021 I expected inflation to have peaked by now. But China and Russia threw a spanner into that forecast, albeit in different ways.

Hence the bottom was just a trapdoor.

Is there further to go?

If we see a recession without an easing of inflation and rate expectations, then who knows when the wider market will stabilise.

Plenty of cyclical and value stocks that have done well could suffer in a stagflationary environment. The last prop would be kicked away from the indices.

That said, I’d like to believe we’re closer to the end than the beginning, at least for the better growth firms. Perhaps I’ll do a naughty active investing post about it. (Bring on our membership area so I don’t have to worry about inflicting such views on sensible passive investors!)

But wherever we go from here, we knew the pandemic market party had to end.

And end it has – with a bang.

The most important thing is to keep pushing on. Just keep buying, as the man said.

Long-term sensible investing is nearly-always rewarded eventually, whether you do it passively or via a coherent active strategy.

Short-term meme stock pump-and-dump traders can win for a while. But eventually most pay for their ride.

Indeed a lot of newer investors are getting off the rollercoaster feeling a bit sick and wondering where they lost their wallets.

I hope they’re not put off investing for life.

As I said the other week, I also wonder when all this will reach the real economy.

We’ve seen a hint with rate rises and the cost of living squeeze.

I suspect central banks have been talking especially tough because they want to scare the markets into tightening conditions for them, to try to avoid excessive real-world pain. Jawboning up tighter market conditions may reduce the direct discipline they need to mete out via actual rate rises, or even forcing a recession to choke off demand. (Not that the latter will help with borked supply chains.)

But usually something big blows up in the real-world anyway.

We’ll see. Enjoy the weekend!

p.s. Alas we didn’t win in the British Bank Awards, although apparently it was close. However the organizers were kind enough to send me some of the comments (without names) you submitted in support of your votes. And they made our week! Far better than any prize to hear such generous reviews of Monevator and its impact on your life. Thanks so much to everyone who took the time.

From Monevator

Low-cost index funds that will save you money – Monevator

UK tax brackets and the personal allowance: 2022 update – Monevator

The annual ISA allowance and how to use it: 2022 update – Monevator

UK dividend tax: 2022 update – Monevator

UK capital gains tax: 2022 update – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!3

Monthly rental costs up as much as 14% as demand outstrips supply – ThisIsMoney

‘Golden era’ of cheap food is ending, says ex-Sainsbury’s boss – Guardian

Crypto billionaires vast fortunes are destroyed in a matter of weeks – Bloomberg

Access to cash will be protected under new law – Which

15 charts that illustrate we’re in – ahem – uncharted territory – A Wealth of Common Sense

Products and services

Cheapest mortgages revealed as rates continue to rise – Which

HSBC is offering a £170 welcome bonus if you switch to HSBC Advance – HSBC

Myth or magic: which energy-saving tips really make a difference? – ThisIsMoney

Transfer your ISA, SIPP, or Dealing account to AJ Bell and get up to £500 to cover costs. Terms apply – AJ Bell

How to get cheap theatre tickets – Be Clever With Your Cash

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Village homes for sale in reach of Jubilee events, in pictures – Guardian

Comment and opinion

How to invest with a looming recession [US fixed income but relevant] – Oblivious Investor

Right for now, but wrong later – Of Dollars and Data

How much is enough? – Indeedably

Sticking to your long-term investing plan – The Irrelevant Investor

How inflation is taxed – 3652 Days

Talking with the legendary professor Eugene Fama [Podcast] – Rational Reminder

How long do bear markets typically last? – A Wealth of Common Sense

Return on hassle – Spilled Coffee

Rules of retirement – Humble Dollar

Would you do data entry on a Saturday morning? – Rad Reads

Those who live by the SORR die by the SORR – Gentleman’s Family Finances

The complex economics of growing old – Minneapolis Fed [h/t Abnormal Returns]

The ethics of index funds redux [Very wonky, but index geeks will enjoy] – ETF Trends

Stocks, rates, bonds, gold correlations: nerdy mini-special

Inflation, interest rates, and value – Musings on Markets

Larry Swedroe: when stocks and bonds fall together – TEBI

The Fed and the bond market – Verdad

Gold’s strange behaviour shows it’s no haven – Wealth Management

Naughty corner: Active antics

How do companies deal with inflation and supply chain disruptions? – Klement on Investing

Revisiting The Outsiders a decade on – Tycoonist

Is high-quality A.G. Barr’s 2% dividend yield high enough? – UK Dividend Stocks

Electric car maker Rivian – the largest IPO of 2021 – has fallen 87% – Yahoo Finance

Crypt o’ crypto

The week that shook crypto [Search result] – FT

The Normie’s guide to this week’s crypto crash – Slate

Terra: to the moon and back – Not Boring

The metaverse landlord renting out virtual properties for $60,000 a month – Fast Company

Crypto muggings: thieves in London target digital investors’ phones – Guardian

Kindle book bargains

The Great Mental Models Volume 2: Physics, Chemistry, Biology by Shane Parrish – £0.99 on Kindle

Two Hundred Years of Muddling Through: The surprising story of Britain’s economy from boom to bust and back again by Duncan Weldon – £0.99 on Kindle

Human Frontiers: The Future of Big Ideas in an Age of Small Thinking by Michael Bhaskar – £0.99 on Kindle

Why You?: 101 Interview Questions You’ll Never Fear Again by James Reed – £0.99 on Kindle

Environmental factors

The UK villagers who won’t leave their homes in the face of rising sea levels – BBC

Mapped: solar and wind power by country [Infographic] – Visual Capitalist

The Iron Curtain’s border zone has grown into an ecological haven – Science Direct

Devastating: 91% of Great Barrier Reef affected by coral bleaching in 2021 – Guardian

The Swan Song of the Hawaiian Po‘ouli – Hakai Magazine

Off our beat

Ups and downs – The Reformed Broker

A doctor’s struggles with sugar – Guardian

If you are the product, how do you take a break? – Abnormal Returns

A few beliefs – Morgan Housel

Marina Hyde: Wagnarok – Guardian

And finally…

“Early in the 1970s, most Americans had never experienced inflation, so they weren’t wary of it and allowed it to blossom. By the end of the decade, they were traumatized by it and assumed that it would never go away.” – Ray Dalio, Principles for Dealing with the Changing World Order

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.

Related Posts