Jamming 19 sovereign entities into one exchange rate and one common short-term interest rate structure combined with limited fiscal flexibility has never made much sense to us. We remain of the view that a break-up, in some form, is far from a remote possibility.
Every so often we like to visit the world of superyachts as revealed in the pages of the monthly superyacht “bible”: Boat International. Why? It tells us whether the ultra-super-rich are still spending freely or battening down the hatches. The Global Financial Crisis sent a cruel wind through the leisure boating market and it took many years to regain its vigour. Long lead-times for “new-build” mean that economic conditions encountered when an order is approaching completion can be very different from those prevailing when the order is placed.
During the GFC many “new-builds” were mothballed as financing collapsed. Potential owners simply walked away foregoing substantial deposits. Many boat-builders went to the wall – including some long-established and respected names.
So what’s the current status? In 2018 the brokerage market chalked up sales of 434 superyachts with a total asking price of 4.26 billion euros. To save you working it out that equates to an average asking price of 9.8 million euros. In the previous 12 months the average asking price was 8.8 million euros and 438 yachts changed hands (total of 3.86 billion euros). In 2016 the total was “just” 3.37 billion euros.
In 2018 twelve yachts measuring more than 70 meters (231 feet) were sold, up from eight in the previous year.
Conclusion — this market is in rude health which immediately causes a rapid increase in our patented palpitation index. When the super-rich are spending at this rate on totally indulgent luxury items it smacks of the tail end of a boom. Superyachts are a classic lagging indicator. This market descends into the mire sometime after the rest of the world has figured out times are not what they were.
The super-rich tend to be compulsive market “players.” In other words, they have lots going on and using age-old financial wisdom generally do so using someone else’s money. When the economic cycle turns sharply down some of the balls in the air thud painfully to earth. What to do? – well, you sell your third or fifth house and (reluctantly) put your floating pride and joy on the market.
How long before balls start thudding to earth? Perhaps another year or two. Perhaps not. If you really fancy yourself reclining in luxury on your own 100 meter slice of indulgence we suggest that there may be a few cut-price bargains around in the next few years. That is, if you can call something a bargain that takes half a million dollars or more to fill with fuel before you leave the dock. Then again, you could just charter one for a week and write the astronomical charter cost off as a deposit on a dream.
The final word
Over long periods of measurement (20 years or more) equities in the major developed markets have tended to provide fairly consistent returns — usually between 5 and 7% compound per annum – including income.
Over the last 20 years, however, returns haven’t matched the past. Were you aware, for example, that in the first decade of this century most developed markets provided a negative nominal return — including income? One of the better performers was the U.S. market but even it generated a negative number. The S&P 500 index, including income, fell by 9.1% over the 10 years to December 2009 (annualized fall of 0.95%). Of course, the current decade, which we are 92.5% of the way through, has seen a marked recovery, generating a total return on the S&P 500 to March 31 of 208% or 12.9% p.a. (all data from Thomson Reuters Datastream). Rolling the two decades together we find that the total return has been 180% or 5.5% p.a. If we deduct inflation which has averaged around 2.2% it suggests the real return over 20 years has averaged little more than 3% p.a. – quite a bit lower than in the past.
So what has changed? It seems to us that the main difference is a lower income component in the total return. Since the mid-1990s the dividend yield on the S&P 500 has averaged at least a full percentage point less than the average dividend yield of the past. This deficiency has not been made up by faster profit growth which could be expected to lead to more rapid market appreciation.
Of course interest rates are much lower than in the past but so is economic growth (and trending lower). We are, in a nutshell, in a low growth, low return world. And, importantly, a heavily indebted world. Some would go so far as to suggest that a classic debt deflation is ahead – negative inflation, non-existent interest rates, economic stagnation. Others would suggest that central banks will blow up an inflation bubble (or try to) in an effort to shrink indebtedness in real terms.
Anything is possible as we haven’t previously lived through economic times similar to the current but we’d prefer to simply stick to the low growth, low return outlook. We’d like to see higher dividend yields to compensate for lower stock market returns. This would suggest a one-off market reset (lower share prices). But the vested interests will fight that tooth and nail.
So be prepared for dull market returns. Should this trend continue you could expect to earn next-to-nothing after inflation on fixed interest (or less than nothing) while equities are priced for “normal” economic conditions. And we don’t have anything close to “normal.” What fun the next decade could be.