After only the briefest of pauses post 2007-09, debt in all its forms is on the rise again and on a global scale; it now represents a staggering 327% of World GDP (or output). From Chinese state enterprises, to US Auto loans and here in the shape of consumer borrowing, debt is back and in a larger way than ever. As the chart below demonstrates, undeterred by Brexit, Trump's victory or worries over North Korea etc, outstanding Credit Card debt is at all time highs (again).
"A consultant is someone who saves his client almost enough to pay his fee". -Arnold Glasow (US Businessman, Humourist). 1905-98.
"Aging seems to be the only available way to live a long life"- Kitty O'Neill Collins. (US Author).
"Know what you own, and know why you own it." - Peter Lynch…
“Those who are easily shocked should be shocked more often.” ― Mae West
I wrote a blog piece 18 months ago, looking at the possibility of Jeremy Corbyn winning the next General Election. It seemed daft at the time, but if recent history has shown us anything, it is that shocks are the new normality. Corbyn has claimed "victory", (which given the shortfall in Labour seats relative to the Conservatives does raise concerns about the future course of the economy under his leadership), but in truth, it was the Conservatives who "lost it" (in both senses).…
“If it’s true that our species is alone in the universe, then I’d have to say the universe aimed rather low and settled for very little.” George Carlin, US Comedian.
We posted a tweet recently highlighting one of the major impediments Active Managers face in trying to beat the Markets, namely the impact of "Skewness" in the returns of Index constituents. (The original article is available in the EBI Repository here).
"He who is not contented with what he has, would not be contented with what he would like to have" - Socrates.
Imagine taking your clothes to a Dry Cleaners, only to discover that the moment you hand them over the counter they are no longer yours; the Dry Cleaning company can now lend them on to someone else. As time goes on, the Dry Cleaner becomes less stringent in choosing to whom to lend your Dry Cleaning, even to those who have a history of damaging or failing to return them. Pretty soon, nobody has any idea who "owns" your clothes, such that it is impossible to get them back. Should the original firm sustain losses on these "transactions", the Government will be on hand to bail them out, however, so they don't really need to take too much care about their lending processes.
I feel a sense of unease about posting this blog; memories of economist Irving Fisher's (in)famous quote about stock prices being at "a permanently higher plateau" less than one month before the start of the Great Depression haunts me somewhat. If the Dow is at 15000 in the next two months, you will not see this blog, (or me probably) again... …
Ever since the "discovery of Fama and French's 3 Factor Model to explain asset price returns, Investors have been seeking to modify and refine this methodology (as apparently 90% explanatory power was not enough!) In 2014, they added Profitability and Investment return but strangely remained silent about the phenomenon of Low Risk (i.e. Volatility) shares outperforming and the documented (since 1993, Jegadeesh and Titman) evidence supporting the inclusion of Momentum as an investment "Factor". Some Hedge Funds have a whole raft of Momentum funds available, and it is now possible to buy these in ETF form, as both Ishares and Vanguard have launched product…
"In April, May announces election in June"- tweet from Ivan the K 18/4/17.
It is debatable whether the population of Britain really wants this, but we are heading for an Election (the third in two years); With almost perfect comic timing, the IMF announced an upgrade to the UK growth forecast on the same day!
The immediate response was a fall in Sterling to $1.2515 followed by a sharp reversal to c.$1.29. Sterling has risen, as opinion polls suggest a Conservative majority of at least 90 seats (and possibly as much as 200). This is what happens when record levels of shorts meet news...
"Oft expectation fails, and most oft there, where most it promises". Shakespeare
We talked about the failure of Global Corporations to invest recently (here), touching on the incentive structure that executives face in deciding whether to do so or not. Today we will discuss one of the major consequences of the lack of investment in new equipment etc. as it pertains to the Western world generally and the UK specifically. The glacial pace of productivity growth and its knock-on effect on living standards is becoming an issue amongst economists and is thus percolating down into politics. Every Minister, it appears, has a plan to close the "Productivity Gap", but it remains stubbornly apparent. The Guardian blames (predictably) job insecurity, long hours, large pay gaps between staff and bosses, and a
"Life is really simple, but we insist on making it complicated". Confucius.
"There is no investment so good that there isn't a fee large enough to kill it". - Cliff Asness (AQR Capital Management).
Fund flows are a well-established method of watching for trends in investment strategies. They tell us what the majority are thinking (or not thinking) at any given time. They normally arrive with a lag of several weeks or even months, so it is dangerous to use them for timing purposes, but they give a good steer on investment sentiment, particularly within Institutional investors.
The major worry on the horizon for the political elites in Europe has been the French Presidential election. The success of Marine Le Pen in ditching some of the more "controversial" policies of her father, has put her into the reckoning for the Head of State position in the second most powerful nation on that continent. Having been consistently dismissed by bien pensent class, the success of Brexit, and then Trump has forced a reconsideration, which has excited both fear and loathing in the corridors of power. The recent Dutch election, which showed a rise in support for Geert Wilders' PVV party (+5 to 20 seats) versus the ruling VVD party's 33 seats (-8), was nevertheless presented as a defeat for the PVV and led to a relief rally in markets. But the French election is a much bigger test, with far more wide-reaching implications possibly for the Continent as a whole. After all, a Le Pen victory could lead to a break-
"I remember the ..... period as if it were yesterday (unlike yesterday itself)" - Albert Edwards, Soc Gen Strategist.
It has been said that all one needs for bull market success is a long position and a short memory. It appears that despite the evidence of the sometimes disastrous attempts at merging two companies Corporate Executives still engage in pointless, expensive and economically dangerous acquisitions which seem to be motivated as much by ego as logic. So we come to the latest- Standard Life and Aberdeen announced this week that they will "merge"to form a new company (called "Staberdeen" by some wags).
An analyst one sunny morning was searching for something in front of his house. A passer-by asked him what he was doing. ‘Looking for my watch,’ he said. After some time looking around, the perplexed onlooker asked him if he was sure that he lost it there, to which the analyst replied "No I lost it in my shed, but it’s too dark in there to find it.’
When you ask an equity salesman whether stocks are "cheap", the answer follows without hesitation (and it's always in the affirmative). The most popular justification over the last 20 years has been that shares are "cheap" relative to bonds, and they often point to the Fed Model to emphasise this point. As the chart below shows, the track record between 1980 and 2000 has been impressive.
"Investing is complicated by the fact that doing dumb things and losing money are not very strongly correlated". Evan Bleker, tweet, 1st March 2017.
Like the Greek debt crisis, furniture store sales promotions, and Arsenals hopes of winning the Premiership, some situations are doomed to be repeated, almost endlessly. Once again, a potential US debt crisis has resurfaced, with March 15th (coincidentally the date of the Dutch general election too), the focal point of renewed angst, as some are now openly talking about another Government shutdown.
This saying may be true, but sometimes it too hard a temptation to resist.
Standard Life is a HUGE company]. According to it's Website, it directly runs £269 billion in funds, and several hundred billion in third party money, as of June 2016, which is more than the GDP of Scotland, from whence the company came.
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price"- Warren Buffett.
It is always helpful to focus on what a share actually represents- it is a claim on a stream of long term cash flows to which shareholders are entitled over time. Given that the price one pays has a strong relationship with future returns, (the higher price one pays, the lower the expected return will be), a method of valuing these cash-flows would seem a sensible starting point. The future being what it is, however, it is not an exact science. Whether it is by design or malice, analysts often get their projections badly wrong. One of the reasons may be to do with their methods of analysis, or more precisely their mindsets when doing said calculations.