"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.
“Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?” ― Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions
Conventional Finance theory has long assumed that Investors/Consumers etc. are rational, risk-neutral wealth maximisers, but the experience of the Dot Com bubble, the mortgage bubble and so on has led many to question this premise. Thus was born the field of Behavioral Finance, which posited that people make irrational decisions in a large number of situations, partly due to hard-wired psychological impulses that we find difficult to control.…
Despite oceans of liquidity, zero (or sub-zero) interest rates and all the politician's exhortations, Companies appear unwilling to invest. Thus, despite the best efforts of Carney, Yellon, Abe and Draghi, the global economy continues to stagger along, with only stock markets showing signs of strength (and even here, it appears that Investors and Traders are fully invested - and absolutely terrified!) Uncertainty rules, with a myriad of "problems" ahead that could end the bull market in an instant ("could" is emphasized here, for good reason). But what is clear is the Reagan's "Trickle Down economics" has not happened, with the Gini Co-efficient (a measure of in…
Just as with Carlsberg, we don't do predictions at EBI, but if we did they would probably be the best in the World...
I am sure you have already had your fill of predictions for 2017, but just in case you haven't here are some more, but with a slight twist - these are the opposite of the consensus view, taken precisely because of that fact. Call it a control experiment - how right can one be simply by saying the opposite of the pundits? We shall check back in approximately 350 days...
2016 was a normal year in most senses - pundits got it wrong, as usual, but this time the magnitude of failure was spectacularly large: not just the puditocracy though. As the screenshot below shows the Bookies got it badly wrong too, and it cost them real money.
"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one... Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome... Nations, like individuals, cannot become desperate gamblers with impunity"
Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds, 1841
Since the victory of Donald Trump, (equity) markets have been on a tear: there appears to be nothing to stop them, as optimism abounds. But there are some strange reminders of a past era, one that didn't end well for Investors. Will history repeat - does it have to?
"This too shall pass" - medieval Persian poetical saying.
The Big Money (Sovereign Wealth Funds, Global Pension money etc.) invests primarily on the basis of Currency - they first select the currency they wish to invest in and THEN the asset class that they prefer, according to their risk tolerance... It is the ebb and flow of this gigantic amount of money that creates Capital Account surpluses and deficits, which in turn can move interest rates and thus currency values themselves, in a feedback loop. Global Capital moves to where they feel safest, and at times they all seem to agree on a preferred course of action - this may be one of those times.
"We have long felt that the only value of (stock) forecasters is to make fortune-tellers look good." Warren Buffett.
There are lots of predictions out there already for 2017. In order to have a fighting chance of being right, I will focus on 2016 and look at the events that shaped what turned out to be an "interesting" (in the "Chinese" sense of the word) year. In no particular chronological order, the "main events" appeared to wrong foot all and sundry - It was not a good year to be a pundit.
"People who think they know everything are a great annoyance to those of us who do". Isaac Asimov
We return to the subject of Oil. The recently agreed OPEC deal to freeze output has finally stopped the rot, pushing prices back up above the $50 per barrel level, to much relief all round (the Saudi's, Russia and US Shale producers all stand to benefit handsomely from this development - it may even allow Venezuela to survive another year!). The chart below shows the extent of the gains since the low point of January/February 2016. The question is now about its duration - can the deal stick, or will the cartel resume its policy of benign neglect, leading once again to over-production and falling prices.