Right in Two…

Right in Two...

Blackadder: I was under the impression that it’s common maritime practice for a ship to have a crew?

Captain Rum: Opinion is divided on the subject. Everyone else says you should-I say you shouldn’t. Blackadder. “Potato” 1986.

The Western population is becoming increasingly divided- by gender, race and region. The recent protests against Trump’s election speaks of an enormous gulf between the viewpoints on both sides. There is even a trending thread on Twitter entitled “We can’t just get along”. Now there is news of a potential recount in some states in the US, in an attempt to change the election result!

In the UK it was Townies versus Country folk, in the US it was based on both Race and Gender. The charts below demonstrate the split.


In the words of Vladimir Illyich Ulyanov, “What is to be Done ?” From a stock market perspective, nothing at all- things are going great; the Dow is up 1600 points from the 9th November low. But the map is not the terrain, and we may be looking at the emergence of “political risk” for the first time in a very long while. Maybe this is why US Bonds are falling and have now (partially) breached resistance-see below- its not just US bonds though; all bonds have been sold off aggressively post Trump.


This clearly reflects uncertainty- about the inflationary effects of an Infrastructure boom, the resultant impact on the Fed’s monetary policy (the end of QE?), and the consequences for bond investors. But it also may reflect positioning by investors; for years, bonds have been supported by the reality of huge Central bank buying, at almost any price across the globe. The withdrawal of that prop cannot but have price implications, if Central Banks were to start selling (remember the Fed currently has a balance sheet of over $4.4 trillion) there would be blood on the (Wall) streets.

The fact is, however, that the President does not come into office until early January 2017, and so this is all mere speculation. The market may be correct, but if so, it has largely priced it in already. Selling bonds at this juncture may be too late to positively benefit investors. On the other hand of course, as we discussed in last week’s blog, the global economic backdrop is not conducive to a sustained rise in bond yields. It is impossible to know in advance which is correct and there is no strategy available to allow us to profit from this situation, without taking unnecessary risk.

So what strategy does work? The main defence is diversification; provided one’s assets are un-correlated this provides an effective antidote to whatever comes next. Not only is the risk of actual loss reduced, but the portfolio volatility is lowered, which in turn reduces the odds of clients selling out at the lows. Prospect Theory tells us that we are loss averse; therefore the most important portfolio constraint is NOT to lose money (as far as that is realistic).

There other options though- depending on one’s individual traits, one can choose to look through market turbulence, (i.e. ignore it) or focus on buying Value. We do both of these here at EBI, and are expecting to be able to re-balance within regional exposures in the Vantage portfolios again in the near term (just not the ones we were expecting a month ago !).