Market Commentary

Equities can be seen as a “call option”on the future growth of a company; once the liabilities due to bondholders are paid, the surplus accrues to shareholders in the form of dividends/share buybacks, etc. or are re-invested to generate future growth in the firm. At least, this is what happens most of the time, but every now and then, things go awry, a company fails and the “call option” expires worthless. It is not a common occurrence, but when it does happen, the shareholders tend to lose everything.

“If you gaze long enough into an abyss, the abyss will gaze back into you” – Friedrich Nietzsche. Amidst the sound and fury of trade war rhetoric, there are signs of problems in the banking system in China. In the last 3 months, there has been a spate of previously unknown events there – bank defaults. This week’s news of a delay in the implementation of (some of) the US tariffs on Chinese goods led to an immediate spike higher in shares (and lower in bonds) but has not changed the situation that has plagued the Chinese banks.

“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…

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.

“Currency Manipulation is what Bertrand Russell called an “emotive conjugation” and Bernard Woolley called an “irregular verb”:* I am cutting interest rates* You are trying to achieve a competitive devaluation* He/she/it is manipulating their currency to obtain an unfair advantage”. – John Kemp (Analyst)

“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.