The madness of crowds – 11th December 2017

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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