Friday Thoughts
Primary/Secondary markets: Investing /Saving …… If you were to look down the recently published Forbes list, you will notice that the most common way to get on there is to start a company – Inheritance comes in a distant second.
The word ‘investment’ when used by financial people often gets used the wrong way, and is misleading.
There are two very different markets when it comes to ‘investing’: primary and secondary.
Primary markets are where the real ‘investment’ is done, that is providing funding for future production (what we do at Parkwalk). Someone who starts a company and/or seeds the capital upfront and then spends that capital in the pursuit of future production is an ‘investor’ in the true sense of the word.
Secondary markets are very different in that they really serve the purpose of allocating savings, rather than investing.
As secondary markets are where already issued securities trade for exchange, you can access them to allocate your already obtained savings. But, you are not funding any real ‘investment’ on the secondary market, you are merely exchanging those securities with someone else in the transaction (swapping your cash for their securities) at the market price. The company doesn’t care who owns it.
In aggregate, the secondary markets will likely only grow a little above the rate of inflation over the long term.
It is on the primary markets where people get ‘rich’.
It is on primary markets where the things we actually ‘invest’ in – factories, people, innovation etc, that will actually make us rich.
A lot of people think that Warren Buffet has got as wealthy as he has by purely investing on secondary markets, and from ‘value’ stock picking.
That is how the media likes to portray him. Maybe because it makes the regular investor (saver) believe it is possible for anyone to create that wealth simply from savvy stock picking.
It’s not.
Buffet has
a) established a company that, in a lot of ways, is more like a private equity firm than simply a fund managing assets
b) provided primary market investment for a significant amount of his companies.
So, it the secondary market that allows us to retire (at a sensible time)….. and it’s the primary market which makes us rich
And the Forbes 500 is mostly a list of people who understand this…
Russia/Ukraine: what will it mean for markets…?
Vladimir Putin is known to have once said that ‘Russia no longer needs nuclear; oil and gas are far better weapons’.
He is very likely to get away with the current goings on in Ukraine, as he knows just as well as us Westerners (including Obama, and despite threats) that any sanctions would harm us more than them.
Russia’s movement in Crimea is no great surprise to those aware of Putin’s Russian plans (ambition to reassemble as much of the Soviet Union as he can get away with) and this is the reason that Western financial markets have been relatively muted for what has been said to be ‘the worst crisis in Europe in the 21st century’, and instead just a bit of a tumble and limited evidence of a flight to safety.
The Russian stock market has taken a hit, but even this is not yet as much as when Russia moved into Georgia in similar circumstances.
Putin knows that as things stand the West cannot and will not do much about it.
Obama’s threats on some sort of retaliation are likely to have been miscalculated, and has only really seemed to harden the Russian support for Putin’s actions in Moscow.
The US president should now either go through with his threats, or, as with Syria, blink. Putin is banking on him doing the latter, and it is hard to see what meaningful sanctions the U.S could impose.
It is already becoming clear that gaining international agreement for any economic sanction with be extremely difficult, especially within the European Union where many governments have plenty of problems at home, without involving themselves in any more outside.
Nearly 10% of UK’s car exports are to Russia, even more for Germany. In fact it is Russia, not China that is the largest and fastest growing of the UK’s emerging markets for exporters. Even more important, for Germany, France and Italy nearly 30% of their gas supplies are from Russia. If this happened the Kremlin would collapse.
The pain imposed on both sides would be extreme.
And, if it comes down to who has the biggest pain threshold there is only one winner – the Russians.
They have had decades of economic hardship and are plenty used to it.
All this explains why Western markets haven’t yet taken this geo-political threat more seriously.
At the moment, they are betting that Putin will not risk a sustained war by invading Ukraine, and that when push comes to shove the US and the West will do very little about the Russian occupation of Crimea.
It’s just not worth it.
As one Italian minister said, ‘what sanctions can you put on a country that can cut off your gas?‘
The Germans seem to hold the key from the European perspective, and they have made their stance pretty clear.
This is of course still an emerging situation and it may well change quickly, but it’s my guess that old Vlad will probably get away with it and this will just end up being seen as another bump in the road rather than the start of World War III and a back breaker for markets.
China growth….
Far more important than Russia/Ukraine for the global economy/markets is the growth in China.
This week the country announced its growth targets for the next year, 7.5%, the same as last year, and it was about what was expected.
The good news is it means that China will keep humming along, the bad news is that by keeping a target which is so high, there is not much room for any disappointment or lower guidance over the next 12 months.
China, remember, is trying to steer it’s economy away from the export led growth of the past and instead to a more balanced consumption driven growth.
Following the 7.5% announcement the Chinese finance minister said it would be ok for China to slightly miss the target as long as enough jobs are created.
He makes a fair point, a small miss would not be a disaster. But it will be interesting to see how the markets would react to that.
Some are less optimistic, and claim that by declining to lower its 7.5% growth forecast China is refusing to break with the past and instead move on and focus on rebalancing its economy.
Asian currencies rose on the news of China staying on an even keel after initial worries of a cut.
Commodities prices also stabilised.
Stock markets reacted well.
So, for now at least, most are happy.
Other bits of interest……
