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Time to start thinking about silver linings

October 3, 2022

I was reading speculation about UK interest rates going to six per cent and I was starting to get quite depressed. I have interest only mortgages which are great when interest rates are low, not so great if they rocket up to six per cent. But then I read an article in the Daily Telegraph by one of my heroes, Professor Patrick Minford. As well as taking a much more positive perspective on prospects for the British and world economies than most people are currently taking he made me realise something important.

Somewhere in my mind I had been assuming that interest rates and inflation need to cross at some point if we are to bring inflation down and with inflation raging in the UK that implies terrifying levels for interest rates. The brilliant prof pointed out that these fears are way overdone. You don’t need interest rates to be higher than inflation, well maybe one day when inflation is much, much lower, what you need is for interest rates to bite and that is already happening. He thinks interest rates are going to peak around three per cent against bank rate currently at 2.25pc. I think he is probably right and that is going to hurt for anyone on floating rate mortgages which is most of us but should cure rather than kill.

By the way I have finally done a deal on my York flags. The patios for my house in Saffron Walden are hopefully going to look amazing, my builder says they will, but so they should. They are going to cost over five times the cost of my first London house; that’s inflation for you. I almost said to him I thought we were building a patio, not the Great Pyramid and he works fast. He wields a digger like a stiletto. It is incredible to watch him in action.

If you are feeling gloomy I recommend you to read the Patrick Minford article on page 23 of Saturday’s Daily Telegraph. It cheered me up. I am not even so worried that the new government have lost the battle on the 45pc top rate of tax. You are bound to lose some battles especially when the Tory party is wall to wall wets. The main point is to win the war and that is still being waged. The great British public, Tory back benchers and that ghastly little creep, Michael Gove and his dreadful wife, Sarah Vine, are not as enthusiastic about entrepreneurial capitalism as Liz Truss, Kwasi Karteng and I, the team who should be running this country, ideally with temporary dictatorial powers but we have to live in the world we are living in. It’s a lot better than Jeremy Corbyn, and I suspect that Kwarteng is going to turn out to be a cool guy. Personally, I feel more positive about prospects for the UK than I have for ages.

And there is certainly room for improvement. Look at the chart of the FTSE 100 below, which was flying in the 1980s and 1990s helped by the impact of Thatcher’s great reforming governments but has stagnated for nearly a quarter of a century. Bumbling along doesn’t work; we need to try capitalism even if the voters don’t really get it. They will when they find themselves in a growing economy again so don’t give up Liz and Kwasi. You are right and they are all wrong and there is probably more support for what you are doing than you think and by the way can anyone reading this name a single policy option put forward by Keir Starmer; that guy makes cyphers look bold and in-your-face.

What is also interesting about Minford’s observations is how well they tie in with my chart readings. My charts are telling me that the next bull market is going to begin sometime in the spring of 2023. The key quote from Minford’s article is:

“So we will likely see interest rates peaking and tumbling in 2023, which will help to get world growth going again.”

Patrick Minford, Daily Telegraph, 1 October 2022

Maybe part of the reason I like Minford is that we are not dissimilar in age. As my cousin would say he is very, very old but there you go. You can’t be young all the time, unfortunately.

Labour has a huge poll lead but so what. Even Jeremy Corbyn managed a huge poll lead at one point and I am not sure I would even trust him to run North Korea. We will know more about Truss as the months pass. At least she and Kwarteng are trying to do the right things and we have not had a government like that for a very long time.

The most important thing to remember about bear markets is that they never last forever and end when things look bleakest. This applies more to fundamentals and news flow than it does to charts; that is the beauty of charts. They can turn bullish while the media are still sunk in gloom and that is most likely what will happen this time. Capitulation comes when media commentary has given up all hope that normal service will ever be resumed again.

As subscribers know for me it is all about my indicators which tell me (a) this bear ain’t over yet, (b) most likely it will be some time next Spring and if I get that right I will crack out a bottle of champagne and (c) until we have much firmer evidence of a turning point it is dangerous to chase rallies however exciting the fundamentals may look.

Strategy

There is a rhythm to stock markets. Two steps forward and one step back in bull markets and vice versa in bear markets. In the case of bear markets this is partly because people are naturally bullish so there are always a few buyers after a sharp fall in prices but also because of short covering.

One day one of those reactions will not be a reaction but will be the bottom. If we are lucky it will coincide with a turning point on Coppock and we will be off to the races again. The next bull market will be different to the last. It won’t be all about e-commerce and the cloud. We have been there, done that so it will be about something or things new.

It will also coincide with something else bullish happening like falling commodity prices, lower bond yields, a change of stance by the central banks from tightening to easing. There is always room for common sense when it comes to interpreting the message in the charts. But for the moment my key message is that we are most likely six months away from a serious change of direction.

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