This is the day the UK isn’t exiting Europe. Surprised? Not really.
Think I’ll try something different this morning – a review of the week touching on some of the key themes we should be thinking about.. Let me know what you think..
But firstly let me apologise for the lack of porridge this week. On Wednesday it was being unable to find anywhere to sit with a computer in London City Airport. Yesterday it was courtesy of Flybe from Edinburgh – I’d like to thank them for leaving us standing in a cold bus while they tried to rustle up a crew. The BA flight took off on time, although I wonder if it went to Duesseldorf?
Let me start with a rant:
Bond Yields and the END OF ABSALOOTLEY EVERYTHING…
While everyone is panicking about US curve inversion and the possibility it is signalling recession, is the real issue even simpler and more obvious? Should we be worried about tumbling global bond yields? Aside from it being impossible for funds to meet long term liabilities, what’s not to like about lower for longer? Actually – quite a lot. Even the ECB has noticed zero bond yields haven’t exactly stimulated growth and jobs across Europe and done nothing in terms of stimulating inflation.
Equities seem blithely unconcerned despite all the cack about trade-wars, rising political anarchy, and a distinct feel this business cycle is likely to wind-down into a slough of earnings downgrades and suchlike unpleasantness. The smart money is not worried, because they understand the truth – there is nothing to worry about BECAUSE A STOCK MARKET MELTDOWN IS ACTUALLY IMPOSSIBLE!
Apparently the taxi firm that isn’t Uber is going to IPO at $72 bln, a phenomenal $25 bln valauation, beating all records as the company getting the most money for losing the most money ever… Why? (Clue the answer is not because Lyft and Uber will be an unbeatable oligopoly – they will probably eat each other, and I have 4 different taxi apps on my phone and none are UBER!)
Nope. The reason is because when bond yields are zero, then stocks become more attractive because they not only offer the potential of dividend yields but also the HOPE of stock price upside. As a result, even the most fantastical, utterly hat-stand, loss-making off the wall crazy as a Mad Fox, Unicorn proposition looks attractive if/when the stock price is likely to rise… (But, remember: Hope is never a good strategy.)
Forget reality – in today’s world equities are all and only about the stock price. And you can square that equation when Global Central Banks can’t afford to admit all their monetary experimentation has been about as much use as tea strainer bailing on the Titanic. The reality is the non-normalisation of monetary policy leaves every single fundamental thing I thought I understood about markets; valuations, yields, risks and returns to be wrong. Utterly.