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.
"Price is what you pay. Value is what you get." - Warren Buffet.
[All returns are quoted in US Dollars, to avoid the currency effects of Brexit on Sterling returns. The basic premise, however, is not changed by the base currency choice as currencies tend to be correlated with the economic cycle, whereas the Value (and Size) premium is understood to be independent thereof. I have used the MSCI World Index, as a global equity proxy. Essentially the same situation pertains throughout the regions of the world and especially so in the UK].
"You expect me to talk Goldfinger?'
“No, Mr Bond, I expect you to die” Goldfinger, 1964.
[The events of Tuesday/Wednesday has necessitated a substantial re-write of this blog - once again, markets have been wrong-footed by a massive underestimation of public mood. If it reads as if I am gloating a bit, it is because I most definitely am].
Where's my boy @JebBush at? Clinton's and Bush's finally kicked out of politics. Phillip Taylor tweet 08.48 am. 09/11/16.
"They would not listen, they did not know howPerhaps they'll listen now."
Don McLean - Vincent
Before the result on Tuesday, I found the following screenshot - notice anything similar? …
"Bankers are just like everybody else - except richer. Ogden Nash (US Poet 1902-71).
(This post is going to be a little formula heavy. Sorry, I shall return to my usual inanity next week).
Since 2009 Central Bankers (via QE etc.) have created a situation whereby all asset prices now have more or less the same expected long-term returns, such that Investors are now indifferent between them. So, Investors have (as was intended), been forced to look for alternative strategies to improve their return outlook. Two such strategies have emerged: the "reach for yield", namely the buying of High Yield equities on the one hand, whilst others have focused on "Value", to wit, the purchase of assets that are relatively cheap compared to their respective alternatives. Both contain some assumption flaws, which we will look at in turn.