I did an interview the other day with Write Words. One of the questions was what is the worst thing about writing? I found that a hard one, because on the whole I really enjoy writing, which is I guess why I do it for a living.
But in the end I answered: the middle. The beginning of a book is exciting, because it is a fresh start. And you always think you are about to write the most amazing book ever.
And the end is exciting, because it’s nearly finished, and you can see how the whole thing looks.
But there is a chunk in the middle, between about 40,000 and 60,000 words, where it is all a bit of a slog. It’s then you need to dig deep to find the will to get it finished, and not to get distracted.
I’m there right now with ‘Ice Force’. Getting up to about 60,000 words though, so hopefully after Christmas I’ll be into the home straight.
Wednesday, 22 December 2010
The Era of Cheap Money is Ending
In my Money Week column I've been looking at how the era of cheap money is ending. Here's a taster.
Interest rates are at a three-century low, and have been stuck at those levels for more than a year. Your bank deposit account pays so little interest you probably don’t even bother to look at the statements any more. The interest on your mortgage is so miniscule you might well wonder why the building society goes to the hassle of collecting it.
Rates are so pitiful that it may well appear bonkers to start speculating about the end of the era of cheap money. But a fascinating new study by the McKinsey Global Institute has looked at the trends at work in the global capital markets over the last three decades, and looked forward a decade or so as well. It concludes that we may well be close to a turning point.
The global savings rate is about to fall sharply, whilst investment will soar. A lot more people will be chasing a lot less money. If that happens, long-term interest rates will rise sharply.
For investors, that is explosive stuff. Bond prices will fall sharply. Equities may well suffer as well. The private equity and hedge fund industries will collapse. But the traditional bank deposit account will suddenly look quite attractive again.
What are the reasons for thinking the cheap money era is over?
The standard explanation for why money has grown so much cheaper over the last two decades has been that there has been a glut of savings, mainly from big economies such as China and Japan.
Whilst true, that hasn’t been the whole story. There has also been a steady decline in investment. Investment as a share of global GDP fell from a peak of 26% back in the early 1970s, to a recent low of just 20% of GDP in 2002. It has bounced around that relatively low figure for most of the last decade, according to McKinsey’s calculations.
Now it might be about to take off again. The world goes through occasional mega-investment booms. The industrial revolution, for example, or the post-war reconstruction of Europe and Japan. It may be on the brink of another one. New countries are industrialising fast, and creating new cities at the same time. Across Asia, Africa, Latin America and Eastern Europe, there is a soaring demand for new infrastructure. Roads, railways, water systems, homes and factories are all being built at a rapid pace. That requires vast quantities of capital. Indeed the rate of global investment was already starting to rise quite quickly. From 2002 onwards, it started to climb sharply, before being choked off by the global recession. As the economy recovers it will start growing again, probably back to the peaks seen in the early 1970s.
On the other side of the equation, global saving may well start to fall. China is probably not going to save as much in the next decade as it did in the past. Typically, as economies grow more mature, they save less and consume more. There is no reason for thinking that China will be any different. The same forces will be at work in other big emerging economies such as India and Brazil.
At the same time, populations are rapidly aging – not just in the developed world, but in places such as China as well. Typically, older people don’t save. Indeed, they live on the past savings.
In short, there will be a much higher demand for capital, and a lower supply of it. You don’t need to know much about economies to figure out that means prices will go up. How much? No one can say for certain. McKinsey estimates that 1.5% could be added to long-term interest rates. But it could be much more.
For investors, however, that is going to make a hug difference.
First, the bond markets will go into long-term retreat.
Although the equity markets get far more attention, the bond markets have been in a two-decade bull market – and you’d have been better off for most of that time invested in bonds than shares. With the cost of capital hitting record lows, fixed income investments just grew steadily more attractive. But rising long-term interest rates will reverse all of that. Bonds will enter a bear market.
Second, equities will be far more mixed. On the one hand, the cost of capital for companies will rise. Shares won’t benefit from investors switching out of low-yielding bonds. That 5% dividend that looked so attractive when a 10-year bond yielded 3% won’t look so great any more. Against that, costs such as pension funds will be easier to finance. Equities will be okay, but will hardly shine.
Thirdly, it will have a huge impact on the capital markets. The hedge fund and private equity industries have boomed as investors have looked for alternative strategies in a world where real interest rates kept falling. But with rates rising, plain old deposit accounts at the bank will look a lot more appealing. There’s not much point in paying a hedge fund manager 20% for some exotic, high-risk strategy when you could be making a perfectly decent return just by parking the cash in your local building society. The alternative investment industry faces wipe out.
Finally, it will impact the rest of the economy profoundly. The credit boom of the last two decades was fundamentally about money being very, very cheap. They were giving the stuff away – just about literally in the case of some credit card companies. Consumers and governments steadily ran up bigger and bigger debts, often without much of an idea how they would ever pay them back. Those days are over. Governments will have to balance their books, and so will consumers.
In a world in which capital is in short supply, people will have to go back to living within their means, and saving up for things that they want to buy or invest in. Now that really will be a big change.
Interest rates are at a three-century low, and have been stuck at those levels for more than a year. Your bank deposit account pays so little interest you probably don’t even bother to look at the statements any more. The interest on your mortgage is so miniscule you might well wonder why the building society goes to the hassle of collecting it.
Rates are so pitiful that it may well appear bonkers to start speculating about the end of the era of cheap money. But a fascinating new study by the McKinsey Global Institute has looked at the trends at work in the global capital markets over the last three decades, and looked forward a decade or so as well. It concludes that we may well be close to a turning point.
The global savings rate is about to fall sharply, whilst investment will soar. A lot more people will be chasing a lot less money. If that happens, long-term interest rates will rise sharply.
For investors, that is explosive stuff. Bond prices will fall sharply. Equities may well suffer as well. The private equity and hedge fund industries will collapse. But the traditional bank deposit account will suddenly look quite attractive again.
What are the reasons for thinking the cheap money era is over?
The standard explanation for why money has grown so much cheaper over the last two decades has been that there has been a glut of savings, mainly from big economies such as China and Japan.
Whilst true, that hasn’t been the whole story. There has also been a steady decline in investment. Investment as a share of global GDP fell from a peak of 26% back in the early 1970s, to a recent low of just 20% of GDP in 2002. It has bounced around that relatively low figure for most of the last decade, according to McKinsey’s calculations.
Now it might be about to take off again. The world goes through occasional mega-investment booms. The industrial revolution, for example, or the post-war reconstruction of Europe and Japan. It may be on the brink of another one. New countries are industrialising fast, and creating new cities at the same time. Across Asia, Africa, Latin America and Eastern Europe, there is a soaring demand for new infrastructure. Roads, railways, water systems, homes and factories are all being built at a rapid pace. That requires vast quantities of capital. Indeed the rate of global investment was already starting to rise quite quickly. From 2002 onwards, it started to climb sharply, before being choked off by the global recession. As the economy recovers it will start growing again, probably back to the peaks seen in the early 1970s.
On the other side of the equation, global saving may well start to fall. China is probably not going to save as much in the next decade as it did in the past. Typically, as economies grow more mature, they save less and consume more. There is no reason for thinking that China will be any different. The same forces will be at work in other big emerging economies such as India and Brazil.
At the same time, populations are rapidly aging – not just in the developed world, but in places such as China as well. Typically, older people don’t save. Indeed, they live on the past savings.
In short, there will be a much higher demand for capital, and a lower supply of it. You don’t need to know much about economies to figure out that means prices will go up. How much? No one can say for certain. McKinsey estimates that 1.5% could be added to long-term interest rates. But it could be much more.
For investors, however, that is going to make a hug difference.
First, the bond markets will go into long-term retreat.
Although the equity markets get far more attention, the bond markets have been in a two-decade bull market – and you’d have been better off for most of that time invested in bonds than shares. With the cost of capital hitting record lows, fixed income investments just grew steadily more attractive. But rising long-term interest rates will reverse all of that. Bonds will enter a bear market.
Second, equities will be far more mixed. On the one hand, the cost of capital for companies will rise. Shares won’t benefit from investors switching out of low-yielding bonds. That 5% dividend that looked so attractive when a 10-year bond yielded 3% won’t look so great any more. Against that, costs such as pension funds will be easier to finance. Equities will be okay, but will hardly shine.
Thirdly, it will have a huge impact on the capital markets. The hedge fund and private equity industries have boomed as investors have looked for alternative strategies in a world where real interest rates kept falling. But with rates rising, plain old deposit accounts at the bank will look a lot more appealing. There’s not much point in paying a hedge fund manager 20% for some exotic, high-risk strategy when you could be making a perfectly decent return just by parking the cash in your local building society. The alternative investment industry faces wipe out.
Finally, it will impact the rest of the economy profoundly. The credit boom of the last two decades was fundamentally about money being very, very cheap. They were giving the stuff away – just about literally in the case of some credit card companies. Consumers and governments steadily ran up bigger and bigger debts, often without much of an idea how they would ever pay them back. Those days are over. Governments will have to balance their books, and so will consumers.
In a world in which capital is in short supply, people will have to go back to living within their means, and saving up for things that they want to buy or invest in. Now that really will be a big change.
On Motley Fool
You can hear me talking about Bust, my book on the Greek crisis, on The Motley Fool website.
Wednesday, 8 December 2010
Let It Snow
It’s cold at the moment, as you’ve probably noticed. Everyone else has, understandably enough, been moaning about the weather. But when you are half way through writing a book called ‘Ice Force’ it does have certain advantages. When I need to get in the mood for another description of snow storms swirling through the Arctic glaciers, all I have to do is step out into the garden.
One of the things you have to do as writer is create a believable atmosphere. Books vary, of course. Some are set in very, ordinary everyday locations -- the suburbs, for example. I like to set my books in fairly exotic places. I think that is part of the appeal of the adventure-action thriller genre. There is a big element of escapism in these books. Nobody wants to escape to Swindon. They want the book to take them somewhere exciting, and preferably dangerous as well.
That does, of course, mean the writer has to create believable detail. You need to make it real, without overdoing the travelogues. The best way is to focus on little things. When I was writing about Helmand in Afghanistan for Death Force, for example, I mentioned the smell of the wild irises that grow in the mountains along the Afghan-Pakistan border. In Ice Force, I’ve mentioned the grinding noise that the plates of ice moving beneath you make as you trudge towards the North Pole.
The atmosphere has to be woven into every sentence you write.
And, of course, it helps if it is snowing outside while you are doing it.
One of the things you have to do as writer is create a believable atmosphere. Books vary, of course. Some are set in very, ordinary everyday locations -- the suburbs, for example. I like to set my books in fairly exotic places. I think that is part of the appeal of the adventure-action thriller genre. There is a big element of escapism in these books. Nobody wants to escape to Swindon. They want the book to take them somewhere exciting, and preferably dangerous as well.
That does, of course, mean the writer has to create believable detail. You need to make it real, without overdoing the travelogues. The best way is to focus on little things. When I was writing about Helmand in Afghanistan for Death Force, for example, I mentioned the smell of the wild irises that grow in the mountains along the Afghan-Pakistan border. In Ice Force, I’ve mentioned the grinding noise that the plates of ice moving beneath you make as you trudge towards the North Pole.
The atmosphere has to be woven into every sentence you write.
And, of course, it helps if it is snowing outside while you are doing it.
The Return of Stagflation
In my Money Week column this week, I've been looking at the return of 1970s-style staglation. Here's a taster....
Historical comparisons are vital for any serious investor, not because the past always repeats itself, but because it gives you a sense of what forces are at work, and how they are likely to shape events. The tricky bit, however, is deciding which historical parallel is the right one.
So where are we right now? Back in the 1930s, recovering fitfully after an almighty global crash? Standing on the brink of a long bull market such as the early 1980s?
In fact, we are probably somewhere around 1969 – coming out of a decade of relatively strong growth and prosperity, but heading into one that will prove a much harder slog. The ‘stagflation’ of the 1970s – a malignant combination of rapid and rising inflation, zero growth, and rising unemployment which wiped out the wealth of the middle classes – could well be what lies in store.
In the debate between whether we are looking at a decade of deflation or inflation, too much attention is paid to where we are right now. At the start of the 1970s, there wasn’t much sign that rising prices were going to be a problem any time soon. Nor was there much sign that mass unemployment lay ahead.
But, as a fascinating recent analysis by Morgan Stanley made clear, there were forces at work in the early late 196s and 1970s that were to pave the way for stagflation -- and which all have very clear parallels today.
There was an international monetary system, which meant that the expansionary policies of the Federal Reserve were exported around the world. In 1970, it was the Bretton Woods system that had been set up after World War Two. Today, it is quantitative easing. But the net result is much the same. The Fed is trying to inflate its own economy, for its own reasons, but much of the expansion of the monetary system ends up elsewhere.
There was a glut of dollars flooding onto the global economy. In the early 1970s, the US was printing money to finance the Vietnam War. Now it is to keep its banking system afloat, but again the net impact is very similar.
There is a twin-track global economy. In the early 1970s, the peripheral economies – in those days mainly Japan, and the emerging Asian economies such as Hong Kong, Taiwan and Korea – were growing very fast, while the main traditional economies were starting to stagnate. The same is true today, with the emerging markets racing ahead, whilst the established giants of the global economy have all slowed down sharply.
Finally, there were structural challenges to the old heavy-weight economies that meant they found it very hard to grow. In the early 1970s, they were faced with the loss of old basic manufacturing industries, and the creation of new service-based economies. In 1970, for example, 35% of British jobs were still in manufacturing, compared with only 13% now. It was impossible to grow very fast until that process was completed. Now, of course, it is debt de-leveraging: gradually restoring both personal and government balance sheets after the crazy borrowing spree of the last decade, which means that growth is likely to be very subdued for a long time to come.
The net result was rapid inflation and zero or minimal growth – the worst of all possible worlds.
Of course, there are differences as well. No historical comparison is ever perfect. There is none of the wage indexing that was common in the 1970s. When wages went up with inflation automatically, that ratcheted prices endlessly upwards. Today, wages are falling in the UK in real terms – they are rising at about 1% less than inflation – and in most of the developed world as well. The OPEC oil cartel is nothing like the force it was forty years ago – it isn’t going to be able to force up the oil price in the way it did in the 1970s.
Still, the parallels are clear enough. On balance, several years of stagflation looks the most likely outcome.
How should investors respond to that?
First, don’t worry about inflation just yet.
Although the main ingredients of stagflation were all in place by the beginning of 1970, inflation didn’t take off right away. It wasn’t until the oil crisis of 1973 that prices really started to run riot, and it was the second half of the decade that saw rampant inflation across much of the developed world. You need to reckon on the big upturn in prices around 2013 or 2014 – not this year or next. So for the time being you are fine remaining invested in assets such as bonds that don’t protect you from rising prices. They will carry on doing well for at least another two years.
Next, switch into real assets.
With zero growth, and rapidly rising prices you need to be out of cash. The outlook for property prices might look bleak on the surface, with squeezed incomes and little growth in lending, but for British investors there have been few better long-term hedges against inflation than houses and land. That was true of every other inflationary cycle and it will be of this one as well. Gold will do well. So will commodity prices. Even better, try and spot the next OPEC-style cartel that can take advantage of loose monetary policy to squeeze up prices to extraordinary levels – iron ore would be one possibility.
Finally, get ready for the clampdown.
Central banks remain remarkably relaxed about inflation – for now. They may well have decided that with so much debt on personal and national balance sheets, modest inflation is the best way of getting the economy back into shape. But stagflation is a nasty condition: minimal growth and rising prices squeeze living standards very quickly, creating real pain. Eventually, inflation will have to be squeezed out of the system. That will create a lot of losers.
At the end of the cycle, we should end up back in the early 1980s – and ready for another two decade bull market in equities. But that part of the story is still a long way off.
Historical comparisons are vital for any serious investor, not because the past always repeats itself, but because it gives you a sense of what forces are at work, and how they are likely to shape events. The tricky bit, however, is deciding which historical parallel is the right one.
So where are we right now? Back in the 1930s, recovering fitfully after an almighty global crash? Standing on the brink of a long bull market such as the early 1980s?
In fact, we are probably somewhere around 1969 – coming out of a decade of relatively strong growth and prosperity, but heading into one that will prove a much harder slog. The ‘stagflation’ of the 1970s – a malignant combination of rapid and rising inflation, zero growth, and rising unemployment which wiped out the wealth of the middle classes – could well be what lies in store.
In the debate between whether we are looking at a decade of deflation or inflation, too much attention is paid to where we are right now. At the start of the 1970s, there wasn’t much sign that rising prices were going to be a problem any time soon. Nor was there much sign that mass unemployment lay ahead.
But, as a fascinating recent analysis by Morgan Stanley made clear, there were forces at work in the early late 196s and 1970s that were to pave the way for stagflation -- and which all have very clear parallels today.
There was an international monetary system, which meant that the expansionary policies of the Federal Reserve were exported around the world. In 1970, it was the Bretton Woods system that had been set up after World War Two. Today, it is quantitative easing. But the net result is much the same. The Fed is trying to inflate its own economy, for its own reasons, but much of the expansion of the monetary system ends up elsewhere.
There was a glut of dollars flooding onto the global economy. In the early 1970s, the US was printing money to finance the Vietnam War. Now it is to keep its banking system afloat, but again the net impact is very similar.
There is a twin-track global economy. In the early 1970s, the peripheral economies – in those days mainly Japan, and the emerging Asian economies such as Hong Kong, Taiwan and Korea – were growing very fast, while the main traditional economies were starting to stagnate. The same is true today, with the emerging markets racing ahead, whilst the established giants of the global economy have all slowed down sharply.
Finally, there were structural challenges to the old heavy-weight economies that meant they found it very hard to grow. In the early 1970s, they were faced with the loss of old basic manufacturing industries, and the creation of new service-based economies. In 1970, for example, 35% of British jobs were still in manufacturing, compared with only 13% now. It was impossible to grow very fast until that process was completed. Now, of course, it is debt de-leveraging: gradually restoring both personal and government balance sheets after the crazy borrowing spree of the last decade, which means that growth is likely to be very subdued for a long time to come.
The net result was rapid inflation and zero or minimal growth – the worst of all possible worlds.
Of course, there are differences as well. No historical comparison is ever perfect. There is none of the wage indexing that was common in the 1970s. When wages went up with inflation automatically, that ratcheted prices endlessly upwards. Today, wages are falling in the UK in real terms – they are rising at about 1% less than inflation – and in most of the developed world as well. The OPEC oil cartel is nothing like the force it was forty years ago – it isn’t going to be able to force up the oil price in the way it did in the 1970s.
Still, the parallels are clear enough. On balance, several years of stagflation looks the most likely outcome.
How should investors respond to that?
First, don’t worry about inflation just yet.
Although the main ingredients of stagflation were all in place by the beginning of 1970, inflation didn’t take off right away. It wasn’t until the oil crisis of 1973 that prices really started to run riot, and it was the second half of the decade that saw rampant inflation across much of the developed world. You need to reckon on the big upturn in prices around 2013 or 2014 – not this year or next. So for the time being you are fine remaining invested in assets such as bonds that don’t protect you from rising prices. They will carry on doing well for at least another two years.
Next, switch into real assets.
With zero growth, and rapidly rising prices you need to be out of cash. The outlook for property prices might look bleak on the surface, with squeezed incomes and little growth in lending, but for British investors there have been few better long-term hedges against inflation than houses and land. That was true of every other inflationary cycle and it will be of this one as well. Gold will do well. So will commodity prices. Even better, try and spot the next OPEC-style cartel that can take advantage of loose monetary policy to squeeze up prices to extraordinary levels – iron ore would be one possibility.
Finally, get ready for the clampdown.
Central banks remain remarkably relaxed about inflation – for now. They may well have decided that with so much debt on personal and national balance sheets, modest inflation is the best way of getting the economy back into shape. But stagflation is a nasty condition: minimal growth and rising prices squeeze living standards very quickly, creating real pain. Eventually, inflation will have to be squeezed out of the system. That will create a lot of losers.
At the end of the cycle, we should end up back in the early 1980s – and ready for another two decade bull market in equities. But that part of the story is still a long way off.
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