Broomer's Blog

Redefining the term ‘Investment’

If I offered to borrow money from you with no interest payments and promised to pay you back less than I borrowed in 10 years time, I guess that you would tell me where to go. I suppose you might be prepared to make such a loan to a family member or possibly a very close friend, but you certainly wouldn't consider it an investment.

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Outlook June 2019

Investors continue to fret about the growth outlook. The impact of the trade war is beginning to be felt and the recent escalation, caused by Trump's move to lift Chinese tariffs to 25%, compounds the issue. Even though economists predict that the economic effects of the dispute should be mild, the pain is appearing across important sectors of the S&P 500. While the first quarter US GDP print was strong at 3.2%, this may have been flattered by a low deflator reflecting the delayed response to the collapse in the oil price in Q4. Remember, the economy is still supposed to be benefitting from the effects of last year's stimulative package and this will soon start to wane. Some of the leading indicators such as the PMI/ISM have weakened (albeit from high levels) although consumer confidence remains buoyant.

Today's supply chains are complex and international, industrial businesses in places like Japan and Germany have felt the consequences of the US-China trade dispute. For instance, the German manufacturing PMI slumped to 44.1 in May, a fifth consecutive month that the index has indicated contraction. Global freight indices reflect this slowdown in trade.

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Looking Back at the Credit Crisis and the 1,2,3 Banking Model

I am in the process of transferring into the office some of my investment related books. Within the pile, I came across a couple of books which I had purposely set aside unread. Having worked at a bank during the credit crisis, I had little desire to revisit those traumatic days through Andrew Ross Sorkin's 'Too Big to Fail' and Greg Zuckerman's 'The Greatest Trade Ever'. Ten years on, I thought that I was finally composed enough to read them. Of the two, Sorkin's is the better, but Zuckerman's is a useful complement by describing the other side of the trade. Sorkin's book is a gripping read, but even now I found it as soothing as a Stephen King horror story and stressful to recount what happened.

I came away from the books with some interesting observations. The crisis was very slow moving in the early stages, many people recognised that something was seriously afoot but it took a long while for the storm to build up to its full force. Subsequent to the Bear Sterns/BNP hedge fund collapse in 2007, bids for sub-prime paper essentially evaporated. Yet prices remained high as no holders of the dodgy paper dared to sell. When the underlying fundamentals of illiquid assets change, it can take a long time to discover what the true price is. Especially when the counterparty with the power has a strong incentive to mask the news.

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Outlook March 2019

The recovery in markets has been remarkable. Having had its worst December since the Great Depression, the US market had its best January since 1987. The volt face by the US Federal Reserve has lifted the spectre of a continued programme of interest rate increases and the chatter on the Street is that even QT may be curtailed towards the end of the year. Despite the size of Trump's stimulative package, the economy appears to have been acutely sensitive to tightening financial conditions and the trade war is acting to complicate matters further.

The precipitous falls in economic numbers during Q4 appear to be stabilising and some of the more forward looking indicators have bounced, alleviating fears of recession. Having got perilously close, the Treasury yield curve is now some distance from inverting [although the overnight dovish Fed announcement has flattened the curve once again]. All this has allowed the VIX volatility index to return to more relaxed levels.

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Geek Squawk: Understanding the Numbers

The quality of economic releases varies from nation to nation but the numbers can have a pronounced impact on markets. The standard of information from the UK's ONS is not bad by European standards, although it has faced criticism over recent years following its partial relocation to South Wales. As might be expected, standards in emerging markets are lower and this is something of an issue for investors as China takes on a pivotal role in the global economy.

Fortunately, the world's largest economy, the US, has a reputation for high quality economic statistics, produced both by the government and non-government organisations. Indeed, such is the dizzying wealth of reports, it is not always easy to identify the most important ones, particularly with many of today's media organisations increasingly focused on capturing eyeballs rather than imparting useful knowledge.

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When It’s That Time of the Month Again

I have the pleasure of sitting next to Charles Hovenden, who has an excellent record of running absolute return products. Charles is a delightful colleague, engaging, thoughtful and entertaining in equal measure. However, towards the end of each month he becomes more withdrawn, anxious and well let's say just a bit crotchety.

2018 was not a good one for absolute return strategies and for many active managers in general, as markets became increasingly driven by momentum. This is not unusual in a mature bull market but nevertheless it makes it no less difficult to come to terms with. Clients rarely recognise such subtleties, elevating pressures as reporting periods approach and little wonder that portfolio manager tension builds towards the end of the month.

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Outlook January 2019

"Britain can be cancelled, top EU lawyer says" so read a headline on the CNN website. It certainly feels like it. A divided nation, a crippled Government and a Leader of the Opposition who transparently covets investors' hard earned savings. The nation is crying out for strong leadership but few of our current crop of politicians come close and Parliament merely mirrors the divisions across the nation. As the old joke advises, you really don't want to start from here. It is perhaps not a surprise therefore that this has been the worst year for UK financial markets since the Great Recession in 2008 and the FTSE 100 is back down to a level first seen in 1999. Thankfully, we have positioned our portfolios with limited exposure to equities, particularly in the UK and this has helped provide some insulation for our portfolios.

Perversely, the principal cause of the markets' woes was not UK related but more global in nature and, in particular, American. Stock markets began to feel the chill draft of the US 10 year Treasury bond topping 3.2% in late September, triggering the global market correction that began in October. At the time, it appeared to be a replay of February's valuation recalibration in response to a higher discount rate. However, many weeks later, nerves have yet to settle despite Treasury prices rallying; the 10 year note is now yielding below 2.9%. Unlike in February, the hitherto market leaders have been pummelled and the ecommerce giants seem have lost their air of invincibility. This is despite Q3 earnings leaping by 24% and President Trump's tax cuts accounting for only part of this bounty.

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One of the Few Promises that I Shall Make

I don't make many promises, but one promise I regularly make to clients is that I will not be calling the top or bottom of markets with accuracy. Every rule has an exception and I seem to have fluked calling the peak of the Bitcoin bubble with timing that can only be described as exquisite. I blogged in early December last year as the price rise turned parabolic about my fears for this market. This warning turned out to be within a couple of weeks of the top of the Bitcoin market. The price is currently trading around $5,500, a fall of 70% from the peak.

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It's not Friday 13th but...

Financial advisers are understandably running scared of the conventional gilt market. Instead many have turned to the indexed linked market seeking safety from growing global inflationary risks. For me this is liking watching the victims of a horror film trying to scramble away only to place themselves in ever greater mortal danger. The index linked gilt market has a scary duration that leaves it extraordinarily sensitive to changes in real interest rates.

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A Treasure in Treasuries

Government bonds come close to the ideal complement for equities in a balanced portfolio. They provide both a steady income and the potential for capital appreciation at times when equities might be stumbling. Indeed few, if any, other assets provide this sort of diversification benefit. However, with gilts currently trading on such paltry yields, managers of balanced portfolios have been left in a quandary, since UK government bonds now provide little in the way of income and scant potential for capital return if the economy slumps.

We estimate that 10 year gilt yields need to be close to 2% to ensure that they will buttress a portfolio meaningfully in the event of a recession. Of course, we could look to the more sensitive longer dated issues, however, these bonds are extremely vulnerable to any revival in inflation and so compounds the asymmetric risks inherent in such rich valuations.

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