"I can calculate the motion of heavenly bodies, but not the madness of people". - attributed to Sir Isaac Newton.
"To every action there is always opposed an equal reaction". Newton's Third Law of Motion
August is supposed to be a quiet month, as dealers go off to the beach, but it is not turning out that way so far - Turkey has seen a nasty decline in both its currency (the Lira) and it's asset markets as investors look to get out at almost any price. It seems that it is becoming increasingly difficult to distinguish between the Lira and Bitcoin on volatility terms and is in danger of starting a self-reinforcing bout of contagion in global asset markets. How did this happen and what does it mean for investors ?
Value investing at its core is the marriage of a contrarian streak and a calculator. Seth Klarman- Hedge Fund Value Investor.
We touched on this subject at the end of April, but thought it might be a good idea to look at the subject of present and future value discounting in more detail.
Last week the Bank of England raised interest rates by 0.25% to 0.75%; although Mortgage rates moved at the speed of light, (I got an e-mail from HSBC telling me that my mortgage was going up 2 and a half hours later!), it appears that savings rates will be moving at a more sedate (or glacial) pace. Many of the newer UK house buyers have not seen a rate rise at all (as we have been stuck at or below 0.5% since 2009), and the effect on consumer spending and confidence is unclear.
“Nothing is so painful to the human mind as a great and sudden change.” – Mary Shelley.
"The key issue is the shift of the centre of gravity from the West to the East, the rise of China and India" - Klaus Schwab. (Chairman of the World Economic Forum).
“Better a diamond with a flaw than a pebble without.” ― Confucius
We return once again to the subject of Value (last discussed c.18 months ago). In truth, not much has changed, except that the chart below now shows an underperformance of Value vis-a-vis Growth of c.4% per annum annualised compared to 2.73% over the period shown in the December 2016 blog post. This has left many (including ourselves) in a quandary. Nearly all of the arguments advanced in the previous blog are still valid (if not more so!), but it has not, aside from a brief 6-month recovery in the second half of 2016, amounted to much; if anything, Growth has recovered with renewed vigour in the last 3 months.
“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief. ― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable.
Having relatively little to do at the moment, analysts appear to be playing the spot the “black swan” game, with attention focussed on the likely cause of the next market hyperventilation. A recent Deutsche Bank study suggests that financial crises are occurring with increasing frequency of late, defined by them as a 15% stock market fall, a 10% foreign exchange rate decline a 10% drop in bonds, a 10% rise in inflation or a sovereign default.
"Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge" - Tina Vandersteel, Grantham, May, Van Otterloo & Company (US Hedge fund).
"A basic principle of modern state capitalism is that costs and risks are socialized to the extent possible, while profits are privatized" Noam Chomsky.
(Equity) markets appear impervious to risk of any sort; no matter what politics, economics, diplomacy or military conflicts throw at them, they either ignore it totally or bounce back within days (and sometimes hours). What gives? Is this a(nother) bubble, or has something changed to reflect a new reality that we may not yet appreciate?
Going back to 2013 (May 2013 to be exact - i.e. 5 years ago), the S&P 500 was at 1,627 and trading on a trailing P/E of 17.6; fast forward to today and we are 2,705 and a P/E of 24.6. So the market has risen by 66%, but earnings by only 19% over that time. The residual is the rise in the multiple that investors are willing to pay for those earnings streams. The P/E has risen by more than twice the growth rate of earnings over that period. Why?
“A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.” - Daniel Kahneman
Extend and Pretend is a phrase that encapsulates a desire to bring forward gains into the present, whilst deferring costs or risks into the future. It refers to the practice of Banks during the mid-2000's of refusing to accept losses on loans (mortgages for example), by allowing borrowers to pay back over a longer time-frame, thus avoiding having to book loans as non-performing in the short-term, but in the process storing up even greater risks into the future. It came back to haunt the financial system in 2007-09, leading to the biggest financial crisis for at least 70 years. The policy never ends well in any sphere of life.
"It is nice to have valid competition; it pushes you to do better" - Gianni Versace.
"You will always hate something in your portfolio. Really, really hate it". James Osbourne (Bason Asset Management) October 2014.
We often get communications from advisors telling us that they have clients who have concerns with regard to one (or more) of their holdings in EBI Portfolios, which for whatever reason are doing badly at that point. What follows is an attempt to explain why the portfolio is diversified and how (and why) this methodology works.
Looking at the One Year chart for EBI 100 (Home Bias) it is not hard to spot the outlier; Global Property has lagged badly in the last year (and indeed over two years as well).
This is an up-date to a post I wrote a while ago.
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” - Benjamin Graham.
It is late on a Friday evening, and my local pub is evincing a, ahem, somewhat liberal interpretation of the UK Licensing laws. So, I get two more drinks and settle back down into the corner of the bar to find my friend, (John) returning to his favoured topic, that of his investments and how well he has done since we last met.
J: Well, I have had a good run in recent months, despite all the market twists and turns of late. Only last month, I bought into Anglo American shares and made 10% in two weeks! Its gone down since, so I am feeling quite pleased with my efforts.
Me: Really? I remember that you also bought Barclays shares a while ago, how is that one going?
"Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer" - Adam Smith (the Wealth of Nations).
Ricky Gervais on intelligence: “Some of you are really smart. You know who you are. Some of you are really thick. Unfortunately, you don’t know who you are.”
Every week at the close of US markets on a Friday, the Chicago Commodity Futures Trading Commission releases its Commitments of Traders Report, where it details the Open Interest in Futures and Options in various assets and commodities markets. This data, current to the previous Tuesday, details where and to what extent traders, investors (and individual investors) are positioned and is keenly watched by many to try to ascertain what other investors are doing with their capital.
When you see that in order to produce, you need to obtain permission from men who produce nothing—when you see that money is flowing to those who deal, not in goods, but in favours—when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—you may know that your society is doomed. - Ayn Rand; Atlas Shrugged, 1957
The title of this post is a reference to a book published in 2001 that reflects on the experiences of 6 writers of the 20th Century, who became adherents of and ultimately disillusioned with, Communism. It is ironic that much the same can now be said of Capitalism; at the very least it appears to be having a mid-life crisis.
"Some calamities - the 1929 stock market crash, Pearl Harbor, 9/11 - have come like summer lightning, as bolts from the blue. The looming crisis of..... the demographics of an aging population, its causes, timing and scope are known". George Will - Political Commentator for the Washington Post, NBC et al.
Over the next decade or so, the Developed World faces the prospect of their populations shrinking at an increasingly fast rate, whilst at the same time the Developing World is seeing continued strong rises in fertility. This fascinating website shows it all in real time, (well not exactly in real time but you get the drift).
Following on from the famous quote that Helen of Troy's was the face that "launched a thousand ships", Isaac Asimov, the science fiction writer claimed to have invented a new measurement unit, the millihelen, which corresponds to the beauty required to launch one ship. The Times newspaper this week pointed out that, as per a letter to the New Scientist as far back as 1959, the inverse also applies; -1 millihelen would be enough to sink one.
There has been much market angst recently over the rise of inflation, as bond prices have fallen, raising yields which in turn has put equities on edge. But would a rise in interest rates actually be the -1 millihelen necessary to sink the economy?
If one turns on the TV almost any time of day, one will see a litany of property related programmes, “Homes Under the Hammer”, “Location, location, location “and countless others adorn our screens in an almost non-stop barrage of lifestyle envy. As of February 2016, Channel 4 had no less than 12 property shows on its screens and this is almost certainly below where we are now. The property market has gone mainstream and has gone Global.
On the day of Jerome Powell's inauguration as Fed Chairman (and before he had time to find out where the cafeteria is!), markets have greeted him with a big bang. There are precedents for this "bad luck". Alan Greenspan started his role as the Chairman in August 1987, 3 months before the Big One in October 1987 and Ben Bernanke also assumed the job in 2006, as the Financial Crisis was just unfolding. So, it is not a unique situation, but it must make him wonder whether the market gods are out to get him. I imagine, ever so quietly, Janet Yellen is having a chuckle...