It was a nervous week in prospect for interest rate watchers, but they needn’t have worried unduly. All the central banks are sitting on their hands for now - China last week, and the US, UK, Europe and Japan this week. But for China, the signalling is that if inflation keeps heading higher in the short term, rates might head higher.
Financial markets were little moved, with most investors obsessed by newsflow from the Near East and tweets from Mad King Donald’s bed chamber. US equities are still holding their ground. On the S&P 500, our “important peak” at 7250 is a given as I write. In fact the short term pattern implies a bit higher than 7250. Just be wary that something else might be going on if the S&P 500 suddenly slips below 7000 in the day or two ahead.
Over the week US tech led the pack, up 1.72%, while most other major markets were down a touch, with Brazil an outlier, down 4%.
In commodities, oil was the big winner, up around 10% over the week, though don’t be surprised by another TACO this weekend, so certain insiders can (again) line their pockets betting on oil. In contrast most commodities were lower, with gold miners and uranium down in the region of 5%.
Of the mixed messages yesterday from the governor of the Bank of England (shock!), investors chose to prefer his suggestion that, despite the threat of higher inflation, they might not raise rates. Why? Because the economy is already in a pickle, with the clearest and bleakest message coming from the unemployment numbers. UK unemployment has already exceeded its Covid peak, the economy is not in recession, and unemployment is still rising. The last thing the economy needs is more pressure from higher interest rates due to an external shock, on which higher rates will have no impact.
Our “What’s Hot? What’s Not?” analysis is out today. Tech dominates the Hot funds, driven by excitement amongst semi-conductor companies. Note that these hardware companies have taken pole position within the tech sector, whereas software and similar companies are down by double digits for the year, from Microsoft to the controversial and horribly expensive Palantir. European defence is the surprising loser, as investors re-assess the opportunity in expensive “big weapons” when you can win wars with cheap drones bought from Halfords. (I exaggerate, but you know what I mean)
Amongst sectors, in addition to tech, relatively cheap emerging markets continue to attract buyers, as does Asia ex Japan. Also helped by the tech exposure e.g. Taiwan. The surprise losing sector is index-linked gilts. Surely that goes up if inflation goes up? You will find an explanation from Claude on that point at the end of the sector update.
Now for something different…
I often refer to “The Japan Problem” when trying to explain how bad it can get for markets. The mention of it might cause some to hide behind the sofa. But many might be bored hearing it again.
So I wanted to bring to you the story of Mr Shin. He is 59 years old, a very sensible professional, who listens carefully to what he is told. This is his personal account of what happened to him next, annotated by the actual ups and downs of one of the world’s major financial markets, in fact THE major market at the beginning of his story…
"The Retirement That Never Was — Mr Shin's Story
It is the summer of 1989. Mr Shin is 59 years old and six months from retirement.
He has worked for the same company in Osaka for 35 years. He and his wife Keiko have saved carefully, lived modestly, and built a retirement pot of £500,000 in today's terms — the patient accumulation of a working lifetime. Almost all of it sits in Japanese equities. Large, well-known companies. Sony. Toyota. Mitsubishi. Names that feel like Japan itself.
The Nikkei stock market has risen over 300% in the previous decade. Everyone owns shares. The financial press is euphoric. Japan is the most celebrated stock market in the world.
If you had asked Mr Shin to assess his attitude to risk that summer, he would have said medium. Comfortable with some ups and downs in exchange for reasonable long-term growth. He is calm, educated, and prudent. He has seen markets wobble before.
He genuinely believes he understands risk.
He does not.
In 1990 the market falls 39%. Mr Shin retires as planned. His £500,000 is already worth £306,000 before he has drawn a single penny.
From 1991 he begins withdrawing £20,000 a year — a conservative 4% of his original pot, fixed in nominal terms. His living costs depend on it. There is no other income.
The market grinds lower through 1991 and then collapses a further 26% in 1992. By the end of that year his pot has fallen to £183,000. He sits at the kitchen table and does the arithmetic three times because the answer does not seem possible.
A partial recovery follows. Then another fall. Then another recovery, and each one convincing enough to kindle hope, but each one followed by a further collapse. In 1997 the market falls a further 21%. In 1998, another 9%.
Through every one of these years, the £20,000 withdrawal continues. It has to. There is no alternative. But the base it is drawn from is shrinking so fast that by 1998 the annual withdrawal represents 27% of what remains. The mathematics of survival have become impossible, and Mr Shin knows it.
In 1999 the Nikkei surges 37%. For the first time in a decade he allows himself cautious optimism. Perhaps the worst is over.
It is not. The dot-com crash arrives in 2000. The market falls 27%. His remaining pot, already a fraction of what it was, drops to £18,000 after that year's withdrawal. The following year it is gone.
Mr Shin is 71. He and Keiko have, between them, perhaps twenty years still to live. The £20,000 a year they need must now come from somewhere else.
There is nowhere else.
Mr Shin did not gamble. He did not speculate. He did nothing that his industry, his colleagues, or conventional wisdom did not actively encourage. He was a medium-risk investor in what was, in 1989, the most admired stock market on earth.
His attitude to risk questionnaire said medium. But his financial capacity for loss — a single asset class, no other income, fixed withdrawals beginning immediately — was effectively zero from the moment the bear market began. One did not care about the other.
The sequencing was the killer. Not the total fall across three decades. The timing of the early falls which were savage, sustained, in the very first years of retirement when the pot was at its largest and the withdrawals had just begun, inflicted damage that no subsequent recovery could undo.
The market did eventually recover, in 2023. Thirty-four years after the peak.
Mr Shin did not.
Some of the most experienced investors alive today believe the US stock market in 2026 looks uncomfortably like Japan in 1989, with extreme valuations, euphoric sentiment, and a decade of rising prices that have convinced millions of investors that serious losses simply don't happen anymore. They do. Mr Shin helps us understand what it can mean in human terms.
I would love your feedback on this.
Have a great long weekend. Tomorrow is a nervous day for me – 12.30pm football!