Broomer's Blog

Outlook December 2016

In a presidential race that featured two of the most unpopular candidates in history, it was inevitable that someone appalling was going to be elected. However, Trump's victory has once again left the political pundits and financial markets astounded. Some of Trump's policies will act to stimulate the economy, others will fall flat. The trouble is that we don't have the detail and frankly even if we did, we still wouldn't be much wiser as to whether they will work. However, what we can be sure of is that Trump represents a shift in economic regime away from monetarism and towards more Reaganomic type policies. These will bring greater fiscal deficits and at a time when the Federal Reserve is already tightening monetary policy, risks inflation.

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The Rising Risks of Eurogeddon

As we feared in June, Brexit has spawned a clutch of ugly portmanteaus. The failure of the Italian referendum will see the back of the pro European Renzi. While Itaxit is not yet fully on the cards, support for the nationalist Five Star Movement is getting within shouting distance of the Democratic Party. The chart below details the depth of discontent in Italy with the euro, which is growing to worrying proportions.JPM Guide to the Markets Sept 2016Even through a thick veil of French arrogance, President Hollande has recognised the futility in attempting re-election with a popularity rating of a mere 4%. This at least opens the door to the Socialists to find a decent candidate to stand. The pollsters currently tip the conservatives to win in May but Marine Le Pen too has a firm base of support. If Le Pen does prevail, unlikely but not impossible according to the polls, expect to hear a great deal about Frexit through 2017.Outside of the larger EU nations, populist parties are also gaining momentum. We should ...

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Gilts Be Damned

BofA Merrill Lynch recently put out a note highlighting that interest rates have fallen to a 5,000 year low. Quite how they have computed this and precisely what the practical implications it has are not clear but I think the gist of their message is self evident.

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What are Trump's policies?

Donald Trump’s Contract with the American Voter 

Some ideas appear sensible, others fanciful and a number downright idiotic.

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Protesting with Trump

In the run up to polling day, one commentator rather cheekily suggested that a vote for Trump is actually a vote for Pence. This is on the basis that it will not be long before Trump is impeached and that his Vice President assumes the role. We would not be as glib as this but the overnight news is definitely a surprise. Trump has led a confusing campaign and it is not clear what he stands for but he has successfully convinced the majority of American electorate that he at least stands for them. I guess this is what democracy is all about.

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Gilt trackers: Getting Touchy Just At The Wrong Moment

Market cap based passive investment strategies are supported by theory and appear to function well in many equity markets. They also appear to work for fixed income markets but here their track records are shorter and not so well supported by logic. The market cap approach directs flows towards the largest borrowers who are not necessarily those best positioned to honour their obligations.

A further issue is that the technical aspects of the way bonds are priced can have profound implications for the risk characteristics of the indices. The impact of the secular fall in interest rates has impacted prices of longer dated gilts far more than those with a shorter time to maturity. Gilts are typically issued around the par price of 100. Today, there are two high coupon long dated gilt bonds which are priced at over 200. As a result, the weighting of these two issues in the index is approximately twice that of when they were originally issued. Falling bond yields pushes out the average duration of the index (ceteris paribus).

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Outlook Sept 2016

Investors this year should be as happy as a guest on the Jeremy Kyle Show, who has just found out that they are not the father. Unfortunately, the returns have not come about through corporate performance, rather a continued compression in yields as discounts rates fall ever lower. By some accounts, discount rates are now as low as they have been in the last 5,000 years. Since the credit crisis we have been in unchartered economic waters and we are now even moving off the known map for many financial markets. This leaves us totally reliant on valuation metrics to act as our compass and liquidity analysis as our sextant. Equity valuations can be justified only in relation to bonds, unfortunately we are struggling to see any way to defend bond valuations. The relaxed nature of the recent market run has left us uneasy and sensing that market participants are becoming complacent.

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Taking Tea with the Mad Hatter

Mad Hatter: Would you like a little more tea? 
Alice: Well, I haven't had any yet, so I can't very well take more. March Hare: Ah, you mean you can't very well take less. 
Mad Hatter: Yes. You can always take more than nothing.

Alice's Adventures in Wonderland, Lewis Carroll

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The Best Stockmarket Chart, Ever

Charles Minard’s 1869 graphic detailing Napoleon’s disastrous invasion of Russia in 1812 has been described as one of the “best statistical drawings ever created” - Charles Minard's Graphic 

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What happens when you criticise central bankers?

"It's [the Bundesbank] like cream, the more you whip it the harder it gets." Willem Duisenberg 1996

The Bundesbank has been eerily quiet over the last few months despite the growing popular discontent in Germany with European monetary policy.

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