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China, Debt and the Rest of the World

Market Commentary | April 26, 2019

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.

Rising from the Dead?

Market Commentary | April 19, 2019

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).

Uncertainty and Risk

A robot walks into a bar and takes a seat. The bartender says, “We don’t serve robots.”The robot replies, “Someday – soon – you will.” One only has to watch financial TV for a few minutes to hear some pundit or other lower their voice and intone sagely, that “markets hate uncertainty”. But when exactly was anything about markets NOT uncertain? What the speaker is actually saying is that market participants hate losses, (which is why they were so keen to see the Fed bail them out in 2008-09, a habit that both parties have since found hard to break).

The rise (and rise) of the CEO

Evidence Based Investing, Market Commentary | April 5, 2019

“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

Evidence Based Investing, Market Commentary | March 29, 2019

“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.

Confidence Trick

Evidence Based Investing, Factor Based Investing | March 22, 2019

“Still the man hears what he wants to hear and disregards the rest.” – Simon and Garfunkel (The Boxer). Ten years ago last week (March 9th, 2009), the S&P 500 hit a low point of 666.79, from which it has subsequently risen to 2,940 in October of last year, for a gain of 441%. A recurring theme throughout this time has been the degree of skepticism, cynicism and general disbelief that accompanied this rise. After a sharp fall into year end 2018, global markets have recovered and currently stand just 3% or so off those highs, as once again, bearish US investors have been “forced in” to the market, as their selling in early January 2019 has led to nothing but frustration.

The Market for Lemons

Evidence Based Investing | March 15, 2019

“Successful investing is about managing risk, not avoiding it” – Benjamin Graham. This phenomenon describes the adverse selection / knowledge asymmetry between buyers and sellers in, for example, the used car market. As prices (or in this case, standards) fall, the only willing sellers at a given price will be those that have “lemons” (defective goods) to sell. Thus, the average quality of goods available in the market gradually falls, leaving only poor quality goods left, which is a form of Gresham’s Law.

What’s Wrong with Buybacks?

Evidence Based Investing | March 8, 2019

“When stock can be bought below a business’s value it is probably the best use of cash.” – Warren Buffett (at the 2004 Berkshire Hathaway AGM). We covered this issue previously in June of last year, primarily from the economic angle, but recent events have appeared to politicise the issue. Several prominent Democratic Senators (Chuck Schumer and Bernie Sanders) want to prevent firms from buying back their shares unless they also increase worker pay and benefits, implying a link between low wage growth and high share buybacks. Marco Rubio, a Republican Senator has joined in. He wants to end the favourable tax treatment afforded to share buybacks (so that they are treated the same as Dividends for tax purposes). Thus, it is believed, firms may be more inclined to either pay out higher dividends or invest more in their businesses.

The Currency Effect on (UK) market returns.

Market Commentary | March 1, 2019

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.

A Torrid January

Evidence Based Investing, Factor Based Investing | February 22, 2019

[The above appeared on the window of a Bookshop, “Bookends of Fowey” in Cornwall]. We don’t often do market commentaries in this blog, but after the biggest January gain for 32 years, it might be useful to look at what drove asset markets to such giddy heights, whereby nearly ALL asset classes went berserk. Once one pores over the fine print regarding performance, some interesting pictures emerge. The first is the economic backdrop, which does not appear overly helpful. Interest rate markets imply no more rate hikes, as the US economy appears to be slowing substantially, potentially taking the global economy with it.