Words that you may recall from the 1992 US election as to where Bill Clinton was meant to be focusing his attention in pre-election comments.
The (decent) financial press have, in the last couple of weeks, featured a number of articles that make grim reading. Some you will be aware of: Brexit uncertainty; say no more – please! Trump being argumentative with the Chinese and the risk of trade wars.
There are though, a few other things that are perhaps quite concerning, and whilst a recession is not necessarily on the way, they are indicative of a need to prepare. Prepare how?
Well if you are planning on trading through the recession then making sure that you have everything ready in your business to ride the storm. It could be ensuring that sales contracts are in place; debtors are controlled with as little risk of possible of bad-debts; costs are in check; and you have sufficient finances to see you through any tough times.
If things are going well, and you are contemplating an exit, now may be a good time – both in terms of it being before a potential downturn, but also whilst multiples are very high and businesses achieving high vales when sold.
So, before we go any further let’s list the things to look out for and then we’ll cover them in turn:
- Brexit
- Trade wars
- Iran et al
- US yield curve
- Warren Buffett
Brexit and trade wars
Brexit and trade wars: I shall say no more other than there is uncertainty. Uncertainty stops companies investing and they become more risk averse
Iranian et al sanctions
Trump has been vocal about his issues with trade with China and Europe: not a good time to sell your German Steel in Chicago… on the flip side nor buy a Harley in France
Iran has been joined the China and Europe; The US has stepped out of an agreement with other countries and Iran and the implications of that have now arrived with sanctions starting last week (7 August 2018). The implications are significant. Iran is the largest car manufacturer in the Middle East. European suppliers have to choose between continuing to supply Iran and losing their sales to the US. Hobsons choice. Or a choice between a rock and the Zagros mountains which are most definitely a hard place.
Iran has the world’s 4th largest proven reserves of oil and so a return to sanctions will have oil price implications that will affect UK (and international) manufacturers.
Turkey hasn’t had a great time either. As a result of refusal to extradite a US preacher imprisoned in the country, Trump has doubled Aluminium and Steel tariffs and the Turkish Lira has tumbled as a result.
US yield curve
Moving on to the US, is a disturbing (according to some) US bonds yield curve.
Keeping it simple the yield curve is a line that plots the difference between short and long-term interest rates in the U.S. It has been levelling-out but many commentators are worried that it will invert as soon as next year.
Why does this matter? An inversion of the curve often signals an economic recession and is thus interpreted as a sign that economic turmoil is around the corner.
One reason for this is banks. Banks make money from borrowing at short term rates and lend longer term at higher rates. But if the long-term rates are the same or lower, there is no benefit in lending. The ability of private companies to borrow is reduced. The UK is dominated by private companies and they, might, be starved of access to debt.
The implications of that are that growth stalls. Or if you plan to sell your company, the availability of debt to buyers falls – fewer sales of companies and perhaps at lower multiples.
Berkshire Hathaway & Warren Buffett
Again, just another in a list of possible indicators. Why listen to Warren Buffett’s, thoughts? Between 1965 and 2017 the compounded annual gain if you had had your money in the S&P 500 with dividends included would have been 9.9%. Pretty good perhaps but if you had invested with Berkshire Hathaway you per share market value in Berkshire Hathaway would have been a compounded annual gain of 20.9%.
The overall gains would have been:
- S&P: 15,508 %
- Berkshire: 2,404,748 %
Past performance is no guarantee of future performance and all that, but it’s worth noting that the 2017 letter to shareholders of Berkshire Hathaway Inc, in reference to sensible purchase prices of companies said,
“that [last] requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed. price seemed almost irrelevant to an army of optimistic purchasers”
The result of that view is that one of the world’s most successful investment companies has not being buying shares at previous levels. Their cash reserves have gone up from the normal $20bn or so they keep on hand to $111bn.
Don’t quote me, and I’m certainly not a financial advisor qualified to comment, but I have an inkling that somebody thinks shares are headed in only one direction.
So, what does this all mean?
Maybe nothing at all, but maybe there a few too many bad news stories. Businesses do best when their owners feel confident about prospects. They are happier investing and taking on new people. For me it is a time to be a little more cautious, although as it is the summer holidays I shall be doing so from a sunbed by the side of a pool. Though sadly not in Turkey, where the exchange rate would have been great! Have a good Summer holiday!