Thursday 28 May 2015

How long wil lthe boom last?

Chart forFTSE 100 (^FTSE)

Predicting 9 of the last 3 recessions, as co-writer Blue Eyes often rightly criticises me for, it s mugs game. Even the informed writers here knew the 2008 crash was coming, but how deep and when eluded everyone - markets are just not predictable.

But when we look back at the FTSE all share, a very rough guide to the UK economy over the decades since 1984, we can discern some key pointers:

1. Thatcher and Major oversaw a huge strengthening of the economy from is weakest point which was probably around 1982/3 in terms of the post baby boomer period.

2. The 1990 recession slowed growth in share prices from 300% to 25% until around 1995. Although there is a clear upturn from 1993.

3. From 1995 the dotcom bubble really distorted the picture until the crash of late 2000/2001, which also cross over with 911. A min-recession took place in the real economy in the Tech and Travel and Hospitality sectors, but the rest of the country survived relatively unscathed - stock prices took a big dip as the effects of the dotcom bubble wore off. The indices returning to its pre-1997 levels.

4. Then we have the disastrous leverage boom of 2003-2007. How so much damage could be done so quickly is frightening. Still, stock prices bounceback within 18 months and have been steady ever since.

5. However, since 1999 there has been zero real growth in the FTSE, even allowing for the changes in constituents, the index has shown little growth.

6. Reflecting the UK's wider productivity issues remarkably well, the indices has been suffering from slow growth since 2011 - 4 years now of slow chugging up.

So what next? Well from 1984 it took until 1987 for a crash and then the overall recovery too to around 1993. This boom then last until 2001. So a 4 year expansion, then a 7 year recovery period, followed by a 7 year boom.

Then we have the dotcom crash, a 3 year downturn then another 4 year boom. Then a huge crash followed by a weaker 7 year recovery period.

On balance, this means we are likely due a 3-4 year boom phase before the next crash. Given property cycles are often cited as 18 years - then this would also match with the next big bust not due to the early 2020's in theory.

What seems unlikely now from a historical context is a huge recession in the next few years. It maybe that with technology changes and volume of interactions that phases are getting shorter - but still, its hard to be a bear even now.

Of course, event dear boy, events - an EU Grexit or Brexit or the final realisation of the massive Chinese bubble in printed money  and over-investment can jinx historical moves. But then again they always could.


Blue Eyes said...

There are worse doom-mongers, to be fair!

Tony Blair once said "I don't make predictions; I never have, and I never will."

The UK economy is weird. We seem to be awesome at selling services to overseas customers, both by selling to customers overseas and by bringing customers here to spend their money. Chinese people come to London to buy tat made in China. I don't really get it. But I am glad we are good at it.

In this context GDP and trade figures are a nonsense, as are averages such as property prices and wages and productivity. London/the SE feels like it is overheating: everything is overcrowded, restaurants are full and evermore expensive, people are tripping over themselves to do/go to whatever is new new new.

I have no idea what is happening in the rest of the country.

A recovery need not end in a bubble and bust, if some of the needed structural reforms are made, such as allowing more housing and infrastructure to be built, sorting out the pension and welfare systems, encouraging invesment over consumer spending.

andrew said...

I think thing are genuinely different this time.

The entire UK stock market pretty much behaves like a long dated gilt.

My prediction
High volatility (by that I mean changes > +/- 10% over a week) will not happen until US interest rates increase rapidly .

I am probably wrong

Blue Eyes said...

Not to mention how much *building* is going on in London!

Steven_L said...

first you post a FTSE 100 chart and refer to it as a FTSE all share chart, when the latter would include small caps and dividend income, whereas the former would not.

Then you use it to re-write modern economic history.

But you finally absolve yourself by finally accepting that land price cycles are about 18 years in length.

Personally I'm thinking about going long the NASDAQ, but paying the premium for a guaranteed stop loss, hoping for a 'blow off' phase of that bubble.

Bill Quango MP said...

There is no more boom and bust

I'm sure I heard a great financial leader say that.

Anonymous said...

6. Last 4 years annualised returns of 8.59% fo FTSE and 9.5% for All share -not too shabby against cash returns of 0.5%.

Jan said...

You forgot QE in your analysis and most of that cash seems to have fueled an asset boom especially house prices in London and the SE (and other major cities worldwide)so it really is a bit different this time.

Sebastian Weetabix said...

I presume that at some point interest rates will rise; I can envisage that putting a lot of BTL landlords under pressure and forcing them to dump their property p.d.q. Cue collapse of house prices, severe bust.

I suppose the 'independent' bank of England won't willingly do it, as no politician wants it on his watch.

dearieme said...

"cash returns of 0.5%": not for the personal investor, at least not this one.

CityUnslicker said...

SW - I really doubt that, rents can go up. The demand for preoprty in the South East is so far aherad of supply it is sickening. Even the massive bust in 2008/9 lasted less than 1 year in London - in the main due to the supply issues. Resi here thought, commercial took a lot longer to recover, nearly 3 years.

Tom Seddon said...

If rents can go up, why haven't they gone up already? It should be fairly low-risk if demand outstrips supply.

MyKronenburgName said...

1. Property boom/bust - this has been wholly engineered to save over-indebeted boomers and the banks they borrowed from. If you aretn selling property into this you are a mug. Thats why all the action in private pension funds is selling commercial property to the pension fund to release cash. This is not a healthy sign; the pension funds have been denuded of cash over the last few years and now the remaining funds are being released by selling the business to the pension fund. The owner gets cash the pension fund gets an insolvent business/warehouse in Exeter.
NHS cuts will require the bed-wetters to sell their properties, kill their mortgages and pay for morphine. So far they arent doing that. Instead they are getting into BTL and strangling their cash. Good luck selling that 2 bed flat when you need suddenly need chemotherapy; I'm sure the buyer ('Pensioners Advice Helpline' or some such) will be sympathetic.

2. This tech boom is very, very different. It isnt about websites and dotcom names its about automation and data aggregation. It will demonstrably and definitively change things at an unprecedented rate; the iPad was only released in 2010.
In 2.5 years we will develop, market, adapt, use and be dependent on a technology we can only imagine. Anyone predicting economic outcomes (that involve growth) in this environment is a mug.

Pure and simple.