In today’s letter I want to show you how a QE-spawned deficit in defined benefit pensions could become a problem for all shareholders and savers – even if you don’t work for a FTSE 100 company with a defined benefit pension scheme. And let’s face it, odds are you don’t. Knowing how you could still be negatively affected – and knowing what you can do about it now – could come in handy.
I’ll also show you how you can join the grassroots political fightback against QE. It’s being led by our man in the City, Tim Price. He’s taking the fight straight to the financial authoritarians who’ve wreaked havoc on British savings and pensions. You asked for action on QE. Tim’s responded.
Before I get to all that, let me pass on the good news from the employment market. The number of Britons between the ages of 16 and 64 with a job reached its highest level ever since the Office for National Statistics (ONS) began tracking the number in 1971. It’s 74.5%. Fifty-two thousand jobs were added between April and June, according to the ONS. Average weekly earnings were up 2.4%.
Of course all those figures pre-date Brexit. But you could almost sense the surprise and disappointment in some of the wire service articles. Brexit hasn’t triggered higher unemployment, falling wages, and attacking dragons from outer space. Yet the Bank of England has put British interest rates on a war footing (a war against deflation). And savers are sadly the collateral damage. More on how you can fightback below. But first…
Pensions and dividends and TradeStops
The defined benefit pension funding gap – where private companies aren’t generating enough on their investment returns to fund their pension obligations – could become a problem for income investors and shareholders, said David Stevenson yesterday. David, in his capacity as a new contributing editor to Lifetime Wealth, investigating income and alternative income ideas, didn’t mince words.
The entire interview will be published next week for Lifetime Wealth readers (including a transcript). In it we discussed whether you should even bother to hold cash anymore; whether the retirement age will (or should) be raised; why owning high-yield shares is good (but puts your capital) at risk; and three of David’s best ideas for getting a yield of at least 5% (hint, not in government bonds).
But in response to a reader question, David made a great point about why everyone should worry about the £1.3 trillion deficit in defined benefit pension schemes. It’s simple. Companies under pressure to fund their pensions may have to cut their dividend. Or, if they don’t pay a dividend, they’ll have to divert cash flow away from investment and to pension liabilities.
Either outcome is negative for owners (directly or indirectly) of large blue chip British firms. You either take a hit to your dividend income, or your capital is put at risk as the shares are re-rated to account for the unfunded liability. The main point is that it’s not just a problem for the companies with the actual pension deficits.
Of course the origin of the problem is that you can’t get a decent return on government bonds any longer, unless you’re talking emerging market government bonds. And those aren’t exactly “risk free”, are they? Neither are gilts or US Treasuries. But that’s really the point: if you can’t match your long-term liabilities with a long-term, low-risk investment, you have to take more risk. And that puts everyone at risk.
Managing risk in the shares you own
Let’s make all this less theoretical and bring TradeStops into it. Let’s take the case of British Telecom. It’s one of the stocks mentioned in a Bloomberg article on the pension problem this morning. Please note that what follows is neither intended nor should be construed as investment advice. The point is to improve your knowledge of the risk in the stocks you own.
First, the article reports that (emphasis added is mine):
Pension deficits have swelled since the June 23 referendum as the Bank of England’s monetary stimulus forced down government bond yields. That’s reduced the return on fund investments… adding to pressure on companies including telecommunications provider BT Group, grocer Tesco and military contractor BAE Systems. Companies may now need to reduce dividend payments to raise pension contributions and close funding gaps. That means investors, who have been insulated from the U.K.’s pension crisis, could feel the effects.
I took a snapshot of BT using TradeStops this morning. I’ve reproduced it here so you can see what I see. Mind you, it’s only one aspect of what you can do with TradeStops. But in the context of whether “safe” income stocks have pensions risks – and whether you should sell or buy now – it’s especially interesting. Have a look:
BT “stopped out” in mid-June
Source: www.tradestops.com
There’s a lot of useful, actionable information in the chart above. But the bit I want to draw your attention to is the number circled in red in the middle. It’s the “Volatility Quotient”, or VQ score. This is derived from an algorithm Dr Richard Smith created for TradeStops. He began using a simple trailing stop for every single stock. But then he improved on it.
The VQ score tells you the volatility for each stock you own, each stock you may buy, or for your portfolio as a whole. What you’ll find, as you begin to use TradeStops, is that not all stocks are created equal. This knowledge can help you manage risk more effectively for each stock and for your portfolio. And by “managing risk”, I mean limiting losses and riding winners for longer. What do I mean?
A higher VQ doesn’t mean higher risk. In fact, as David pointed out yesterday, some funds’ management strategies explicitly seek out volatility. The big price swings attract opportunistic traders and trend followers. Volatility isn’t evil.
But volatility is… volatility! I don’t mean to be obvious. But when you know the volatility of a share, you know how much normal whipping and sawing to expect in the normal course of price action for that share. A conservative stock tends to have lower volatility. A more speculative stock tends to have higher volatility.
TradeStops helps you set trailing stops based on the VQ score. For a more conservative stock, the VQ score should be lower. That means your trailing stop will be tighter. You can see in the BT example that the VQ score was set about 17% below the highest price the share closed at. That was at ÂŁ4.84 on 2 February.
A “stop loss” signal was triggered on 13 June. If you followed it, you’d be out of the stock. And judging by the SSI trend, no matter how attractive the indicated gross dividend yield (3.57% according to Bloomberg), there’s not a case to be made – according to TradeStops – that now is a good time to buy the stock.
The three-legged stool of risk management
Whether you do or not is entirely up to you. But TradeStops has been designed to help individual investors answer three simple questions: when to sell, when to buy, and how much to buy. If you’re a serious investor, I have no doubt it can help you manage your risk better. That should mean much better portfolio returns over time.
Showing you all of that – in detail – is what Monday night’s broadcast was about. Richard went into precise detail on what he calls his “three-legged stool of risk management”. Don’t think this is just about minimising risk, though. The primary goal is this: maximising gains.
II’ll let you know tomorrow. And a transcript should be available by early tomorrow afternoon if you have a slow internet connection or would just prefer to read and skip ahead to the good parts.
Speaking of that, if you’ve already watched the broadcast or are part way through, please remember that the offer we extended you is only good until Monday 22 August at midnight. If the system is of no interest to you or you’re not an active investor, that’s fine. But if you are interested, you’ll need to decide soon.
Savers, pensioners, and sound money lovers of Britain, your country needs you
Now, back to the wars. Tim Price from the London Investment Alert has taken up the challenge. Last Friday, he wrote and submitted a new petition to the government to end QE. I forwarded Tim your many, many messages of support to end QE. He took it from there.
Today I’m asking you to support Tim’s call to end QE by signing the petition he created. You can do so by clicking the link below. Please note it’s a government website and they will require you verify your signature by sending you an email. Here’s the link:
https://petition.parliament.uk/petitions/164630
Tim and I discussed what the petition should call for. In the end, this was the wording he chose:
Establish a commission to limit the mandate of the Bank of England and end QE.
Quantitative Easing (QE) attempts to create economic growth by unconventional, unproven methods. QE has been accompanied by unprecedentedly lower interest rates on savings accounts and Government bonds. These low interest rates threaten the real wealth of British savers, investors and pensioners.
We the undersigned, as concerned citizens of Great Britain believing in sound money and responsible public finances, do call on Her Majesty’s Government to:
- Establish a commission for limiting the mandate of the Bank of England and its Monetary Policy Committee (MPC);
- Make clear to the MPC that the Government does not support QE and calls for its immediate end;
- Declare that it will not favour the interests of large banking groups over those of individual British savers and investors.
If you agree with that, sign the petition. There’s no guarantee it will change anything. But if you want to make your voice heard, this is one way to do it. And if you feel strongly about it, forward this email to family and friends, share it on Facebook, or tweet it.
Based on my feedback, I’d say there’s a huge gulf between how ordinary Britons feel about QE, and how the financial authoritarians feel about it. Whatever QE was originally designed to do, it’s an ongoing disaster for savers and pensioners. And the distortions it created in the bond and stockmarket threaten to wipe out even more hard-earned wealth.
Enough is enough. Sign the petition if you agree!
Category: Economics