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.
Central banks are complicit in the illusion – understanding the brutal reality of what their monetary experimentation has led to: a world where the most sensible corporate investment is buying back stock, and stock markets can’t be allowed to fall, because such a collapse in sentiment would utterly undo the little financial good zero interest rates created. Ouch.. “Its a rat trap baby, and you been caught!”
My only recommendation would be in such a mad, mad, mad world… fill yet boots….
There is no point in worrying today about stuff you will have to worry about tomorrow: if and when the illusion ends, you will have zero chance of being able to exit, because concurrent with insane monetary policy experimentation and distortion, global regulators decided they’d better get in on the act and thus they stepped in to regulate markets to prevent a repeat of 2008. So they introduced new rules and killed liquidity, made hedging irrelevant, and turned markets from being vibrant centres of wealth creation into despondent job creation schemes for compliance officers.
THE FUTURE OF FINANCE AND INVESTMENT
I was up in Edinburgh earlier this week, at Heriot-Watt University’s Centre for Finance and Investment. I’m hoping to become an advisor to the centre. I’d see my mission as altering today’s graduate and post-graduate students to the dangers of regulation, monetary experimentation, but, when all around in financial assets is distorted, especially the opportunities inherent in my alternative assets investments! Get them young I say.. give me the boys and girls today and I shall give you tomorrow’s CIOs!
On of the areas we discussed were ideas for research projects – and that’s particularly interesting; for instance turning around my long held belief that firms with large cash piles tend to underperform because their management lack the imagination to deploy money effectively – empirical research demonstrates they’ve actually outperformed in recent years.
Discussing research ideas with the Centre’s advisory board through up lots of fascinating ideas, concepts and approaches. Topics ranged across the board – from the underperformance of Absolute Return Funds, Corporate Governance and Behavioural Bias, The Woodford Effect, Private Equity distortions, liquidity and a host of other stuff including the promotion of gender equality across finance.
Very happy to hear ideas from readers on areas for academic research – I’ll feed the sensible ones to the centre.
BOEING – A MORE FUNDAMENTAL ISSUE?
A few weeks ago Boeing stock tumbled in the wake of the second B737 MAX crash. Then the price stabilised, waiting for the investigative reports to come in. Markets took the view the situation would quickly be fixed, the production run of over 5000 aircraft would continue, and that the 350 B-737 Max aircraft parked around the planet would be allowed to fly again.
Easier this week Boeing released a software update to the suspect MCAS stall prevention system. Yesterday officials investigating the Ethiopia crash confirmed it was broadly similar to the earlier Lion Air disaster: the MCAS system activated. The Ethiopian Airlines flight crashed soon after. 346 people died in the two related disasters.