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Fed mis-step?

4th March 2020 by Mark Potter Leave a Comment

When I posted yesterday early, markets had ticked up after assorted helpful noises from the World Bank, IMF and others.

This morning, after the US Federal Reserve cut rates by 0.5%, markets are heading down again.

If the doctor prescribes a lot of drugs, you may worry more, not less

As the cut was at the top end of what might have been expected, this is not in the least surprising. It gives a signal to markets that things are ‘really bad’.

There are other predictable effects: the US dollar will weaken which may be good for the US economy and bond prices will rise as yields fall further in the expectation of even lower rates later. That latter impact is good for investors whose main insurance is having a fixed income element set against the equities in the their portfolio – for now at least.

Monday Mashup – can we be un-biased?

10th February 2020 by Mark Potter Leave a Comment

The hyphen is not a grammatical slip -up, although I know there is the odd typo in my output; I like to think it puts me in the same category as The Grauniad.

I am referring to the notion of fighting those human psychological processes generally called ‘biases’. A very good fund manager at Jupiter Asset Management (he has just taken over one of Neil Woodford’s old mandates) once said he spent his working days fighting his human biases so that he would stick to his logical and tested investment training, experience and processes.

Common traits, as they have been called in a less academic way for many years and in many contexts of life, can trip up investors at all levels of experience and expertise. I have a T-shirt with the this quote from Mark Twain on it: ” When you find yourself in the majority, it is time to stop and think”.

The point is not that the majority are always wrong or that being a contrarian is a badge of good judgement, but that it is easier to ‘go along with the crowd’ so one ought to ask why are the crowd thinking that way and do we agree with it if we think objectively. The biases that drive the majority view may be many and varied and that is beyond the scope of this post (for a good introduction, search ‘Thinking Fast and Slow’).

A topical example for investors might be Tesla shares, which on any logical or intellectual basis are priced so that the slightest of upsets would result in very large losses for investors, yet professionals are still recommending purchases. In this case the main bias that makes you think you ought to join in the party is the FOMO one – the fear of missing out.

If you were asked ‘would you buy an investment that could lose 40% or more in a few days?’, I am petty sure you would say no, so objectively, you are not going to buy Tesla shares. But you may still wish you had. That is another aspect – the issue of regret.

I have one piece of advice for all investors. It is encapsulated in my guide to investing by way of a proper process and covers the early stages: know your objectives and how much you can afford to lose (your capacity for loss). After you have invested, when you are conducting reviews and when you are tempted to buy something, always run through those steps before letting the biases get the better of you! Un-bias yourself!

Monday Mashup – nCoV

27th January 2020 by Mark Potter Leave a Comment

The above abbreviation is I read the correct title for the new form of coronavirus that has been the topic of news headlines for a few days. It is actually called novel coronavirus by the WHO. We have in the past seen outbreaks of other variants from this virus family: SARS and MERS. If you want more data on that, you know how to Google!

A global epidemic could be as damaging as a world war

I am writing about the virus because I have seen headlines like “market sells off on coronavirus scare’. That supposed ‘sell off’ was of course a figment of the sub-editor’s imagination. However, as I wrote a while back when there was more concern about the SARS variant, disease at epidemic levels is a very serious risk for markets. How much risk depends on the effectiveness of the early reactions of the international health authorities to the outbreak and how soon it is contained. There is a point in the progress of an epidemic when it ceases to be manageable.

We have plenty of history to examine when thinking about the implications of rapidly spreading infectious and potentially fatal illnesses. Not long ago I read Defoe’s Diary of the Plague Years (about the plague ahead of the The Great Fire of London) and by co-incidence I just started on one of my Christmas presents, Boccaccio’s Decameron, which to my surprise opens with a long narrative of the impact of the Black Death in 14th Century Italy. I also quite recently saw a documentary about the horrendous Ebola virus (not actually gone away) in Africa.

All this co-incidental research tells me that an out of control illness destroys economies at a phenomenal rate and in a year ot two can cause devastation that could take decades or even centuries to recover.

My understanding of current readiness and maybe more relevant, political will to do something, is that it is good in China, reasonable in adjacent places like Australia and to me at least, unclear in the Western world. It was very noticeable that the initial Ebola outbreak only got the attention and resources it needed from the best specialists in North America when the Americans and Canadians had their own nationals coming home and discovering they had the disease. I would not be so sure that the Orange one would offer the same resources now.

Although the better educated people had a surprisingly resourceful and intelligent approach to dealing with the plagues of the Middle Ages, they had no real medical skill and of course only very limited pharmacology, so whole populations were decimated or even wiped out. We can be more optimistic that this infection will be controlled and the impact minimised. But I have a slight nervousness when I make that assertion. If the disease starts to get out of control, the impact on financial assets would be a heavy one.

During World War 2, a German diarist called John Rabe, who was in Nanking when it was overrun by the Japanese recorded that he bought two genuine Ming vases for one dollar each. There are still many houses in Lithuanian that have been unoccupied since their Jewish owners were murdered and the contents looted in the Holocaust. One reads that Italian towns are selling houses for 1 euro each. In Japan there is a village where the only ‘inhabitants’ are hundreds of stuffed toys.

Financial values are totally dependant on active demand and without people, there is no demand for assets. That is why mass deaths in an epidemic is a great risk to asset valuations.

Seasons Greetings!

24th December 2019 by Mark Potter Leave a Comment

A Santa Rally seems to have at least begun – we can but hope it will continue through to the New Year as the legend suggests it should! That will probably depend on a Don more modern but just as deluded as Cervantes Quixotic hero concentrating on windmills as the enemy and not the Chinese, the Europeans, or in fact anyone powerful.

After Christmas, one should carefully analyse the last year’s portfolio performance and plan for the New Year. Or do what I do….

Anyway, I expect we will again all be trying to make sensible decisions in an unpredictable world much as usual in the New Year. Enjoy your festivities.

Unknown unknowns

12th November 2019 by Mark Potter Leave a Comment

Donald Rumsfeld’s words come to mind when I read reports of the very serious events in Hong Kong. We know what is happening. We know the Chinese are moving towards dealing with it. What we don’t know is how, or when.

One might guess it will be sooner rather than later. As Hong Kong is a very significant actor in the Asia Pacific stock market, that ought to worry us.

One would hope that a heavy handed reaction to clamp down on the rioting, which is more likely than not, would not directly impact on business activity in the region. But another unknown is how the rest of the world would react.

With China being the main driver of global growth and the US already in some ways being at war with China, this is a black cloud we need to keep an eye on.

Monday mashup – did Nige blink first?

11th November 2019 by Mark Potter Leave a Comment

A couple of my readers have commented that global stock markets are not turning as positive as one might have expected following what seemed to have been the first signs of resolution of two of the major uncertainties: Brexit and the US/China trade war.

I suppose one can understand a lack of joy about the apparent progress in the trade talks as a single Trump tweet could write off weeks of careful work by officials.

My confidence about the likely result of the Uk General Election has not been taken on by the markets, at least not until today. With the Tories miles ahead in the polls and even traditional Labour voters not wanting to vote for Jeremy Cornyn, one would have thought it was a racing certainty for a Tory majority of some size, and that would allow a closing strategy on Brexit to become clear. I think businesses and investors are now more keen just to know what they will be facing, as opposed to worrying about what it will actually be. Many will have decided what they will do either way by now.

What has changed today and instantly pushed up the Pound and the UK ‘home’ market (The FTSE 100 suffers when the Pound goes up) is Nigel Farage’s announcement that he won’t field candidates against the Tories where they would be expected to win (as I understand his position at this time).

He must have accepted that his future, which only exists if the Brexit party has at least a few MPs, was looking to be a short one if he had election results that comprised a number of also rans in seats that were gifted to Labour or the Liberal Democrats when the Brexit vote got split. He maybe even thinks this noble gesture will get him a job with the Government later (not likely in my view).

Time will tell, as ever, if this is proof that Boris and his ‘oppos’ have made enough of the right calls to get themselves 5 years in power. Given that Labour has made some genuinely Socialist policy proposals, the City will be more relieved than usual if the chances of a Labour victory are further reduced.

My feeling is that there is an opportunity to make a tentative start at buying into funds with exposure to the sort of UK businesses that have been subject to undervaluation because of Brexit uncertainty as opposed to their actual business models. Today’s figures on the UK economy 3rd quarter were also not too bad.