Market Commentary

The Politics of Trade

The Politics of Trade

“We have to work towards free trade because otherwise we will miss out on many opportunities for cooperation, and relations amongst countries will become much more difficult” – Lee Hsien Loong (Prime Minister of Singapore).

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Eddies Under the Surface

Eddies Under the Surface

With the S&P 500 Index having just touched all-time highs and Donald Trump deciding that now is a good time to demand a cut in interest rates by 1% and to re-start QE, contrasting their timidity with that of the Chinese Central Bank, averring that the US economy would go up “like a rocket” if they followed his advice. This would appear to be akin to fighting a fire with gasoline, but that doesn’t mean the Fed won’t do it anyway, (though not this week it seems!)Outside of US markets, however, things are not quite so rosy, as indicated by the fact that the MSCI World Index ex-US Index is nearly 11% below its highs (reached in January 2018), and nearly 20% below its 2007 highs, indicating that, once again, the US is leading the charge higher.

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China

China, Debt and the Rest of the World

China has become an increasingly important player in the Global economy in recent years. As the economy has grown, its effect on world liquidity has also expanded. In the middle of February, the Bank of China announced that “Total Social Financing” (a metric that includes Renminbi loans to the real economy as well as Shadow Banking credit growth), exploded by a factor of three, to 4.64 trillion Yuan ($685 billion). The amount of outstanding loans in the Chinese financial system is now $30 trillion, more than double the GDP of that country. This has more than offset the declines seen in 2018, suggesting that the Government has once more opened the credit spigot, possibly in response to the economic slowdown caused by the on-going US/China trade dispute.

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Rising from the Dead?

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).

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The rise (and rise) of the CEO

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.

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Yield Curve Histrionics

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.

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The Currency Effect on (UK) market returns.

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.

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It's a Kind of Magic..?

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)?

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Something Wicked This Way Comes?

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

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