This just in: UK consumer price inflation in July was 0.6% according to figures out this morning from the Office for National Statistics (ONS). Expectations were for 0.5%, according to Bloomberg. That prompted some breathless commentary on Twitter that a weaker pound was already leading to higher inflation via import prices (a weaker pound).
But that’s not what the ONS said. ‘The main contributors to the increase in the rate were rising prices for motor fuels, alcoholic beverages and accommodation services,’ it reported. It somehow omitted that transport prices were up 1.6%. Booze was up 0.5%.
You can understand people wanting to have a drink in July. The weather was nice. And whether you were celebrating Brexit or mourning it, alcohol may have been involved. But here’s the point: The inflation figure was 0.5% in June and 0.5% in March — well before Brexit. For now, the data isn’t showing anything Brexit related.
And let me throw this out for your consideration: Maybe the new UK needs higher interest rates, not lower rates. Inflation hasn’t spiked yet. But if you want to dis-incentivise cash hoarding and fear, you can raise interest rates, make savings pay again, and quit acting like there’s an economic catastrophe at hand when there’s not.
Over to stocks
The UK stock market has hit a ‘critical technical zone’, while US markets continue to hit all-time highs. Meanwhile, the Rothschild family’s listed investment fund is cutting its exposure to UK shares and has warned that the geopolitical landscape has ‘deteriorated’. And if you’re worried about your pension in a low interest rate world, spare a thought for the millennial generation who will probably never be able to retire.
Let me start with the simple question I’ve been asking you for a week: Should you sell your stocks?
The simple fact is that the single biggest mistake investors make is selling low and buying high.
Is the index ‘overbought’?
The FTSE 100 has risen for eight straight days. It closed yesterday at a 14-month high of 6941 points. But the pound fell against the dollar yesterday. And with July inflation and June house price figures out today, the wind behind the index’s sails could falter. Technically speaking, it may already have.
The relative strength index (RSI) on the FTSE 100 is above 70, as you can see on the chart below. Technical analysts will tell you that an RSI over 70 suggests an index or security is ‘overbought’. An RSI under 30 suggests an index is ‘oversold’. The last time the RSI went over 70 on the FTSE 100 was in May of 2013 — right before the index fell 12%.
[Click to enlarge]
The index is within striking distance of its all-time high of 7089 points made in April 2015.
The question is: If the index is oversold, which components will lead it down? To figurethat out you’d want to look at the individual stocks that make up the index and see where the RSI is on each one.
Yet sometimes doing nothing is the best course of action. It’s certainly the best course of action if you don’t have specific analysis to act on. The macroeconomic data out later this week may confirm what the technicals suggest: some of the stocks in the index are overbought. Some — the ones that benefit from a weaker pound — may be just fine.
Rothschilds sell stocks and buy gold
If you’re running a family office with a multi-asset diversified portfolio, you’ll want to hear this.
The Rothschild family’s listed investment fund is cutting its exposure to stocks from 55% to 44%. Lord Rothschild said that close to a tenth of his personal money and client’s money is now in gold and precious metals.
Lord Rothschild said that the UK’s low interest rates were ‘the greatest experiment in monetary policy in the history of the world.’ He added:
‘We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30 per cent of global government debt at negative yields, combined with quantitative easing on a massive scale…preservation of capital in real terms continues to be as important an objective as any.’
I’d say that, other than living a hardworking, honest and ethical life, that you can look back on with satisfaction on your deathbed, preservation of capital is the mostimportant objective in a market like this. Secondary objectives would be generating some safe income from your investments. Finding a way to earn a capital gain not juiced by QE and low rates comes third on my list. Climbing Mount Everest, fourth.
For The Daily Reckoning