Evidence Based Investing

On the day of Jerome Powell’s inauguration as Fed Chairman (and before he had time to find out where the cafeteria is!), markets have greeted him with a big bang. There are precedents for this “bad luck”. Alan Greenspan started his role as the Chairman in August 1987, 3 months before the Big One in October 1987 and Ben Bernanke also assumed the job in 2006, as the Financial Crisis was just unfolding. So, it is not a unique situation, but it must make him wonder whether the market gods are out to get him. I imagine, ever so quietly, Janet Yellen is having a chuckle…

“Green light, STOP – if you want to see where you are taking the most risk, look where you are making the most money.” – Paul Gibbons.

“Risk comes from not knowing what you’re doing” – Warren Buffett A week ago, a bond mysteriously disappeared from the list of ECB assets being held under the Corporate Sector Purchase Programme (CSPP). The Steinhoff 1.875% bond due for 2025 had gone – the bond had neither been redeemed nor defaulted, so it would seem that it had been liquidated (i.e. sold).

“We have low levels of arrears, strong credit risk management and a low risk balance sheet”- Adam Applegarth, Chairman of Northern Rock (2006). Since the Financial crisis of 2007-09, High Yield bonds (previously known as Junk, but that name reduces their sale ability), have become as popular as a foreign exchange client at Wells Fargo. Credit risk has become less “risky” as Investors have piled into some bonds of dubious quality allowing company’s, who would otherwise struggle to refinance to do so on extremely generous terms. Prices have duly responded, with returns over five times that of Investment Grade and Government equivalents (see below).

Records galore in Equities as Bloomberg reports, prices melt up, whilst volatility collapses. We are now in the second longest period without a 3% peak-to-trough draw-down, as (some) investors continue to take positives from almost all news. As we spoke about last week however, not all are feeling the love, as Professionals continue to look to sell/short markets, warning investors of crisis to come. They will be right eventually of course (as is a broken clock), so it may be time to examine risk tolerances in preparation for a correction (that may not occur, if at all, for a while). After all, forewarned is forearmed…

“Dear Optimist, Pessimist, and Realist. While you guys were busy arguing over the glass of water, I drank it. Sincerely, the Opportunist.”- Unknown

I’m forever blowing bubbles,Pretty bubbles in the air,They fly so high, nearly reach the sky,Then like my dreams, they fade and die.

The grotesque juxtaposition of the deadliest mass shooting in US history and another 150 point surge in the Dow, following on from the seeming indifference to the prospect of nuclear war in the Korean peninsula has prompted me to wonder if capitalism (or at least it’s current version) is in any way moral. It is often said that capital itself is amoral-it merely goes to where it is treated best, but participants can (or should) be. The excesses of executive pay of recent years and the Equifax stock sales by Executives prior to the disclosure of a major data leak, however, suggests otherwise. It is of course the case that without capitalism, we would all be living i…