Rants
Midweek Musings – Spanish Inquisition?
Friday is not mid-week, I know. Apologies if you were wondering why there was no post on Wednesday.
I saw this week a headline in the FT that ran: Investors Should Expect the Unexpected. How absurd.
Most readers will know why nobody expects the Spanish Inquisition. If not, ask Google, Bing or ChatGPT. It’s the meme from 1970’s BBC TV that you want, not 15th century religious history.
However in spite of the FT’s urging, investors cannot expect the unexpected, because if they did, it would have become the expected. You see the difficulty?
I can’t know what the FT wrote about this because I don’t pay their exorbitant subscription, so this is a bit of a rant (with a purpose).
Crystal ball gazing
The better point to make is that the next direction of the market is not often indicated by the easily available headline ‘facts’ or even the current pricing trend.
The next inflection in a given asset market is quite often not at all unexpected to someone who carefully reads relevant news and economic, financial and trading data. Such a person will also have to understand their personal psychological biases and how to resist them.
Furthermore, taking decisions in anticipation of what is going to be called later the ‘unexpected’ , but was in fact something entirely predictable (like say the bursting of the dot com bubble) is difficult because an investor who is sufficiently thorough will always be ahead of the market and will see short term underperformance or even losses (if the foresight prompts purchases rather than sales).
Knowing what is going to happen is not so difficult, but judging the timing is more tricky.
According to the Bible, it took 40 years for the legendary Jewish prophet Jeremiah to be proved right big time. In the meantime he was pretty unpopular. I have no wish to be thrown down a well nor for my readers to wait 40 years to see that I was right all along. I do think however that one can see what the market does not want to acknowldege maybe 6 months to 2 years ahead.
Give us another example, I can hear you thinking!
I already gave one: dotcom stocks in 1999 – I had none in client portfolios built on my recommendations. Another: the collapse of gilt and fixed income prices in early 2022. For now: problems coming out of China and that region.
Those are all worries. On the plus side: current undervaluation of UK shares outside the FTSE 100.
I am not obliged to give FCA risk warnings, being a mere blogger, so will end with a biblical one instead: Beware of false prophets!
I don’t really know the future, of course. I just make an educated assessment and I am wrong at times.
Midweek Musings – the post 1984 Ministries of Truth and Peace
It is disturbing to read that the Indian government has raided the local offices of the BBC on the grounds of potential tax irregularities, just after the airing of a documentary critical of the Modi admininstration. This to me, as a close observer of Russia post 1990, is blatantly out of Putin’s play book.
There is increasing evidence and narrative that the governments of larger emerging countries are becoming more totalitarian, more Orwellian. Furthermore, a nation with literally thousands of years of respecting the codified law as inviolable, Israel, is facing up to politicians wanting to diminish or even stifle the judiciary so as to give more power to the executive.
When I was writing papers about English law as a student in the 1980s. I noted the advent of something new – enabling legislation, where as Act of Parliament gave a very wide range of powers to executive organisations (at that time it was the Health and Safety at Work Act) with limited access to the Courts for citizens or businesses on the end of enforcement actions, even when they were being very unfairly treated.
The ever increasing power of the elite elements and in some cases even an individual member of the political class and its executive bureaucracy and enforcement units is a worry that might make one hesitate to allocate a lot of money to emerging markets. That is part of what we automatically think is the political risk dimension that is a significant negative for investors in those countries and regions.
It occurs to me that the same sort of political interference risk has been there for some time in the developed world, most notably in the the USA and UK where the power of lobbying and the ‘light grey’ corruption actually play out to protect businesses, so a sort of mirror image situation.
We can see most of what Orwell predicted in 1984 and Animal Farm in Russian, China, many smaller stares in the emerging world (most obviously North Korea) and possibly now India, albeit in many cases with a cosy wrapping of capitalism and what is taken to be an improvement in living standards.
We may not think that the behind the scenes events at the likes of the Davos ‘economic’ forum, or the VIP tendering line for politicians mates, just to give 2 obvious examples, is what Orwell had in mind, but in my view, it is much the same thing. A very few people in power are able to manipulate society so as to acquire power and wealth and supress their opponents.
In the ‘Western’ model, our freedom is restrained so much more subtly, thanks to the operations of the media and advertising industries. The Orwellian TV in the corner with its ever watching camera is actually called Google or Facebook or ChatGPT and comes everywhere with us.
We investors do have one big advantage over the poor protaginists of Orwell’s imagination: as investors we can join in the game on the winning side. We just need to know what businesses have best stacked the odds in their favour. I suspect you have some ideas!
Midweek Musings – you what?!
I read this morning a headline from the BBC that the governor of the US Federal Reserve has said that interest rates will have to keep going up if US unemployment does not rise.
This is like a doctor in the middle ages repeat bleeding a patient with leeches because they are refusing to get better!
The idea that you cure inflation by forcing up unemployment (ie generating a recession) is based on the theory of the Phillips Curve (see Investopedia for a full explanation). There are many reasons to question the usefulness of thinking from the mid 20th Century today, but whatever one thinks might now be different, the Phillips theory is founded on the idea that the inflation one is trying to squash is demand fed.
In the current cycle, it is known that most of the sources of inflation were supply side (war in Ukraine, logistics issues, Covid lockdown in China etc.)
So we should not be at all surprised that pretty sharp jumps is interest rates have had little impact on inflation. In truth, they will have compounded the damage, like the leeching doctor. I am not some lone punter saying that, so are Nobel Prize winning economists.
It will be the case that ever increasing rates will in the end force a recession that was not otherwise happening and that will increase unemployment, a trailing indicator, and inflation will have an extra heavy and crude brake (ie the leeched patient will be dead!)
Thus we have the top monetary policy fixer in the world’s largest capitalist economy by a country mile wanting to kill off enterprise and make only banks richer, and that after 2008!
I must be dreaming.
Watching Brief – February 2023
Pottering About
Last month’s article taken together with my weekly blogs since have exhausted my capacity for pontification on the direction of markets. I will not write anything new on that subject here, but for ease of reference, I reproduce below the conclusion of my January briefing.
- Fixed income assets with higher duration look much more attractive although buying now would be for early adopters who may see some losses before they get rewarded. Personally, I often both buy and sell an asset class a little early.
- Quality global growth companies are oversold due to the over discounting of future growth for higher interest rates that won’t last that long. Businesses with strong market share, pricing power and large customer bases buying products that don’t need re-inventing are currently at very fair prices, maybe below half price on what they were 18 months ago.
- If recessions are not long and deep, smaller company funds are well paced to bounce back faster than funds that are mostly mega cap and into energy stocks.
- Geographically, the North American market looks to me to be the least risky, Europe is probably priced for more risk than is realistic and UK businesses can (surely?) only have better times ahead after the almost eternal blundering of the political classes for many years. In the Asia Pacific region, Japan may for once be a profitable call as the Yen has potential to strengthen (Japan is the only place where they probably welcome inflation!) and China looks to me to be a market still with potential but undermined by politics. Other emerging markets may well benefit from China’s less friendly positioning to the USA and Europe.