How our Dividend letter works (part 2)

An excerpt from a bigger HindeSight Dividend supplement written by Mark Mahaffey, Aalok Sathe and Ben Davies – the full PDF is available by signing up to our Dividend Letter.

Property valuations in the UK are extreme again, particularly for our main subscribers. However, China, Canada, Australia and many other countries look equally, if not more, at risk of a crash.

UK residents have total faith in UK property and this has unfortunately blinded them into continuing to pay ever higher prices. The media revel in writing sensationalist news stories in order to sell their wares – whether they are old-fashioned paper scribes or digital journalists, the game is the same. Property prices are making all-time highs ‘good’ news, but wait, are they really? Most people aged under 40 can’t afford to get on the ladder without the Bank of Mum and Dad, and what’s the point of climbing aboard an incredibly rich asset class that will cost you over 50% of your take home income. The lightly reported reality is that the prices of two bed flats inside the M25 are soaring, but properties over £2.5mil in Chelsea are down by 15% over the last year because the increase in stamp duty has hurt domestic buyers (note to the academics at HMRC, if you are looking to increase tax receipts from a transactional tax, do not kill the level of transactions, as has happened in London prime), as well as the dwindling demand overseas. Further afield, in Blackpool, the prices are reported to be 20% lower than in 2008.

The first sensationalist negative property news I have seen is a recent article in the magazine, ‘City A.M.’ It seems the media is potentially swinging 180 degrees to get their readers’ attention and focusing on the number of price reductions across the land.

Valuations are usually just a mix of both interest rate serviceability and wages. The lower the interest rate, the higher the wage and the higher the property prices can go up. On an income basis, we are unfortunately at extremes again throughout the country. The risk is that the employment cycle will roll over and interest rates will rise sharply, which would really bring the house down, excuse the pun.

Remember, Japanese property prices peaked in 1989 and then fell every year for 20 years, in some case by 80%. Do not be surprised if current valuations in the frothiest property markets of the world, like the UK, follow this tragic pattern.

Source; Bloomberg, Sean Corrigan Macro

Gold valuation

The only member of the permanent portfolio that does not have a very rich valuation is gold. From the high of around $1900/oz in 2011, it fell to $1050 at the end of last year – a fall of almost 50% with the mining stocks faring far worse. Since then gold has regained ground to $1250/oz and is now one of the best performing assets this year. Despite this volatility, and its history of boom and bust cycles, gold remains one of the longest serving asset classes and stabilises many portfolios in times of crisis. We will write about gold specifically in the near future and the potential for much higher prices, but please feel free to visit www.hindecapital.com and download from the report section any reports that are of interest. We believe that investors should hold a reasonable weighting of their portfolio in gold at this time.

A recent report by one of the most respected and profitable long-term fund managers, Stanley Druckenmiller, has declared that his fund is selling equities and maintaining a 30% weighting in gold at this time. The title of the presentation is ‘Endgame’ and it can be found on a google search with ‘Druckenmiller’.

The sobering fact is that most of the favoured and heavily allocated asset classes are exceptionally rich and offer appalling risk/reward dynamics, whether it be cash, bonds, equities or property, and they remain so at this time.

THIS IS MY MAJOR CONCERN

Stanley Druckenmiller is one of the best traders and investment managers of the last four decades, who is staring at the same charts and ratios as many other long-term market participants, including ourselves. We all know full well that we are probably facing the most exceptional headwinds for wealth creation or mere preservation of all time.

BUT IT HASN’T HAPPENED YET… and it continues not to happen. So are we worrying about nothing and crying wolf, or is the gap between current prices and future reality widening all the time? Unfortunately, I believe the latter. I think the ludicrous interest rate policy, coupled with quantitative easing worldwide and currency debasement, is allowing the markets to maintain an illusion of high plateau, while the support is rapidly being eroded. I believe the Wiley Coyote moment will be the most horrendous gap down in asset class prices ever because the markets have not been able to discount future concerns as they usually do, and the illiquidity will not allow many to exit.

The time for protecting your portfolio is NOW, while there is still time.