Market Commentary

ZIRP- Another Japanese innovation, this time from the Bank of Japan, whose aim was to stimulate the Japanese economy by having a Zero Interest Rate Policy: so far (15 years and counting), it has had an extremely limited effect. NIRP- A variation on the above theme, whereby Central Banks (particularly the ECB, but not limited to them ) employ a strategy of Negative Interest Rate policy: the likely economic result will be much the same.

Some debts are fun when you are acquiring them, but none are fun when you set about retiring them. – Ogden Nash This week we shall focus on a number of (partially) related stories in lieu of a major theme. The common denominator is debt – how companies, states and even countries deal with the issue will shape the economic landscape for years to come.…

In the wake of the Fed’s non-decision on Interest rates last week, the markets have remained highly volatile and there are now questions being raised about the Fed itself. As Vanguard’s Chief US economist put it, “we are concerned with the Fed’s acknowledgement of recent market volatility in its decision. The Fed runs the risk of being held captive to the markets as, paradoxically, much of that volatility is due to the anticipation and uncertainty around when the Fed will move”.

There is always an easy solution to every human problem — neat, plausible, and wrong. – H.L Mencken (writer, 1880-1956) Declines in markets over the past three months have, as usual, led to an inquest into what went “wrong”, conveniently ignoring the reality that losses go with the territory, and at around 10% is no more than a run of the mill correction. Some suspects have been hauled up in front of the court of public opinion: Hedge funds (a usual suspect if there was one), Factor investing in general (smart beta, alternative beta etc.), and risk parity in particular. Hedge funds can be (partly) absolved of this charge. Losses, whilst large in some cases, were not generalised, and they may well not have been the catalyst for the chaos, but merely caught up in it all.

As the increasingly farcical Greek debt saga staggers on, away from the spotlight a potentially bigger crisis is brewing in the US. The Island of Puerto Rico, led by Democrat Governor Alejandro Padilla has declared their $72 billion debt “un-payable” and is looking to “re-structure” (aka reduce) the debts. The problems experienced in Puerto Rico are not unprecedented – New York and Cleveland in the 1970’s, and Orange County in the 1990’s faced similar problems, but subsequently recovered. The problem for the local authorities is that they cannot just declare bankruptcy-under US Law, neither Puerto Rico nor its “sub-state entities” (public corporations, judicial districts etc.) can do so, unlike in US cities such as New York or California. Public Corporations, such as the PR Electric Power company owe between $20-25 billion. For comparison, New York, the most indebted US State, owes $29 billion in total, despite having a population five times that of Puerto Rico.

The seemingly endless Greek saga looks to be close to denouement today (9/7/15) as Prime Minister Tsipras appears to be set to acquiesce to the terms demanded by the Troika, the ECB, (and most importantly), Angela Merkel. Indeed, they are likely to be harsher than those originally rejected by the Greek people in last Sunday’s referendum. In return, there is the prospect of a new long-term aid programme, but one that will expressly not include “haircuts” for the various creditors. The question is, who are those creditors, and how much will they lose if Greece were to go bankrupt, and exit the Euro Zone (the so-called “Grexit”).

In what seems to be a depressingly familiar story, we have been made aware of another banking scandal involving the mis-selling of unsuitable products to investors, this time by the venerable institution Coutts. It is by no means the first (or last) time this will happen – a Forbes article highlights the biggest scandals of 2012 (what does it say about an industry that can have at least 10 “scandals” per year?). Typing in scandal to ETF.com produces circa 6,000 hits, so it can be truly said that Industry has a FIFA-like track record in mis-behaviour. The question is therefore begged as to why investors still use (let alone trust) these firms to work on their behalf. We shall get to that later, but first the details.