Broomer's Blog

Outlook June 2018

Geopolitical events invariably cast a shadow over markets, but it is relatively rare for them to manifest into something that affects the economic cycle. Events that alter the secular trend are even more exceptional but this is not to say that they don't happen. Thatcher's deregulation drive of the 1980s and FDR's 'New Deal' are examples and we suspect that Trumponomics may be another. Labelling Trump's policies as Trumponomics is unhelpful since it hints of an underpinning philosophy, which is entirely absent. Political direction rests with a demagogue.

For decades, economies and markets have quietly benefited from freer movement of goods, capital and labour. This is a trend that has not only been halted but sent into reverse. The direct impact of $20bn of tariff costs on a $20tr economy will be trivial but adds unwelcome grit to the running of the system. It will be interesting to observe voters' reaction as the repercussions are felt. Already, mid-Western soybean growers are grumbling as soon might the blue collar shoppers of Walmart where 70-80% of goods are sourced from China.

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The Beauty Parade

Keynes famously used an allegory of a beauty contest to describe how markets behave in the short term. He posed the question of how you should go about betting on the outcome of a beauty contest. To be successful, you should not bet on who you think is the most beautiful contestant but those who you think the judges will consider to be the most beautiful. His point is subtle but distinct.

James Montier at GMO recently highlighted some apparent inconsistencies in the results of the Merrill Lynch Fund Manager Survey. He points out that a significant majority of fund managers now believe the US market to be overvalued,

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Trump’s Follies

It is galling to watch Trump's vain posturing as he parades around the world. It is easy to push his buttons; he seems to offer an entire keyboard of them. We may have sympathy with Gary Cohn's rumoured assessment of the man as being 'dumb as shit' but he is the one in power and we are obliged to objectively consider the consequences of his actions.

The tax cuts have been a good thing for the stockmarket, though these are now wholly reflected in prices. The improbable device of soaking the rich with even more wealth will almost certainly spur economic growth, perhaps by as much as 0.7% this year and a further 1.5% in the following one according to the Economist. However, this comes at a monstrous cost to the government deficit which will hit nearly 6% by 2020. Through modern history, the deficit has never been greater outside a time of crisis. This leaves the economy in a vulnerable position and the government's finances risk spiralling out of control if something untoward occurs.

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Outlook March 2018

A correction is normally defined as a fall of between 10% and 20%, January's downturn just qualifies with the S&P falling by 10.1%. The adage that markets head higher on the escalator and come down in the elevator could scarcely be more apt. Note that the S&P 500 is leading the global rebound from February's lows and already the tech sector is breaking new ground.

This stumble took us back only to where we were in the autumn and it has done little more than blow off the market froth that had developed over recent weeks. If global markets begin to run again (as we suspect they might) this episode will quickly be forgotten. The catalyst for the fall was the US Treasury market where yields had surged 45 bps over the first six weeks of the year. They have since stabilised. One board member of the Federal Reserve described this episode as "small potatoes". We absolutely concur and fear that it is only a taster of might be to come.

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So, how are we doing?

Our Managed Portfolio Service has just passed through its three-year anniversary. While we do not look to compete principally on performance, I was curious to see how our portfolios have done in relation to others.

In the below chart, we have added the fee adjusted performance and volatility characteristics of our longest standing volatility managed portfolio range. These portfolios (highlighted in orange) can be compared to funds in the IA Volatility Managed sector.

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Crypto-currencies

The link to this article contains one of the best descriptions I have read of how the crypto currency market is structured and how it may develop. For those interested in the subject, I strongly recommend it.

I have not met with the authors nor for that matter with anyone from the Australian based Platinum Asset Management. The firm does not have any funds readily available for sale in the UK. The Platinum website has developed enormously over the years and the insights section is well named. The firm's principal, Kerr Nelson, was recommended to me by an old colleague and I have kept an eye on his views ever since.

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Pedalling Harder Just as the Brakes are Being Applied

My brother-in-law is a cycling fanatic. I asked him the other day if there is a technical term to describe pedalling while the brakes are being applied. He thought about this for a moment, before suggesting 'stupidity'.

It is almost 10 years since the financial crisis and the long drawn out recovery finally appears to be on a self-sustaining path. Monetary policy is gradually being tightened in the US, emergency rate cuts are being reversed in the UK and the ECB is dialling down its QE programme. With US unemployment just hovering above 4%, many monetary hawks will be thinking this is not before time.

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Pandora’s Box of UK Politics

Investing in developed markets rarely involves high levels of political risk; over the long term markets are driven by the path of corporate earnings. However, today UK investors need to contend with some major unknowns, the outcomes of which may well significantly impact returns.

The EU and UK have agreed that the first stage of the Brexit negotiations have been completed and talks can now proceed to discussions about trade. This has come at quite a cost for the UK Exchequer. The €50bn figure banded about is rather adjacent to the higher end estimates of what the divorce would cost. So much for the negotiating skills of Davis and May. On a gross basis, the separation cost will probably exceed €100bn, which puts the £350m per week on Boris's bus into perspective. It will take years before the NHS begins to see its bounty. Brexiters are right to be thinking how the hell the nation committed itself to such huge sums so surreptitiously.

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Outlook December 2017

While the mood in the main developed markets does not feel heated, professional investors are becoming optimistic and momentum in markets is clearly building. The world index's 13-successive months of positive gains is unprecedented, though this may be more to do with the dollar's weakness than investor euphoria (or Donald Trump for that matter). Money is pouring into more peripheral markets, for example: $450m for a da Vinci painting of doubtful provenance, Bitcoin (enough said), and a rampant IPO market in Hong Kong. The Fed may be reversing QE but let's not overlook that the BoJ and the ECB have pumped $2tr into the system over the last 12 months. These liquidity flows are now below the peak hit last year but the dollar's weakness and easier credit conditions have helped keep the monetary conditions very loose.

Trump is clearly a man where scant attention should be paid to what he says and it is far more productive to watch what he actually does. Thankfully, there is much less of the latter than the former. His more populist policies are confined to Twitter while actual policy has been more conventionally Republican - not a great surprise given a cabinet heavy in Goldman Sachs alumni and ex-Armed Forces Generals. The tax reform bill is making its tortuous way through Congress and it would appear that both Houses have agreed to reduce corporation tax to 20%. If ratified, this is great news for stockmarkets, however, from an economic perspective the need for a fiscal boost at this juncture is at best questionable.

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The Dangers of Charts

Many people in the investment industry are competitive people. Over the years, I've noticed several managers use selective information to justify their positioning and win over their audience. On the occasions when I've been clever enough to spot this, I tend to leave in a bit of a huff. All in all, I am more impressed by those seeking the truths of a situation rather than scoring points with potential clients.

Charts can be a useful tool for snake oil salesmen. In one of my earlier blogs, I set a quiz that taxes even the most experienced investment professionals. Sometimes interpreting charts is not quite as straightforward as it might appear.

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