'Please, sir, I want some more.'- Oliver Twist (Charles Dickens)
That we are living in a low return world is now so widely accepted as to be bordering on a cliche- but HOW low will long term returns likely be? With the caveat that no one really knows, it is possible to come up with a reasonable set of assumptions that can provide us with a range of potential outcomes. We looked at this issue around a year ago, so now might be a good idea to revisit the prospects from a slightly different angle, as there are many ways to arrive at a conclusion, some of which will be similar.
"The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America" - Steve Mnuchin (US Secretary of the Treasury).
The Dollar is currently about as popular as a rattlesnake in a lucky dip; earlier this week the US Dollar Index hit lows not seen since December 2014, and is down nearly 12% since the start of the year. Speculative positioning in the US Dollar has also reversed sharply, with Hedge funds etc. now net short for the first time since 2013 (note the confluence of short positions with major market lows!). Since the Dollar is the world's reserve currency, it is an important indicator of risk appetite across the globe. We wrote about Dollar negativity in October last year and it seems to have returned.
"When you get something for nothing, you just haven't been billed for it yet" -Franklin Jones Journalist 1908-80.
"The Americans will always do the right thing… after they’ve exhausted all the alternatives" . (attributed to Churchill, though there is doubt as to its veracity).
The row between the US and North Korea has been escalating, with increasingly angry words and threats (whose intensity is mirrored 5000 km away on the Indo-Chinese border) being exchanged. After studiously ignoring the rise in the diplomatic temperature for nearly a month, last week it suddenly exploded into life with markets, especially Asian markets, understandably taking fright. Buying resumed this week as nuclear Armageddon didn't occur over the weekend, (though one must wonder who these "investors" think they will be able to sell to in the event of a holocaust), but the situation remains tense as both sides contemplate their next moves.
“If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.” - Warren Buffett
Entia non sunt multiplicanda praeter necessitatem.No more things should be presumed to exist than are absolutely necessary. (Occam's Razor).
One of the defining trends of recent years has been the rise of ETF's /Index funds which have taken hold over the course of the period post the Financial Crisis. There have been a proliferation of "Factors", or possibilities of Alpha generation, many of which turn out to be either useless (i.e. they never worked) or redundant (they don't now). This study suggests that there have been 59 new Factors "discovered " between 2010 and 2012 alone!
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