Its Not Harry

Comment and opinion for retail investors in the UK

Economics

Midweek musings – I hope you were paying attention

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A piece in today’s FT refers to investors suffering the 60/40 blues. It comments that the expected diversification benefit of adding a large chunk of fixed income securities to an equity portfolio just did not work in September and 60/40 porfolio investors suffered from both an equity sell off and rapidly rising gilt yields.

As I have been saying…

There is more of that today as the market focuses on rising energy prices. It would be a surprise, but not improbable, if the much anticipated end of cycle market sell off was driven by oil and gas prices. People of my age were used to talking about the energy crisis constantly in that late 70s (I had my moped fuel ration book in 1973/4) and we note the re-emergence of those two little words in media coverage.

As I have pointed out before, an increase in bond yields of 1% is not too dramatic if the rise is from 10%, but a rise from 0.5% to 2% is very dramatic for longer maturities. We are now witnessing the process live.

I have been writing for quite a while that owning a general mix of fixed income securities was not necessarily going to be useful in the next part of the global economic cycle. Some bond fund managers (tactical or speciality funds come to mind) may well still be able to offer some volatility control and even make a little money, but index trackers heavy on long dated gilts and US treasuries are going see their performance hammered.

Midweeek Musings – we’re all doomed

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As Private Fraser used to tell Captain Mainwaring…

I read another piece from Noriel Roubini, the academic economist who shares Fraser’s positive oulook, within a few hours of a news item that explained how the UK government had to cover much larger interest payments due to a change in gilt yields. These 2 items fit together.

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Midweek Mashup – Money For Nothing

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Global stock markets have reacted as expected to talk of inflation and potential central bank actions but I have already written about that a couple of times. Most markets are around 2% off recent peaks and Sterling has returned to strength after a short pull back. Both these factors will impact the bottom line of our portfolios but only in a way that is part of the normal daily volatility of markets. In my opinion, nothing out of the ordinary, especially in May – remember ‘sell in May and go away’?

In the absence of anything else of significance to investors having come my way recently, I am going to dig into the reasons why things like NFTs (non fungible tokens), Doge coin, neglected old sports cars with worn out engines and even someone’s less than box fresh sports shoes are apparently worth improbable amounts of money – for now.

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Monday mashup – what to say?

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I was of course tempted to put Christmas greeting is the heading and I do of course hope all my readers will have a healthy, peaceful and reflective break.

Some presents may not be getting delivered as planned this year

However, most of you will like me have families and would have been looking forward to seeing children, nieces and nephews, grand children and other family members, and that may not be possible now. The international news this morning is especially gloomy about the Covid-19 situation in the UK with some news media extracting (arguably out of context) the health minister’s phrasing that the situation is ‘out of control’.

Actually Covid infection rates are much worse where I live and the situation is being controlled (hopefully – not much evidence so far) by really tight quarantine measures. They may have been left to the last minute in the UK, but my guess is that the stricter measures are the right action and will need to last a while. At least vaccination programmes are getting under way

In terms of prospects for economies and the long term future of certain types of business, we have serious cause for concern. That is compounded by the approach of January 1st because whatever terms the UK will be applying to trade and other forms of necessary collaboration with mainland Europe after that, there will be more friction.

The news is rarely positive but at the moment it is almost apocalyptic some days

The processes of trade are used to spinning at high speed, like a well oiled machine that never switches off. Any engineer will tell you that even a small increase in friction, or a loss of lubricants, will cause overheating, unpredictable performance and even breakdown of sophisticated machinery.

But, as we know, investment markets and the economy are only connected in a complex and indirect manner, like the weather and the price of your morning coffee.

There are plenty of purely financial reasons for betting on stock markets continuing to rise – accommodative central banks, the rise of SPACs, digital money trends and much more. This I will address in more detail in my comments next month.

So, what to expect? The Spanish Inquisition? But nobody expects the Spanish Inquisition :-). (non-Monty Python fans please indulge my whim!).

My point is that markets are overvalued in many sectors and regions by a large margin on conventional measures, but nonetheless one can still make money riding the momentum.

Such unusual times require a thoughtful and intelligent approach to investing. I hope that in 2021 I can help you follow such a course!