We Intend to be Here for the Long Term

August 2021 Investment Report

 

 

We are currently receiving enquiries, on an almost daily basis, about potentially selling our business to national wealth management firms. Two weeks ago, the starting point for one enquiry included a formula for selling our business, which produced a figure that was equivalent to almost three times the industry average. There are a number of reasons for sharing this information with you: -

1. To reassure you that we have no intention of selling our business unless we are forced to do so through circumstances outside of our control.

2. I thoroughly enjoy my work and if I were to retire, I would miss the mental stimulation that it provides. I may partially retire at some point but I intend to continue to work for as long as I am able to do so.

3. We have been working towards protecting our clients’ portfolios from the consequences of historically high levels of debt, and we intend to see that commitment through to the end of the debt crisis that has been building for decades.

4. We are in the process of recruiting another university graduate, who is already partially qualified. The two university graduates that will be employed with us may be in a position to offer advice to both existing and new clients within the next two to three years.

5. In most industries, a significant increase in the volume of takeovers and the multiples paid for those businesses occur at or close to the top of the market and perhaps this is another sign that financial markets are close to peaking.

6. The number of enquiries and the prices being paid for small wealth management businesses, suggests that many of these large national wealth management firms have little or no idea of what lies ahead. There are around 400 large national wealth management companies within the UK and we suspect that only a handful have a true understanding of the debt problems and how they might evolve.

7. As these debt problems unravel, we should be able to increase our market share significantly whilst maintaining our ethics and service culture and in turn, provide greater security for both our clients and our team at Vertis Private Wealth Management Limited.

8. Having discussed investment strategies with a number of these national wealth management firms or their agents, when they have enquired about our business, we have established that by selling our business to them, we would have to follow their investment strategies. By and large, this would expose our clients to the debt and inflation risks from which we have for a long time been preparing and protecting them.

 

 

 

 

 

Index Linked Gilts

At the end of 1994, the real yield (https://www.investopedia.com/terms/r/realinterestrate.asp) on Index Linked Gilts was +4.0% (offering a return of inflation plus 4% per annum if held to maturity). The real yield on Index linked Gilts is now -2.45% (offering a return of inflation minus 2.45% per annum if held to maturity). The yield on assets moves inversely to the price. So, as the real yield fell from +4% to -2.45%, the total gain on Index Linked Gilts has been 519.1%. Over the same period, inflation in the UK increased by 103.4%!

 

It is unlikely many, if any, investors in Index Linked Gilts at the end of 1994, expected the real yield to fall to -2.45%. Because of excessive debt problems and the need to keep interest rates low, we now expect the yield on Index Linked Gilts to fall below -8.0% per annum. Future returns should be similar to those achieved since 1994, although probably over a much shorter time horizon, as the end of a cycle tends to happen more rapidly than the build up to it.

 

Gold

The US Dollar gold price is approximately 40% below its inflation adjusted peak in 1980, providing the opportunity to make that gain (66.7%) in the future. Furthermore, if inflation were to increase by 50%, then the gold price could increase by 149% (100 x 1.66 x 1.5 - 100).

 

For the last thirty years, the price/earnings ratio (https://www.investopedia.com/terms/p/price-earningsratio.asp) of gold shares relative to that of global shares has ranged between 40% and 250%. They are currently trading at around 60%. To get back to the peak of 250%, which they have achieved on four previous occasions in the last thirty years, gold shares would gain 316.7% on a relative valuation basis.

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For the last thirty years, the price-to-book ratio (https://www.investopedia.com/terms/p/price-to-bookratio.asp) of gold shares relative to that of global shares has ranged from 40% to 200%. They are currently trading at 75% and to get back to 200%, gold shares would gain 166.7% on a relative valuation basis.

 

If the gold price increases as we anticipate, this would increase the earnings and book value of gold mining companies and the potential returns could be much higher. I have written previously that gold miners’ profit disproportionately with increases in the gold price. This means a small percentage increase in the gold price can result in a much greater percentage increase in gold miners’ profits and hence the share price of gold mining companies.

 

Banks

We are often lulled into thinking in a formulaic manner based upon accepted wisdom. In a recent weekly update, I referenced the president and chief executive of the Federal Reserve of Minneapolis, who suggested that analysis by numerous outside experts indicates that banks need about 20% in reserve ratios (https://www.investopedia.com/terms/r/reserveratio.asp), compared to the current international statutory requirement of 13%.

 

 

 

 

 

I have given this matter further thought. Let’s assume that the minimum requirement becomes 20% and be kind in assuming that the reserve losses were to be 10%. That would mean banks would have to increase their reserves by 10% to get back to a reserve ratio of 20%. Losses occur during a period of economic hardship. The rebuilding of reserves would mean a lack of lending (unless it were financed by evermore printed money which would make that money worthless) and that would defer that economic recovery for a very long time.

 

Economic history shows that losses across the whole banking system can be as high as 20%. Consequently, in order to maintain an adequate banking system that is capable of withstanding the worst of all crises, bank reserve ratios should have been maintained at 40% with a lower buffer of 20% only in the event of an economic crisis. Prior to the Global Financial Crisis, the international reserve ratio requirement was 8% and now it is 13%. What an awful mess we have created for ourselves!

 

 

The views reflected herein are those of Vertis Private Wealth Management Limited and should not be regarded as a recommendation to invest in any one product or service; before investing you should always consider personal investment advice.

Where you seek the advice of Vertis Private Wealth Management Limited, we continually monitor markets and will advise you where there is a change in the findings of our research and provide advice and guidance on any alterations that may be required to the investment strategy that we have previously recommended.

Vertis Private Wealth Management Limited does not accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Investors should be aware that the value and income from investments can rise and fall and that past performance should not be considered as a guide to the future. Your capital may be at risk.

Mitchell Neale

Vertis Private Wealth Management Limited