Not the Nine o’clock News – 17th December 2017

As long time readers will know we do not put much credence in end of year forecasts; nor in fact forecasts in general; the Fed and the Met Office being stand out examples. As an alternative to what is going to happen in 2018 (“Markets will fluctuate”…attributed to J.P. Morgan) we have put together some memorable quotes we have picked up during the course of 2017.

Firstly, the reality about forecasting – “Forecasts are financial candy. Forecasts give people who hate the feeling of uncertainty something emotionally soothing.” Thomac Vician Jnr student of Ed Seykota. 

And equally damning is this – The Illusion of Certainty – Gerd Gigerenzer – “Many of us smile at old fashioned fortune tellers. But when the soothsayers work with computer algorithms rather than tarot cards, we take their predictions seriously and are prepared to pay for them.”

“Our industry is full of people who got famous for being right once in a row.” Howard Marks

And then we have forecasts with added hubris for good measure…”Inflation is not where we want it to be or where it should be” – Mario Draghi

At least one person gets it! – “I never think of the future – it comes soon enough” – Albert Einstein

As does the Sage of Omaha – “Forecasts usually tell us more of the forecaster than the future” – Warren Buffett

And the late, great Peter Bernstein – “Forecasts create the mirage that the future is knowable”

Or put another way –  “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting.” Jesse Livermore – Reminiscences of a Stock Operator

Another quote from Livermore reminds us that it won’t be different this time…”There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure.”

There are quite a few “idiots” around right now…allegedly “The problem with bubbles is that they force one to decide whether to look like an idiot before the peak or an idiot after the peak” John Hussman

Advice on the pricking of bubbles – “The specific manner by which prices collapsed is not the most important problem. A crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. Think of a ruler held up vertically on your finger. This very unstable condition will lead eventually to its collapse, as a result of a small or the absence of adequate motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position, the instantaneous cause of the collapse is secondary.” Didier Sornette French geophysicist

Statistics – sadly an under rated business – “Lottery: A tax on people who don’t understand statistics.”

“All models are wrong, but some are useful.” George Box statistician

We are promised higher inflation in some quarters but…”Despite the cost of living, have you noticed how it remains so popular?”

Most puzzling development in politics is the determination of European leaders to recreate the Soviet Union in Europe – Mikhail Gorbachev

Here is some intelligent advice from a surprising source – “Sometimes your best investments are the ones you don’t make.” – Donald Trump.

And from another head of state turned technical analyst – “Follow the trend lines not the headlines.” Bill Clinton

“Government is instituted for the common good; for the protection, prosperity and happiness of the people; and not for the profit, honour, or private interest of any one man, family, or class of men” – John Adams, 2nd President of the United States. Something the 45th should bear in mind…if only

“The main difference between government bailouts and smoking is that in some rare cases the statement “this is my last cigarette” holds true.” Nicholas Taleb

Economists are getting a bad press so we won’t buck the trend – “Economics is like a dead star that still seems to emit light, but you know that it’s dead.” – Nicholas Taleb

“Anyone who believes in indefinite growth of anything physical on a physically finite planet is either a madman or an economist” – Kenneth Boulding

“I imagine that Ben Bernanke, Mario Draghi and Haruhiko Kuroda all stay awake at night imagining ways to force negative rates on savers. But the larger question, beyond a sociopathic desire to control others in service of one’s own intellectual dogma, is why anyone would advocate such policies. I can’t emphasize strongly enough that there is no economic evidence that activist monetary intervention has materially improved economic performance in recent years.” John Hussman

“Reliance on monetary policy as an effective stabilising device would involve a high degree of instability in the capital market. The capital market would become far more speculative and longer run considerations of profitability would play a subordinate role. As Keynes said, “when the capital investment of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done.” — Kaldor, 1958 

And finally’ in a lighter vein…”Grow your own dope. Plant an economist.” Graffiti seen at the LSE

Lastly some classics that you may have seen before but are worthy of repetition mainly because they will make you smile.

“The fact that there is a highway to hell but only a stairway to heaven tells you something about the anticipated traffic…”

“There are three excellent theories for arguing with women…none of them work”

“Some people see the glass half full. Others see it half empty. I see a glass that’s twice as big as it needs to be.”
George Carlin

For those of us with teenage children – “Why can’t life’s problems hit us when we’re 17 and know everything?”

Nothing like a good game of cards – “I stayed up all night playing poker with Tarot cards. I got a full house and four people died.”

“I don’t exercise because it makes the ice jump right out of my glass.”

“The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine” Abraham Lincoln

And as Christmas is coming we will all need to do follow this guide

How to reduce your stress:

1 don’t respond to negativity
2 go for a walk, be active
3 be honest
4 read, write more
5 give without expecting a get
6 breathe deeply
7 forgive first
8 write thank you notes
9 be a better friend
10 you are not your job
11 complain less
12 laugh more

Especially 12!

Have a very Merry Christmas and all that you wish for in the New Year.

Clive Hale –The View from the Bridge – 17th December 2017

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The madness of crowds – 11th December 2017

“Howard Marks of Oaktree Capital, in his recent newsletter, summarised today’s investment environment brilliantly. He says there are four noteworthy things: current uncertainties are unusual in terms of number, scale, and insolubility; prospective returns are just about the lowest they have ever been; asset prices are high across the board; and pro-risk behaviour is commonplace. We would add that the correlations between most multi-asset portfolios makes the market a very crowded telephone box.” Artemis – The Hunters’ Tails

With much fanfare but little ballyhoo – it was 6.30 in the morning after an all-night sitting in Brussels – Mrs. May described her “triumph” – as only the FT could describe it – as a significant breakthrough; only for Donald Tusk, whose dourness would turn out the lights on any parade, to say that the trade talks would be a very different matter. If the press thinks the PM is out of the woods, then they are delusional, but that is the spin we will get.

In the US, Trump appears to have had his first victory over the legislature. The 479-page tax bill has been voted through, but it is still not certain that it will arrive on the Donald’s desk for signature. The bill is a mixture of hope, economic experiment and pork barrel politics of the worst kind. Its efficacy was in doubt before the ink dried on the handwritten amendments. The markets have discounted the passing of the bill at least three times and probably will do so again, if and when it gets signed into law.

North Korea is potentially the most “explosive” uncertainty. Trump would like to put FB back in his box. This would involve military aggression which would signal to the Chinese that the current hegemon still worthy of the name, but it won’t be long before China assumes that title, militarily, economically and financially. The end of an empire; we could tell the US a lot about that, but they won’t listen. This is some way down the road, but have no doubt that President Xi intends to make his mark.

Then we have the Middle East and the Saudi, Iranian, Russian, US quartet currently playing an unholy tune in Jerusalem with the Chinese looking on. The refrain seems to be “Get Iran,” but there is as much misinformation here as anywhere else.

It wasn’t so long ago that we had a reverse yield gap where bonds yielded more than equities. For the cautious investor bonds were a haven and provided a decent income; not any more unless you are brave enough to venture into high yield which, as a reminder in case the lesson has been forgotten, behave like bonds on the way up and equities on the way down. In fact, of late they have been acting like equities on the way up too!

On the valuation front there are myriad examples with which to regale you from the CAPE Schiller Inflation adjusted P/E which is now higher than in 1929 with only the 2000 tech bubble to beat, to the ability of second rate European corporates to issue non-investment grade debt – junk to you – at negative nominal yields; stick that on your balance sheet Mr. Draghi.

On the risk score the ETF brigade are still buying more and more expensive large cap stocks and having a good dig at the active value managers who, in the end will have the last laugh, if not a side splitting guffaw! Auction prices still astound with $450 million paid for a Leonardo of dubious authenticity. The seller was a Russian who had bought the painting for $125 million from a dealer who had paid $80 million for it. He decided to sue the dealer for over charging him and put the item up for auction at a reserve price of $100 million. Quite what he does now is uncertain, but at least he can afford the legal fees to pursue his case!

The ultimate get rich quick pill is Bitcoin about which everyone from pole dancing teachers (it’s an excellent form of exercise don’t knock it!) to the proverbial shoe shine boy are falling over themselves to get involved.

This chart of the crypto boondoggle is very reminiscent of many tech stocks in 2000 not to mention the South Sea Company in the 1720s. Quite what the intrinsic value of a Bitcoin is no one can tell me, and the volatility is equally off the chart. Since Friday the price hit 17,000 reversed to 13000 (-23%) and is now back to close on 17000 again on Monday morning. This is not investing it is speculation of the highest order.

The key now is to be running a properly diversified portfolio with the accent on “properly.” The days of relying on bonds to do the job are well past although there are still many folk looking in the rear-view mirror whilst extrapolating into the future – a very uncomfortable position! Diversification implies that not everything in your portfolio will be going up at the same time. If it is, and many portfolios have this characteristic in the race to the top that we find ourselves in, then they will all go down together. That is not, despite history saying that your holdings don’t correlate strongly, diversification. Trend following hedge and gold shares look to be one of the answers. Yes, they’re volatile, but you don’t get true diversification without it.

Clive Hale –The View from the Bridge – 11th December 2017

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On the QT – 31st July 2017



It’s been a while and lots of ships have passed under the bridge, including an unnecessary election in the UK, the sacking of 12 White House staff members for various “misdemeanours” but mainly for disagreeing with he who must be obeyed, an interest rate rise in the US and the “successful” launch of yet another North Korean missile. There are sure to have been far more important items on the agenda, but the one constant has been the rise and rise of the US stock market.

One thing that has changed and is unarguably the most important event so far this year is the central bank narrative. Before Bernanke became an ex master of the universe he opined that QE – quantitative easing – didn’t work in the way the Fed had and anticipated i.e. cheap and plentiful money would promote economic growth as businesses borrowed to expand their operations.

They borrowed all right! To the tune of having a lot more debt than in 2008, now representing 45% of GDP. Not too shabby when compared with US government debt at “only” 100% but then they don’t have the distinct advantage of being able to print money. Whilst the cheap money regime continues corporate management will continue to borrow to fund share buy backs that cosmetically enhance earnings per share. Fewer shares, same, or in the case of many US corporates lower earnings, and the value of those shares rise as we are currently seeing.

Interest rates need to rise to make the corporates turn to real investment in their businesses to grow earnings, without the need for financial chicanery. The Fed have been slowly turning the tanker around firstly by cutting off new QE, then by reducing the reinvestment of redemptions and they are now talking about “normalising their balance sheet” by selling back some of their holdings in US Treasuries and other assorted US debt. In other words, “QT” – quantitative tightening.

The ECB have also joined in. Such is central bank speak, they have not said, “yes we will reduce our balance sheet any time soon”, but they are nearly on the same page as the Fed. Meanwhile Kurodasan is still trying to cap JGB yields. When he eventually fails, when not if, the BoJ will join the club too, but a lot of damage will have been done by then. Hubris always seems like a good idea at the time…

The Fed will probably raise at its September meeting into a storm of increasingly poor economic data. The “recessionistas” are repeatedly told that a GDP slowdown won’t happen until the yield curve inverts i.e. short dated yields are higher than long dated, but what should short rates be in an environment where the market sets rates not the central bank? 3%? 4%? There’s your inverted curve right now!

This brings us nicely along to the current state of the markets. How would they react to higher rates and/or a recession? Not well, I guess you would say. Here are some observations from Howard Marks at Oaktree.

“We have some of the highest equity valuations in history.”

  • The S&P 500 is selling at 25 times trailing-twelve-month earnings, compared to a long-term median of 15.
  • The Shiller Cyclically Adjusted PE Ratio stands at almost 30 versus a historic median of 16. This multiple was exceeded only in 1929 and 2000 – both clearly bubbles.
  • While the “p” in p/e ratios is high today, the “e” has probably been inflated by cost cutting, stock buybacks, and merger and acquisition activity. Thus, today’s reported valuations, while high, may actually be understated relative to underlying profits.

“The so-called complacency index – VIX (the S&P500 volatility index) – is at an all-time low.”

  • What’s the significance of the VIX, anyway? Most importantly, it doesn’t say what volatility will be, only what investors think volatility will be.
  • It’s primarily an indicator of investor sentiment “Forecasts usually tell us more of the forecaster than of the future.” – Warren Buffett.
  • In a similar way, the VIX tells us more about people’s mood today than it does about volatility tomorrow.

“There has been an elevation of the can’t-lose group of stocks; the FANGs, reminiscent of the Nifty 50. When taken to the extreme – as it invariably is – this phenomenon satisfies some of the elements of a bubble including:

  • trust in a virtuous circle incapable of being interrupted;
  • conviction that, given the companies’ fundamental merit, there’s no price too high for their stocks; and
  • the willing suspension of disbelief that allows investors to extrapolate these positive views to infinity.

“We have seen a movement of more than a trillion dollars into value agnostic investing aka passives.”

  • Passive funds do no research on the companies they buy and are ambivalent about valuation.
  • They hold more and more of the increasingly expensive and less and less of the cheaper value stocks.
  • Buy at the top sell at the bottom. What could go wrong?

“We have the lowest yields in history on low rated bonds and loans.”

Netflix issued €1.3 billion of Eurobonds, the lowest-cost debt it ever issued. The interest rate was 3.625%, the covenants were few, and the rating was single-B. Netflix’s GAAP earnings run about $200 million per quarter, but according to Grant’s Interest Rate Observer, in the year that ended March 31, Netflix burned through $1.8 billion of free cash flow. It’s an exciting company, but as Grant’s reminded its readers, bondholders can’t participate in gains, just losses.

“Yields on emerging market debt are lower still.”

“We are witnessing the highest level of fundraising for private equity in history”

“The biggest fund of all time – Softbank Vision – has just raised $100 billion for levered tech investing.”

“Billions are pouring into digital currencies which are backed by nothing – not even a central bank promise…”

“I absolutely am not saying stocks are too high, the FANGs will falter, credit investing is risky, digital currencies are sure to end up worthless, or private equity commitments won’t pay off. All I’m saying is that for all the things listed above to simultaneously be gaining in popularity and attracting so much capital, credulousness must be high and risk aversion must be low. It’s not that these things are doomed, just that their returns may not fully justify their risk. And, more importantly, that they show the temperature of today’s market to be elevated. Not a nonsensical bubble – just high and therefore risky.”

“Try to think of the things that could knock today’s market off kilter, like a surprising spike in inflation, a significant slowdown in growth, central banks losing control, or the big tech stocks running into trouble. The good news is that they all seem unlikely. The bad news is that their unlikelihood causes all these concerns to be dismissed, leaving the markets susceptible should any of them occur. That means this is a market in which riskiness is being tolerated and perhaps ignored, and one in which most investors are happy to bear risk. Thus, it’s not one in which we should do so.”

On the QT I couldn’t agree more.

Clive Hale –The View from the Bridge – July 30th 2017

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Fed Up – February 18th 2017

If you were going to set up an organisation to help control and regulate the economy and the banking system how would you start? Would you employ over 1,000 Ivy League trained economists, many with PhDs, but little or no practical knowledge of running businesses? Would your board of governors come from the same background and would the owners of the organisation be the very bankers that you were duty bound to regulate? I somehow doubt it. But even if you were so minded would you then allow untested economic theories to be implemented without a thorough study of the potential consequences of zero or even negative interest rates on the real economy or the massive inflation of your balance sheet by the purchase of trillions of dollars’ worth of government debt? No, you wouldn’t, but welcome to the world that is the Federal Reserve System of the United States.

Nine years into the recovery from the Great Financial Crisis and the Fed is still wondering why its policies are not working as intended. Their theory goes that if you lower interest rates, companies will be happy to borrow and invest in their businesses as consumers, who begin to feel the wealth effect of rising property and stock prices, pick up their spending levels. Several problems there. Most consumers don’t benefit from “trickle down wealth” and corporations, faced with less than robust demand, saw a perfect opportunity to massage earnings per share by increasing debt to buy back their own shares, which does very little for the economy, but does boost the bonuses paid to corporate executives.

On the regulatory front the legislation brought in after the GFC, known colloquially as “Dodd Frank”, to control the excesses that led to the crisis in the first place, is under threat. It was probably not the best thought through piece of legislation and was of such size that it is unlikely that many senators or members of congress, who passed the bill, have read the thing. It did of course constrain the investment banking community from running proprietary operations amongst other things, which in the run up to debacle were among their most profitable pastimes.

Not surprisingly, given that the Fed is owned by the banks, their protestations and not inconsiderable financial lobbying have found the ears of the Chairwoman, who recently opined that the regulations need relaxing again. Added to the view that interest rates are now a one-way bet, it is no surprise that financial stocks, and the fortunes of the investment banking sector in particular, have been on the rise. The question that doesn’t seem to have been asked is what happens to all those interest rate derivatives when rates get a serious move on.

The 10 year US Treasury note reached a high in terms of yield in 1981 of 15.84%; younger readers may need to go and have a lie down. This was from a low 35 years earlier in 1946 of 2.08%. 35 years on from the peak, in 2016, Treasuries hit a low of 1.36%. The perceived wisdom is that rates won’t get above 3% as this will put a cap on economic growth and rates will start to fall again. At the same time, US equity prices are reaching for the sky. However, seven year projected real returns for US large cap stocks, from US based investment managers GMO, are around minus 1%-2%, which implies something of a re-rating from here. GMO’s CIO is Jeremy Grantham, a Yorkshire man at heart, who knows a good deal when he sees one, and whose favourite observation is that value managers are never wrong, just early. If you are wondering how sustainable the Wall Street fan club at Dow 20,000 can be, just remember which organisation has been mainly responsible for getting us to these giddy heights via a series of uncontrolled and untested policy experiments; aka cheap and “free” money.

Clive Hale –The View from the Bridge – February 18th 2017

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PS – the title for this piece and some of its content has been inspired by Danielle DiMartino Booth’s new book Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America. She was adviser to Richard Fisher the former president of the Dallas Federal Reserve bank, which gave her great insight into the workings of the machine. I have quoted below the publisher’s introduction to the book.

In the early 2000s, as a Wall Street escapee writing a financial column for the Dallas Morning News. Booth attracted attention for her bold criticism of the Fed’s low interest rate policies and her cautionary warnings about the bubbly housing market. Nobody was more surprised than she when the folks at the Dallas Federal Reserve invited her aboard. Figuring she could have more of an impact on Fed policies from the inside, she accepted the call to duty and rose to be one of Dallas Fed president Richard Fisher’s closest advisers.

To her dismay, the culture at the Fed–and its leadership–were not just ignorant of the brewing financial crisis, but indifferent to its very possibility. They interpreted their job of keeping the economy going to mean keeping Wall Street afloat at the expense of the American taxpayer. But bad Fed policy created unaffordable housing, skewed incentives, rampant corporate financial engineering, stagnant wages, an exodus from the labour force, and skyrocketing student debt. Booth observed first-hand how the Fed abdicated its responsibility to the American people both before and after the financial crisis and how nobody within the Fed seems to have learned or changed from the experience.

Today, the Federal Reserve is still controlled by 1,000 PhD economists and run by an unelected West Coast radical with no direct business experience. The Fed continues to enable Congress to grow our nation’s ballooning debt and avoid making hard choices, despite the high psychological and monetary costs. And our addiction to the “heroin” of low interest rates is pushing our economy towards yet another collapse.

This book is Booth’s clarion call for a change in the way America’s most powerful financial institution is run–before it’s too late.

 

Goodbye to all that – January 2nd 2017

If we had said at the beginning of 2016 that the UK would vote for Brexit, the US would vote for Trump and that Leicester City would win the Premiership you might not have taken the bet; a pity as a £10 accumulator would have netted £45 million…. According to Ladbrokes no one took that bet, which reinforces our view that a forecast, at any time of the year, is just someone else’s opinion and not fact as all some politicians, economists and central bankers would have us believe. These opinions are then promulgated by the main stream media and thus miraculously become true as far as most unthinking readers are concerned.

Both the Brexit campaign and the US election were two classic examples of the Fourth Estate swallowing every blue pill given to them and then having the nerve to report on the “growing threat” of fake news! Who to believe? Not the press that’s for sure! Central bankers are no better; Carney’s admonition that a vote for Brexit would mean a rise in interest rates lay in tatters mere days after the result along with the chancellor’s threat of higher taxes; politicians are ever economical with the truth are they not?

One thing we can “look forward to” in 2017 is more political uncertainty. We have no idea what a Trump administration will spring upon us, but the markets seem to have voted already and new all-time highs in the US are not very far away at all. The bulls are in charge and have admonished the Cassandras by reminding us of what didn’t happen in 2016. We should also be very aware that “didn’t is not the same as hasn’t”; a quote from Grant Williams at RealVision highlighting one of the many subtleties of linguistics not to mention market action. So instead of divining the financial tea leaves here is a selection of quotes that we have stumbled across during 2016 that seemed quite relevant at the time.

“A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result that the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship.” – Alexander Fraser Tytler – a variation relevant today would be that the “minority discovers it can vote itself largesse and then contrives to control the majority” Rule by the 1%?

How many things served us yesterday as articles of faith, which today are fables for us? – Michel de Montaigne, eg a flat earth, the heliocentric universe and in the not too distant future central bank omnipotence.

Reliance on monetary policy as an effective stabilising device would involve a high degree of instability in the capital market. The capital market would become far more speculative and longer run considerations of profitability would play a subordinate role. As Keynes said, “when the capital investment of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done.” — Kaldor, 1958. A classic example of history repeating.

An inferno that sadly lacks the poetry of Dante – Brigitte Granville economist at Queen Mary University talking about the effect of negative interest rates on the pensions industry. One of the many consequences of QE; unintended or otherwise…

The effects of quantitative easing may be diminishing compared with a few years ago, but “what we should say is, ‘Effects are diminishing, so let’s do more.’ This is the spirit of Abenomics.” Etsuro Honda, an advisor to Japanese prime minister Shinzo Abe bless him…

“The art of financiering consists principally in multiplying and confusing accounts, till, at last, no one has courage to undertake an examination of them.” William Cobbett “The Budget”, 1805.

In the end the Party would announce that two and two made five, and you would have to believe it. … The heresy of heresies was common sense. And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right. – George Orwell, “1984” (1949) Have no doubt, “1984” is no longer a work of fiction.

If you don’t trust gold, do you trust the logic of taking a pine tree, worth $4,000-$5,000, cutting it up, turning it into pulp, putting some ink on it and then calling it one billion dollars? Kenneth J Gerbino. Name me a fiat currency that has survived and you can have all my gold and don’t forget Grant Williams quote mentioned above. “Didn’t is not the same as hasn’t”.

Gold; a zero-coupon irredeemable bond with no credit risk and where the issuer is God

Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened. Sir Winston Churchill

Either you repeat the same conventional doctrines everybody is saying, or else you say something true and it will sound like it’s from Neptune. Noam Chomsky

I predict future happiness for Americans if they can prevent the government from wasting the labours of the people under the pretence of taking care of them. Thomas Jefferson

I don’t make jokes. I just watch the government and report the facts. Will Rogers

Some people see the glass half full. Others see it half empty. I see a glass that’s twice as big as it needs to be. – George Carlin (1937 – 2008)

Some little known Zen teachings

No one is listening until you pass wind.

Experience is something you don’t get until just after you need it.

Light travels faster than sound. This is why some people appear bright until you hear them speak.

The fact that there is a highway to hell but only a stairway to heaven tells you something about the anticipated traffic…

There are two excellent theories for arguing with women. Neither one works.

And finally – “The trouble with quotes on the internet is that it’s difficult to determine whether they are genuine” Abraham Lincoln

And my favourite in these highly interesting times

“You can live in fear….or you can dance with her.” Unknown

May 2017 bring everything that you wish for – Happy New Year

Clive Hale –The View from the Bridge – January 2nd 2017

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7 No Trumps – November 27th 2016

Playing bridge, backgammon or chess is not dissimilar to “playing” the markets. Every new hand, board or day brings something different; a new auction, a new gambit, a new strategy. However, in the world in which we find ourselves the markets have an unseemly edge; they are not always what they appear to be at first sight. The conspiracy theorists have been roundly derided, but then we find that LIBOR is being rigged, gold and silver are being manipulated, banks have sold worthless bonds and we suspect much other skull duggery besides. The “culprits” have been fined and a few scapegoats have gone to jail; known, in current day parlance, as “the cost of doing business”.

The media have barely raised a sweat in reporting these “misdemeanors”. For many outside the banking “cartel” LIBOR is probably a second derivative of Trebor a well know mint confection in the UK. Much of the interest these souls pay on their mortgages and credit card loans is based on LIBOR rates, so perhaps they should be more concerned. But no, life goes on in a virtual reality world created by the media enterprises and their not insubstantial backers.

The latest “news” is that there is a lot of “fake news” being reported. How else would the Don have become president elect and the Brits have voted for Brexit? And it’s all being funded by those pesky Ruskies, apparently. No I am not making it up but somebody is! Blame anyone but yourself… Let’s have a recount and a riot or two instead; ask yourself who’s funding that. The media have so brain washed the great unwashed that folk are losing the ability to think for themselves.

And one wonders whether we would have turned the White House into Trump Towers or voted for Brexit – or indeed joined the “Common Market” in the first place, if we had thought for ourselves and been able to base our decisions on reliable information and data rather than the Animal Farm rhetoric we have today. If only…rational thought is but a dream in a world of breakfast TV and “reality” game shows; and a dream held most dear by the classical economists who are still there, as ever, in Neverland.

We alluded earlier to markets where the playing field is often an uphill struggle; sometimes, but not always of our own making. In the world of bridge, “underhand” behaviour is much frowned upon, but it happens. In the original edition of “Moonraker”, the third book in Ian Fleming’s series of fourteen “classics”, Bond is tasked with finding out why a member of M’s club is winning so consistently on the bridge tables. He is cheating of course and Bond palms, and deals, a rigged deck so that Drax, the villain, can be taught a lesson. For the bridge aficionados, have a quick web search and you will find the hand and how it was played. He opens the auction with 7 clubs, an unlikely pre-emptive bid, Drax doubles the bet, Bond redoubles and Drax loses the then princely sum of £25,000; the price of doing business has risen substantially since then!

Today the hand would have been played in 7 No Trumps. That would be a “No” from each of the BBC, the New York Times, the Guardian, Channel Four News, the Economist, the Washington Post and CNN. Ask yourself how could they have got it so wrong? How indeed and who said fake news? Come on own up!

Clive Hale –The View from the Bridge – November 27th 2016

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The Un-Presidential Election – November 6th 2016

The Un-Presidential election campaign is drawing to, what one would hope, is a blessed close. However, the parallels with the UK’s EU referendum are in many ways similar; not least of all the certainty that the losing candidate will not accept the outcome and that the post-election mood will be as fraught as on the campaign trail; each side’s legal teams are gearing up to dispute the result as we “speak”.

The polls look to be as unreliable too, although the gap has closed to within the normal tolerance for error, so it’s now anyone’s race. Unless of course you are part of the main stream media, the “Establishment” or Large Corporate world in which case Hilary is your darling and Trump doesn’t stand a chance. Again, more shades of the UK Remain campaign that branded anyone with a proclivity to leave as a suitable case for treatment, along with dire warnings (threats) about the economy, immigration and national security. You could be fooled into thinking that we have exported a trend to the US for a change, until you remember that Obama flew into London and told us in no uncertain terms that the “special relationship” would be under severe strain should we be foolish enough to vote “the wrong way”. The bookies also seem to be hoping to avoid a re-run of June 23rd they are offering Hillary at 1-3 on and Donald at 3-1 against – a 75% chance against 25% for those of you not familiar with the patois in the betting ring.

An interesting late twist, at least for students of Murdochology, is that the Dirty Digger appears to have changed his allegiance from The Hillbillaries to the Despicable Don. His ability to “back the right horse” has been in evidence in the UK with Murdoch “journals” swinging the vote for John Major in 1992. “It was The Sun wot won it”, boasted Britain’s highest-selling tabloid newspaper immediately after the result; and, in his resignation speech, Neil Kinnock said that “the Conservative-supporting press has enabled the Conservative Party to win yet again”.

The fact that Kinnock blamed the press and not himself for an inept campaign that ended with him making a “triumphal” entry to a meeting in Sheffield on the eve of the election, suggests that the press effect was not as great as the tabloid press thought, but certainly enough to swing a goodly number of voters in marginal Labour held constituencies. In 1997 the Murdoch press was firmly behind Blair as the Digger correctly sensed that the Tory hold on UK politics was slipping away and he needed a new champion to help further his “cause”.

Changing political affiliations is then a matter of “good” business practice and with trust in Clinton’s ability to tell the truth about pretty much anything at rock bottom there is a sense that even if she wins she will be dogged by investigations into her nefarious past at every turn. Being associated with a President that may be on the road to impeachment even before election day is a strategy to be avoided. As Trump’s agenda is pretty much unknown, being in the same camp to “help” determine policy is a much better idea.

For the US voter, it’s very much like a scene out of the Matrix, where Neo is asked by Morpheus to choose between the blue or the red pill. The blue pill maintains the status quo, which is a comfortable place to be and he goes back into the Matrix; the red pill is a leap into the unknown and a battle to change the system. Hilary would be more of the same; much more. More government interference, more spending, both healthcare and military and further erosion of privacy by stealth. As George Carlin irreverently opined, “I love this country for the freedoms it used to have.”

Trump has promised much, but plans to deliver are pretty thin on the ground. He is unlikely to have the support of both the Senate and Congress, even assuming any Republicans would vote for him; such is the division he has created within the GOP. His suggestion that future campaign contributions would be severely restricted and that former government officials would be banned from taking high paying sinecures with big business after leaving office, currently one of the most lucrative gravy trains in Washington, is even less likely to enamour him to either side.

The choice between a President that no one trusts and one with suspect personality traits is unpalatable to say the least. The issue though is more fundamental than that and was spelled out by George Orwell, whose classic book, 1984, is getting more like the real thing every day. He said that, “A people that elect corrupt politicians, imposters, thieves and traitors are not victims… but accomplices”. Don’t take either pill…

How will the markets react? With great gusto, but in which direction? FTSE and the S&P spent last week going South and are down 6% and 5% respectively since the recent all-time highs. A Clinton in the White House, with a decent majority, and a relief rally is baked in. Trump would almost certainly have the opposite effect. What neither candidate has tackled is the debt problem. Clinton will spend more and print more and Trump has said he knows how to deal with debt from personal experience. He knows what bankruptcy means, but reneging on US Treasuries? Really? More spending and the initial reaction would be for the markets to carry onwards and upwards, but only too soon they will work out that the new President has no principles, no idea and no clothes…

Clive Hale –The View from the Bridge – November 6th 2016

Are we there yet? September 11th 2016

Those of us with children will be used to this refrain as we turn out of the driveway on the way to destinations unknown. Equally we will smile when recalling that “les enfants terribles” were more than likely asleep when we did eventually get there. A perfect analogy for market participants in this most unloved bull market perhaps. In the last edition of the View we asked “When?” and suggested that all was fine as long as the central bank narrative held together. This past week has put that idea very much to the test.

The US jobs numbers were below expectations and the markets rallied thinking that the Fed wouldn’t raise rates in September after all – the 21st is the day to put in your diaries. Then the Fed vice chairman, Stanley Fischer, opined that negative interest rates seem to be working in other countries; “seem” being the operative word… He was quick to deny that the Fed would introduce them in the US and even implied that they could raise rates whilst others were cutting!

We then had Kurodasan, the Bank of Japan governor, saying that he would cut rates as far into negative territory as needs be if the current policies fail to stimulate the economy; a dilemma the BoJ has been facing for the last 25 years and counting; will they ever get the message? Well the bond market might just deliver it to them. In the past few weeks the yield on the 10 year JGB has gone from minus 0.3% back to pretty much 0%. It doesn’t sound much, but the losses inflicted on short term traders, especially those whose positions have any element of gearing, have been more than painful; it has been described as a “VaR event”.

VaR, or value at risk, is a rather quaint, but almost universally accepted, method of determining the risk that, for example, trading desks in banks subject themselves to in their dealing with Mr. Market. VaR calculates the likelihood of loss in the following days trading based on current positions and historic volatility of those instruments. So VaR may be say an acceptable 1% or 2% with usually a “high” degree of probability. There are of course outliers outside the “high” range, but they are only supposed to come along once in a blue moon, and risk controllers and management content themselves with that fact; until it all blows up, which is beginning to look like the case with JGBs.

The malaise has already spread to other sovereign bond markets with a Bloomberg headline on Friday proclaiming that Bund yields had “soared” to 0%! This came on the back of the ECB press conference on Thursday, given by Mario Draghi, who was far from convincing in terms of both what he said, “the European economy continues to recover”, and his general demeanor, which was something a lot more than “defensive”. As for the latter a rabbit in the headlights would be apt and as far as the economic recovery goes, saying that it is anaemic at best would be very generous.

The equity markets, oil and precious metals all took a hit as well and the opening on Monday morning will be “interesting”! The futures markets are already suggesting that FTSE will open 70 points below Friday’s close so tin hats on and let’s see what these central bankers are made of!

Clive Hale –The View from the Bridge – September 11th 2016

 

Albemarle Market Commentary – September 1st 2016

“I and others, have, for several years now, suggested that the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models – those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost “commonsensically”, cannot function well at the zero bound or with a minus sign as a yield.” Bill Gross – Janus Capital Group

Not always the most consistent of commentators, but there is no denying that his latest epistle carries more than a hint of truth. Markets are broken and trying to divine an investment strategy is more akin to going through the card at Newmarket; the odds at the race course will be a lot fairer than the ones currently on offer in bond world. Savers in search of income are being forced into areas which from a risk perspective they wouldn’t normally touch; high yield bonds, emerging market debt, equities and property all of which stand close to all-time highs and are seriously “expensive”, beset with liquidity issues or provide little or no downside cushion.

Worse still, the pensions industry still clings to heroic assumptions about growth rates in all manner of markets. Underfunding has been an issue for many a year but if realistic growth rates were factored in the shortfall would be catastrophic for insurance companies and pension fund trustees alike. In the US the American Academy of Actuaries and the Society of Actuaries has scrapped its long time joint Pension Task Force and banned the dissemination of its paper highlighting this dilemma, under threat of legal action against would be transgressors. As one pensions expert put it, “an inferno in the making, but without the benefit of Dante’s poetry.”

In the UK, Carney has said that he won’t go as far negative rates, but with the 30 year gilt yielding circa 1% he’s pretty much there already and providing actuaries here with a very similar headache. ZIRP didn’t work and NIRP is destined to fail even more spectacularly. Faced with minus rates savers are not spending; they are saving more! Markets are beginning to wake up to the fact that the central bankers are running naked. A number of fund managers that we speak to regularly would genuinely like to see markets significantly lower as they are struggling to find anything resembling value. Be careful what you wish for is an epithet that immediately springs to mind. The markets certainly seem keen to test the central bankers’ metal; will the Fed raise rates in September or will they flinch again?

As we continue to observe, the common narrative that the central banks are minding the store is beginning to wear a little thin. We are approaching the “witching” month of October so we are maintaining our cautious stance in terms of our risk budget. There is a possibility that the major US equity indices may make further highs, if the Fed manage to provide some balm at their next meeting on September 21st, but that would be an opportunity to take some more chips off the table. The other major concerns, pre-referendum, were the Chinese “devaluation”, which has been proceeding stealthily, while attention has been drawn elsewhere, and concerns over the European banks where stealth too is being applied; in Italy thus far, but open warfare could erupt at any moment, so we must remain ever vigilant.

UK

House prices in the UK remain firm dispelling yet another Brexit fear story. Our PM has told her civil servants that Brexit must be delivered, but we would rather see some action. Triggering Article 50 would do it, but her reluctance in this matter suggests there is another strategy in play. The number of influential Remaindeers clamouring for a re-run is growing apace including the unholy Virgin, the disgraced former Labour leader and one, but not both, of the candidates for the current post. If by some perversion of democracy they succeed, then ComeWhatMay can say well I told them to deliver, it wasn’t my fault….

Carney has cut rates despite any indications that the economy needed a flu jab. He has said he won’t contemplate negative rates and bond markets around the world seem to have taken that message on board with government bond prices here and around the world, notably Japan, ticking upwards again.

US

In the US, consumer sentiment is up, most likely on the back of rising house prices. This, despite the fact that year on year house sales are falling again. In the US you can find a statistic to prove, or disprove, almost anything! The serious electioneering is about to start but don’t expect the debate to be “serious”. Rather like the Brexit episode over here, expect Project Fear to be used by both sides, but mostly by the main stream media at the behest of the vested interests including, but not exclusively, the military, big business, big egos and the small minded.

If the Fed raise rates at their next meeting it will be the first time in their history they will have done so this close to an election. Barney Frank, a staunch supporter of Clinton and one of the co-sponsors of the Dodd/Frank Wall Street Reform and Consumer Protection Act (a curiously named piece of legislation given that Wall Street doesn’t appear reformed by any stretch of the imagination and the consumer is still on the ropes) has already told Yellen that it would be a mistake to risk destabilising markets and perhaps the broader economy a few weeks before Election Day. He is obviously only too aware that falling stock markets are a reliable indicator of change of party allegiance at the White House.

Europe

The EU has not yet fully woken up to the fact that Brexit is more of a problem for them than for the UK, and they are in no mood to see Article 50 invoked either. We are a significant trading partner and the already fragile European economies would suffer further if we were to source more of our imports elsewhere. Despite all the ECB’s attempts, inflation remains stubbornly low and, as of now, are heading lower; that wouldn’t have anything to do with negative interest rates would it?!

Japan

With the odds on a September rate rise improving, the US dollar has strengthened and as a corollary the yen has weakened, which is just what the policy wonks in Japan have been striving towards. The Nikkei is back testing the 17,000 level again.

Abe is still struggling to get the third arrow out of his quiver and the cynics are saying that he has in fact shot the first arrow (massive QE) three times! Unless the yen continues to weaken from here the outlook for the equity market has weakened considerably although on a relative valuation basis parts of the market are seriously cheap.

Asia Pacific and Emerging Markets

China’s slowdown is still a concern as is the ongoing devaluation that is exporting deflation to the rest of the world. The Chinese market is still being propped up by the government, but other Asia and Emerging markets have generally done a lot better; India has been especially strong.

Another market that has been surprisingly resilient has been Brazil, which in local currency terms is up 50% since January. Dilma Rouseff has now been impeached for election rigging, and whilst the new president, Michael Temer, “has a lot of wood to cut” the Brazilian economy is showing signs of improving.

Commodities

The oil price continues to struggle to get back above $50 on any consistent basis and despite pumping for all its worth, the Saudis are finding their economy under considerable pressure. Non-oil GDP is now falling on a year on year basis. Their cost of production is sub $20. In the North Sea oil doesn’t make a penny under $52 a barrel; a message there for the SNP perhaps…

The precious metals have had a stupendous run since January, despite being the most hated asset class back then. We are now seeing a consolidation phase and prices may retrench below $1300 for gold and $18 for silver. They are still one of the best insurance policies against central bank induced currency debasement.

And last but not least…Bonds

The yield on the 10 year JGB (Japanese Government Bond) is still negative, but we have a seen an upward surge over the last month following the BoJ’s tacit admission that maybe, just maybe, QE doesn’t work. The implication being that the JGB buying programme will cease. They own more than 50% of the market anyway so it would have had to have stopped at some stage! Other markets around the world have followed suit, but in a much more tentative fashion.

The key bell weather to watch is the 30 year US Treasury. A move back above 3.2% would herald a change in a very long running trend.

Summary

The central banks have, as expected, stepped up to the plate. Whether they can keep the plates spinning longer term remains to be seen and we can be sure that the UK’s Brexit saga has many more twists and turns to keep the markets preoccupied. Chinese yuan devaluation and the outcome of the US elections all add to the uncertainty.

We observe closely for signs of success…or failure.

  • Government bonds still look expensive despite deflation yet again being discussed as the bigger problem. Short term the trend in rates is upwards.
  • Spreads on corporate bonds are still tight. They are not cheap either and default risk can only rise from here, making high yield potentially less attractive. Is the yield premium adequate? There is also significant concern over liquidity risk despite central bank and regulatory stress testing.
  • Western equity markets may be about to start a long expected correction although a new high in the S&P remains a possibility, but it could be the last roll of the dice.
  • Property remains attractive as a real asset offering a higher spread against most fixed interest markets, but the UK market is effectively closed for the time being as many funds have been gated due to large redemptions.
  • European markets are in a state of flux. Conventional wisdom says that ECB QE should be beneficial for financial assets, but the Greek issue is yet to be fully resolved and Spain is still struggling to form a government. The elephants in the room are now the banks. However, it is unlikely that the ECB would allow a full blown crisis. The Nikkei index has risen as the yen weakens, but needs a new high above 17-18,000 to remain viable. Emerging and Asia Pacific markets are not overly expensive now, but will continue to be volatile and affected by dollar strength and Chinese economic weakness.
  • Central banks are committed to supporting the markets, but their aura of invincibility is beginning to slip. Ultra-loose monetary policy will create inflation eventually, but currently deflation is still an issue and it is getting harder to see where anything other than tepid growth is going to come from; even China is succumbing to the malaise.
  • Gold should continue to rise but is currently overbought and a correction is underway.
  • Commodities generally will not see a sustained trend change until the global economy shows more signs of life although in the short term expect geopolitically induced rallies. Oil at $50 means shale producers will start turning on the pumps again which will increase supply and keep the upside price in check.

Clive Hale – September 1st 2016

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When? August 22nd 2016

When?

“The art of financiering consists principally in multiplying and confusing accounts, till, at last, no one has courage to undertake an examination of them.” William Cobbett “The Budget” 1805

“I imagine that Ben Bernanke, Mario Draghi and Haruhiko Kuroda all stay awake at night imagining ways to force negative rates on savers. But the larger question, beyond a sociopathic desire to control others in service of one’s own intellectual dogma, is why anyone would advocate such policies. I can’t emphasize strongly enough that there is no economic evidence that activist monetary intervention has materially improved economic performance in recent years.” John Hussman 2016

The effects of quantitative easing may be diminishing compared with a few years ago, but “what we should say is, ‘Effects are diminishing, so let’s do more.’ This is the spirit of Abenomics.” Etsuro Honda, an advisor to Japanese prime minister Shinzo Abe

William Cobbett would no doubt be amazed at the level of “multiplying and confusing” that is practised by the central banks and the general banking system at large. Large perhaps not being an adequate description of say the Fed’s balance sheet, investment banks’ derivatives’ books or unacknowledged bank bad debt all of which are up there in the trillions.

John Hussman has dared suggest that the emperor has no clothes. It is no mere suggestion, but fact, that quantitative easing, negative interest rates, deployment of helicopters (do they know how expensive it is to fly helicopters?!) and other sundry methods, designed on the back of a fag (cigarette to our US readers) packet, to normalise economies, has failed. Unless of course your goal is to inflate the stock and bond markets to levels of over valuation that will ultimately lead to a crash, which of course our heroic masters of the economic universe will fail to see coming and will have very little ammo left to do anything about.

The question is of course, “When?” With any degree of accuracy, it is an impossible question to answer. Etsurosan is typical of his breed confidently predicting that more of the same will work…eventually – beatings will continue until moral improves etc etc. Japan has been subjected to 25 years of monetary experimentation and has little, and that’s being generous, to show for it. GDP is barely above 1991 levels and the mean growth rate is less than 1%. The Nikkei was over 22,000 and interest rates were 6%; today they are 16,500 and minus 0.1%. The only thing to have gone up is the BoJ’s balance sheet from under Yen 1 trillion to over Yen 4 trillion and, as if that weren’t enough, they want to do more!

Super Mario, the president of the ECB, not to be confused with Shinzo Abe the PM of Japan, who donned the Nintendo “suit” at the Rio closing ceremony, cannot sport any better credentials. Doing whatever it takes has produced some growth in the Club Med economies, but given how low growth had got down to, that would have happened anyway. The economies of Germany and France are struggling to get any meaningful traction 7 years into the “recovery” phase.

Janet Yellen & Co seem to be afraid of their own shadows, having raised rates last December and then blinked. The data in the US is just as patchy as in Europe with the numbers from the Bureau of Labor Statistics about as believable as Team GB coming second in the medal table – no wait – but you get my gist. Will they raise rates again this year? Probably, maybe, who knows?

Carney has cut rates at the BoE in the belief that Brexit has unleashed Armageddon, as the Remaindeers would have you believe. Brexit has been blamed for anything and everything. The only worry in this corner is that it won’t happen at all. ComeWhatMay seems more than reluctant to invoke Article 50 and is undoubtedly getting support from across the pond, where their European “diplomatic initiative” would be in tatters if we do actually leave, with the threat of France and Italy following suit.

The central banks can keep this Ponzi scheme going for a lot longer than you or I can remain solvent by betting against them, but ultimately it is their solvency that is the issue. Whilst they continue to make things as complicated for folk to understand as Cobbett implied, maintain the narrative that “they have got your back” and “muddle through” as John Mauldin is wont to say, then they will hang on to the illusion of control.

However, when, not if, a true black swan event comes out of left field, then the bond, equity and real estate markets will find that they have been priced for perfection and the down draught will be a sight to behold. Whilst we wait for the dénouement, where do we put our hard earned cash.

Winning by not losing is a maxim that springs to mind as being eminently useful for this predicament in which we find ourselves. If you want to invest in negatively yielding debt, feel free; free of any return that is. Equity prices have been bid up by corporate management borrowing at insanely low rates and buying back company stock, as opposed to investing in research and development, which is what the central banks want them to do. They would have done, had interest rates been at meaningful levels, where improving efficiency was the better way to earnings growth, rather than the artificial accounting sleight of hand we have at present. Other than deep value equity plays, this market, too, is for the birds.

Real estate has been one of the bond proxy’s for those seeking yield, which is pretty much all of us, but reality is returning to real estate. The great residential property boom looks to be ending with significant corrections in Vancouver and parts of Oz. London has maintained some degree of order as a weaker pound has made it relatively attractive for foreign buyers, but the sheer amount of new properties going up makes parts of the metropolis look like China New Town. Commercial property is all fine, allegedly, but the market place is changing rapidly as the internet of things changes our shopping and working habits. Retail, office and industrial property ownership is going through a significant sea change; not everyone will come out of this on the right side.

So if not there, where? Hedge funds have been getting a bad press as they have not performed as well as pure equity funds. Guess what? That’s what they do when equity markets go on a tear! The FCA has launched an inquiry into whether they represent value for money, so folk will in all probability be put off just at the time when they come back into their own. Remember the reasons for buying an asset; these funds, and trend followers (CTA funds as they used to be known) in particular, are insurance policies against market instability. If the monetary base continues to be compromised by the central banks then the only real currency is another must; gold of course. There are still pockets of the equity markets where deep value can be found, but if you have to hold equities in general make sure you build in some optionality into your portfolios.

Where might this elusive black swan appear? China? Nobody except Kyle Bass thinks they will devalue the yuan in a rush, but will take their time as is their nature. Kyle is a Texan and branded by all those who “know better” as the archetypal Stetson wearing article. Those who really do know better and know the man himself realise that his admonitions are based on logic and experience that only a few possess and have more than a fair chance of happening; sooner rather than later. The US? If Hilary wins it will be the same old same as, but a Trump in the White House could have more unintended consequences than the fragile infrastructure can bear. Europe? We have a plethora of insolvent banks in the EU. Draghi can probably fix the Italian Job, but any fall out across France and Germany might be impossible to contain. There could be more defections from the EU. Le Pen is gearing up the French right and Renzi, the Italian PM is nearly as unpopular as Hollande. When the natives get restless things tend to change pretty fast. And we haven’t even mentioned Russia, the Ukraine, Syria and many more potential bear traps besides.

We truly live in interesting times do we not?

Clive Hale –The View from the Bridge – August 23rd 2016

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