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.


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.


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.


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.


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?!


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.


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.


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


“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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