Rising from the Dead?
This guy goes to a psychiatrist and says, “Doc, my brother’s crazy; he thinks he’s a chicken.” And the doctor says, “Well, why don’t you turn him in?” The guy says, “I would, but I need the eggs.” – Woody Allen (Annie Hall).
Market Commentary
Read more
The rise (and rise) of the CEO
“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact” – Warren Buffett. In recent years, the role of the Chief Executive has become increasingly high profile. They are widely recognised (at least in the media) and feted as veritable supermen, taking a firm by the scruff of the neck and leading them to greater glory. They are interviewed by business media with a reverence that borders on awe and they wield a great deal of influence on governments – the near-universal belief in their judgment on the part of MPs, for example, may help to explain why the latter are (mostly) against Brexit. A “loss of confidence” is often a precursor to an economic slowdown (and job cuts), which may also justify parliamentarians’ attentiveness.
Yield Curve Histrionics
“Reversion to the mean is the iron rule of the financial markets” – John Bogle. Last week it finally happened; the US Yield curve inverted (i.e. interest rates for longer-dated bonds went below those of shorter-dated ones). The rates available on 10-year bonds are now the same as those of 3-month bonds and the premium for investing over 30 years is now just 0.38% per annum. As the chart below shows, market expectations for interest rates now expect declines rather than rises in 2019. Last week, equities sold off sharply as recession fears intensified, amidst a big slowdown in Global Trade.
The Currency Effect on (UK) market returns.
A common saying in finance is that “markets take the stairs up and the elevator down.” We are often asked by clients to explain the reasons for the dramatic fall from grace of UK equities relative to the rest of the world. Many suppose that it is a function of the fall in Sterling as a result of Brexit (and the political paralysis that has followed). In fact, all other things equal a fall in Sterling would serve to raise UK plc’s earnings due to the translation effect (i.e. a lower value of the pound would mean a higher return on the overseas income, once that money is converted into Sterling) and as domestic revenues for FTSE 100 firms are fairly low (c.22%, meaning 78% of the revenue is generated overseas),a fall in Sterling is seen as good news for UK share prices.
It’s a Kind of Magic..?
You may not have heard of Modern Monetary Theory, but you soon will do; it is becoming increasingly popular in the US as the “democratic left” searches for an alternative narrative to that of Donald Trump and a way to harness popular discontent with the way capitalism appears to be working. As we have discovered recently, economic illiteracy is no barrier to popular acceptance and though this ideology is clearly of that idiom, it does look set to go mainstream in the run-up to the next Presidential election, set for November 2020. I will not attempt to debunk the theory itself (as my view of it is entirely independent of the likelihood of its’ coming to pass) but instead look at the consequences for asset prices in general should it do so. Forewarned is most definitely forearmed. So what is Modern Monetary Theory (MMT)?
Something Wicked This Way Comes?
The passing of Jack Bogle this week leaves the world of investing much poorer, but his career has benefitted investors enormously (nearly $1 trillion) according to some. He eschewed the riches that most on Wall Street seem to covet and genuinely helped millions of investors get cheap access to capital markets returns. This post sums up what many of us owe to him; he has truly left an enormous legacy, which we should all try to keep alive. “Success is not final, failure is not fatal: it is the courage to continue that counts.” – Winston Churchill
Are Markets Becoming Less Illiquid?
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price – Investopedia.
Will the Fed flinch?
David Rosenberg @EconguyRosie:”One silver lining from the stock market’s horrible behaviour is that we haven’t had a presidential tweet since Oct 31st”. (Gluskin Sheff Chief Economist).
A Brief History of Time (and Puts)
As of Friday last week, World Equities had lost $15 trillion in value (-7%), with almost two thirds of Global stocks now in “Bear market” territory (i.e. down 20% or more). In Wall Street, talk is already turning to the possibility of the “Powell Put” being in play – the idea that, should markets fall below a certain point, the Fed will ride to the rescue with rate cuts/money printing/buying assets directly etc. or whatever else is deemed necessary to ensure that asset prices don’t fall. As we pointed out a couple of weeks ago, asset prices appear to be the only relevant metric in policy decision-making – and don’t the markets know it!
