Broomer's Blog

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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China – cracked or crocked?

The FT reported recently that Charlene Chu, a highly regarded ex Fitch analyst, estimates that bad debts in China could reach $7.6 trillion. This analysis is based on the surge of lending made during 08/09 and from extrapolating experience of similar credit booms in other economies. Once the boom turns to bust, bad debt ratios have peaked at an average of 34%, well above the 5.3% of loans currently being officially recorded as non-performing or in trouble within China. It would take a hard landing to sour loans to this extent, nevertheless anything like $7.6trillion represents a gigantic number. To put this number into perspective, US and European banks lost in the region of $3trillion during the financial crisis. Concerns about the health of the Chinese banking system have been circulating for many years. How can so much money have been deployed so quickly, so effectively? How big are the problems hidden in the shadows, what is discounted in current market valuations and what steps have the Chinese auth ...

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A Thought Worthy of Halloween

Successive UK governments have been driving down corporation tax, Alistair Darling started the trend by reducing the rate by 2%, to 28%, in 2008 and George Osborne was a keen advocate of lower corporation tax during his tenure. Since when the rate has been progressively cut to 19%. This has been sold to the electorate as showing the world that the "UK is open for business".

Interestingly, corporation tax revenues have surged to all time records and while it might be tempting to suggest this is something to do with the voodoo economics behind the Laffer Curve, there are probably more important factors at work. Corporate profitability is currently high with the tax take swelled by the Brexit induced fall in corporate investment and foreign income increasing in value.

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Outlook September 2017

Volatility has collapsed over the summer months with the standard deviation of returns on the S&P 500 running at well below half the normal level. This is not to say nothing has happened. Brexit negotiations are proceeding painfully slowly. This is scarcely a surprise but political commentators and insiders are becoming disheartened by the calibre of many of those in the Cabinet. Such are the complexities of the task at hand, it would tax the very ablest. Worryingly, many of the current crop of British politicians are firmly from the second division.

Events in the Korean peninsula are serious but we should not forget that North Korea has been a nuclear nation for almost a decade. However unpleasant, the world needs to learn to live with this threat. If America had any good means to deter North Korea from pursuing its nuclear programme, it would have surely used them already. The biggest risk we face is from an overreaction, but as I wrote here, even ratcheting up the war of words is counterproductive. The DKK has an agenda and this clearly does not involve thermonuclear war. Even an impetuous set of sanctions could do far more to damage international trade than this tin pot country warrants. Let us not forget that Kim Jong Un spends less on feeding his people than Americans lavish on their pets.

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This Time It’s Different

It is often said that the most dangerous words in investment are that 'this time it's different'. The phrase resonates through stockmarket history as experts pontificated that old rules of valuation no longer apply and the current crisis/situation bears little similarity with what occurred in the past. The words were widely echoed during the 1990s tech boom, as they were during the depths of the bear market of 2008. Since the days when it was first formally identified by Graham & Dodd, the value philosophy has proved its worth and presented investors with one of the few reliable ways to earn super normal returns, since valuation levels typically revert to the mean. Indeed such is our respect for its power, it plays a principal role in Square Mile's tactical asset allocation process.

Reasoning that things are different this time is typically an expensive mistake. So, I almost fell off my chair the other day when I read that no less an authority than Jeremy Grantham was postulating that valuations may be reaching a new, higher plateau and that "it can be very dangerous indeed to assume that things are never different".

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Trump is going to end up with kimchi on his face

Donald Trump really does not need anyone's help to make him look foolish; he seems perfectly capable of doing this all by himself. Over recent weeks, I have been following his comments on North Korea with disdain and North Korean President, Kim Jong-un, must be relishing the propaganda victories that Trump has continually presented him.

My wife was born in Seoul, so I tend to follow events on the Korean peninsula with more interest than many. Events north of the border are often disturbing, sometimes weird and occasionally comical. This Telegraph report about Kim Jong-un's father provides some flavour to this. The people of the South are also incredibly proud of their small nation. Koreans are typically a passionate people and are sometimes referred to as being the Italians of Asia. If you are ever in search of an entertaining evening, I would strongly recommend taking a drink in a Korean bar when the national football team is playing.

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Is the Don Trying to Get a 90 year old Granny Pregnant?

Trump has already developed a reputation for using statistics like a drunk uses a lamp post - for support rather than for illumination. During the campaign trail, he brazenly talked about lifting the economic growth rate to 4% and even 5%. More recently the White House has produced a budget proposal incorporating a 3% p.a. growth rate for the next 10 years, which sounds a little more plausible but still ambitious when compared to history.

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Outlook June 2017

Markets have made strong upwards progress so far in the year, though unlike in prior years earnings growth is coming through sufficiently strong to keep multiples stable. This is providing some comfort to us though we do wonder how long this EPS spurt can persist. Economic growth is unexciting but at least it is steady and broadly based. Recent data suggests that the US economy may be softening a tad but this is being offset by the pick up in Europe. Equity market valuations remain expensive but are unlikely to come under severe threat whilst conditions remain benign. This does not preclude the possibility of a summer correction and after the recent run, some back filling is now overdue.

We are baffled how interest rates can be maintained at negligible levels as the spare capacity created by the financial crisis appears close to spent. Experience tells us that we should be seeing wage pressure with inflation following on at its heels, though there is scant evidence of this happening. The slow down in productivity is another mystery and although arguably this predates the financial crisis, the scars created by the crisis may have deepened the trend.

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Filling the Bath in the Dark

NAIRU is one of those nasty looking acronym beloved by economists. Typically, the concept works very well in theory but has an unfortunate tendency to breakdown as soon as you apply it in the real world. It kinda makes sense that if there is a sufficiently large pool of unused labour in the economy, wage inflation will remain under wraps. Only once that spare capacity is used up do workers have the power to claim higher wages which are in turn passed on in higher prices.

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