Broomer's Blog

How the Global Financial System is plumbed and the strains that it is under

We have seen some strange moves in financial markets over the last two weeks. The dollar has slumped, then soared. Governments have basically underwritten corporate credits yet credit spreads have widened out to levels not seen since the GFC. Gold prices tumbled by 10% and are now climbing once again. Government bond prices have swung wildly, gilt prices slumped by over 10% at one stage. What is going on? Below are 10 observations: 1. Adverts: Watching TV over the weekend, it is almost comical to watch adverts for cruise holidays and to see offers for two frozen pizzas for £5 – as if supermarkets have any left in stock. However, this underlines how rapidly the situation is moving. This crisis has not developed in weeks, but in days. The global financial system is struggling to deal with the speed and magnitude of the changes.. 2. Loo rolls: Are we not using the same amount? Admittedly wholesale supplies (offices, restaurants etc) now need to be redirected through the retail system and t ...

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Coronavirus: how long will the disruption last?

Last week, global stock markets endured their worst trading since the 1987 crash. On Thursday alone, the FTSE 100 fell by 10% and the index has slumped by over 31% so far this year. Is this as bad as 2008? Certainly, the speed of the market adjustment is beginning to feel like the nadir of that crisis. However, in distance travelled global markets are only off 20-30% compared to the 40-45% falls in ’08. What is very different is that the financial system is not at risk. The main costs of this outbreak will fall upon governments and business will face a period of disruption. The key question is how long this period of disruption will last and markets are likely to become more settled once this is determined. Action against the outbreak is being moved to one of managing and slowing rather than elimination. Isolating and suppressing outbreaks involves very significant economic costs that largely fall on businesses. Managing and mitigating will also have costs but these will be largely borne by what is ...

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Outlook March 2020

It is becoming increasingly apparent that this virus, while serious, is not as deadly as some of the early figures suggested, as many cases seem to have gone unreported. Across the population the death rate is probably going to be around 1% for those infected. Whilst the haunting news of the death of the 34-year-old Li Wenliang, the whistleblowing doctor from Wuhan sticks vividly in our minds, this seems thankfully an exceptional case. This is a disease that predominantly takes the old and the sick. Though all age groups remain at risk, and many will require hospital treatment, 99% will pull through. The Koreans have been assiduous in their testing and identifying all those who have the virus. I am no virologist, but looking at the mortality rates there, I reckon someone in my age group (I turn 52 on Thursday) has approximately the same risk as dying from Covid-19 as any other disease or accident that might befall me over the course of the coming year. According to the website, UK men in the ...

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Coronavirus: markets taking the hit?

Stock markets around the world have plunged earlier this week as the coronavirus spreads. Over the weekend, large parts of Italy's industrial heartland were placed in quarantine and the oil price has slumped by 20%. The FTSE 100 has fallen by 6% on Monday morning. The virus has now infected people in over 50 countries and appears to be becoming established in several places. There have been successes in constraining its spread, however. A few weeks ago, new cases in China were measured in thousands each day. Now they are measured in the tens (44 to be precise). It would appear to be over optimistic to hope that the disease can be eliminated, and when outbreaks occur, the spread can be very rapid. This is increasingly looking like something that we must learn to live with. We have been a lucky generation. Our forefathers had to handle a host of epidemics such as smallpox, diphtheria, and cholera. Society continued then as it will do today. Covid-19 is nas ...

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Coronavirus: is the market’s reaction overblown?

Action to contain the new coronavirus, involving travel restrictions and quarantine areas, is economically damaging. Recent falls in stock market reflect this. We do not have full details of the disease and its severity but it is becoming increasingly clear that it is most dangerous to the elderly and infirm. Unusually, young children do not appear to be particularly susceptible and reported infections among the young appear surprisingly low. We have no wish to dismiss the human tragedy involved, but the groups most at threat are largely economically inactive. Health care services will come under pressure and care costs will be high, however, this burden will largely fall on the public sector. Taxes could consequently rise or, more likely, public borrowing will increase. Global central banks have cut interest rates to support the economy. This should help offset the damage wrought to supply chains and demand. Economists’ estimates of the costs of the virus range anywhere between 0.5% and 10% of G ...

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Coronavirus in perspective

The expansion of the coronavirus outbreak is frightening but needs to be placed into perspective. So far, there have been 3,000 cases out of a population of 6,000,000,000 if we exclude China. There will be further cases, but the disease appears to be containable. Some nations, including poor ones, have been quick to isolate those infected and nip their outbreak in the bud. Even China, with nearly 80,000 recorded cases, appears to be winning its battle as the number of new infections falls. For the moment, we have confidence that other nations such as South Korea and Italy will take the steps necessary to isolate the disease. Sadly, we are less sure about Iran where the authorities have been in denial. The country's links to Afghanistan and Syria seem to leave a high probability that the virus will find a base in the Middle East (though the arrival of summer could stem the rate of infection). If established in the Middle East, outbreaks will continue to pop up around the world as a consequence. The human tr ...

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I attended a presentation by a firm last week, considering asset allocation in a low yield environment. The firm in question is a US based quant shop (they style themselves as ‘systematic investors’), who employ some highly regarded market practitioners as well as banks of PhDs. They run a range of strategies including risk parity.

The presentation was elegantly crafted and engaging. Its central theme was that bonds still have a full role to play as diversifiers in balanced portfolios and that investors should continue to rely upon capital values to appreciate despite the paltry yields on offer. This argument is almost entirely reliant on the assumption that there is no lower bound to interest rates.

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Outlook December 2019

Recession risk remains heightened though the odds of one forming have dropped as the economic data shows signs of stabilising. The consumer is holding up and index of Leading Economic Indicators may be about to turn up as base effects kick in. PMIs remain soft, particularly in manufacturing but at least trajectory is less worrying. The yield curve has normalised but this provides no comfort – it always has done ahead of a US recession, which has typically lagged an inversion trough by12-18months. We can only wait with fingers crossed.

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Thoughts on Election Results

As you will be aware, the Conservative Party won the election by a large majority. Sterling has strengthened materially in the foreign exchange markets this morning and the UK stock market has risen. Investors are relieved that Corbyn and his Marxist agenda has been roundly rejected by the electorate. Markets also benefited from the overnight news that the US appears close to agreeing a 'phase one' trade agreement with China, stock markets in the Far East and in Europe have also risen this morning.

At last, the UK has a strong government with a clear mandate to get Brexit done. We expect the UK to leave the EU by 31st January, though the transitionary period will probably have to be extended beyond December 2020. We, and other investors, are now considering whether this brings sufficient certainty to justify lifting exposures to UK assets.

Trump Leaves a Foul Odour over the Korean Peninsular

I was saddened to hear the news over the weekend that the North Korean leadership had walked out of the nuclear programme talks. North Korean diplomats were left looking like statesmen in their press interview as they portrayed the US as being inflexible and not able to 'give up their old viewpoint and attitude'.

For those who have followed North Korean developments for years, the news is not a surprise. Throughout the period of 'friendship' between Trump and Jung Un Kim, North Korea has delivered nothing of worth. The "big" success was the Punggye-ri nuclear test site closure but there were indications that this decrepit base had already being scheduled for closure. Since when, the DPRK has continued with its missile testing programme, most recently, a successful launch from a submarine.

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