Market Commentary

“Whatever hysteria exists is inflamed by mystery, suspicion and secrecy. Hard and exact facts will cool it”- Elia Kazan (Broadway and Hollywood Director). We last wrote about the US Yield Curve at the end of March this year, but since then, speculation about it appears to have run rampant. Markets now seem certain of a recession, with timing the only bone of contention. As a consequence, the world is now awash in bonds that have negative yields, ($16.7 trillion, as per Bloomberg chart below), meaning that investors are paying issuers to own their bonds. On the face of it, this makes absolutely no economic sense whatsoever. As of early August, European government bond yields were deep in negative territory, with UK Gilts not too far behind. This week, (16/08) 10-year Gilts were yielding the princely sum of 0.45% per year.

The phrase above dates back from John Maynard Keynes’ book, “A Tract on Monetary Reform” written in 1923. Since then, debate has turned on whether Gold is a store of value or just another commodity. Until recently, however, the debate looked settled; the price has spent nearly a decade going down from a high above $2,000 to around $1,100 in December 2015. Still, the “Gold bugs” kept the faith, continuing to warn of impending disaster (notwithstanding the failure of those disasters to actually happen). In the last few weeks, it appears that they may be getting their day in the sun. Last year, it was among the better performers, losing only around 2% in US Dollar terms and it’s up nearly 10% so far in 2019 – many investors are now starting to re-assess their views. Analysts are getting bullish, as indeed are Ce…

“What You Gain On The Swings, You Lose On The Roundabouts.” – Robert Jordan (US Author), from his book “The Path of Daggers”.

Angels on the sideline,Baffled and confused.Father blessed them all with reason,And this is what they choose? – Right in Two (Tool). At the end of January 2018, we highlighted how a number of seemingly contradictory things were happening in US asset markets; shortly thereafter the Dow Jones Index fell around 13% peak to trough in the space of just 5 trading days. We appear to back in twilight zone mode once again – in the last week, both the Dow and the S&P 500 have achieved major Index milestones (27000 and 3000 respectively) and are already heading towards the next “psychological” levels at what appears to be escape velocity.

“If there must be madness, something may be said for having it on a heroic scale” – J.K Galbraith (The Great Crash of 1929). There has been plenty of negative news over the last few months and an even bigger list of issues over the last year or so, but (US) markets appear blithely unconcerned; despite the litany of calls for a decline, (or a crash), nothing appears to dent sentiment and the buying continues.

One of the major problems Advisors (and ourselves) face is the expectations of clients. Fuelled by the relentless media focus on outsized gains in some individual assets, (mostly equities), investors imagine that these gains are easily made and thus they should get involved too. The fact is that they are abnormal (or they would not be news at all), but that is not what the media imply. Of course, fund managers are happy to play along, as they judge that this increases the interest in their products and this article contributes to this phenomenon, with the fund manager telling us that Inflation plus 5% is a “realistic and achievable goal”. The chart below does not break down the asset class exposure, but it can be found here.

Hubris is interesting because you get people who are often very clever, very powerful, have achieved great things, and then something goes wrong – they just don’t know when to stop – Margaret MacMillan (Canadian historian and Oxford University Professor). [The following analysis focusses on equities for the sake of brevity, but the points made are equally relevant to Bond Index funds and ETFs].

“It is not the strongest or the most intelligent who will survive, but those who can best manage change.” ― Leon C. Megginson (Business Professor 1991-2010). The price war between asset managers has been fierce in recent years but has been more aggressively fought in the passive arena- as this article noted late last year, Active fees have fallen by less than those of Passive funds, despite starting from a higher base. Like an eye-witness to a major catastrophe, the Active managers appear to be in a state of numbed incomprehension, unable to process what is happening to them. Meanwhile “feemageddon” as it has been dubbed, rolls on relentlessly; Passive funds have taken huge bites out of Active Manager’s assets, as investors wise up to the cost (as well as the returns) differentials.