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As you were

On a headline level, 2018 has started exactly as 2017 finished. Stocks are up, U.S. short term rates are up—but the dollar has traded heavy—and economic data continue to tell a story of a synchronised upturn in global growth. The bears are furious, or perhaps just confused. Hussman recently published a prepper’s guide to a hypervalued market. And value investor extraordinaire—and famed bear—Jeremy Grantham from GMO invokes the “highest-priced markets in US history,” but also proclaims that we’re now in the “melt-up phase” of the bull market. I am all for holding opposing views at the same time, but markets demand a view and a position. So which is it Mr. Grantham? Long, short, or flat? I am not holding my breath for an answer. I have long since left the extremes behind. Picture a spectrum with Hussman and GMO at one end, and the wet-behind-the-ears trader, who have never experienced a sizeable drawdown in Spoos, at the other end. Hint: You want to be somewhere in between.

Separating signal from noise is an important skill in this game, and markets currently are throwing a number of curve balls at investors. What better way to kick off 2018 than by highlighting the ones that matter.

China, Markets and Tradingclaus vistesenJanuary 7, 2018commodities, spoos, Equities, China, CNY

Mark to Market

Barring a disaster in the final trading sessions of the year, the portfolio will return about 5%—excluding fees and dividends—in 2017. This is a far cry from the nearly 20% of the MSCI World, but better than a hole in the head. The good news was concentrated in the first half of the year. Profit-taking trades in Wells Fargo, Sabadell and Japanese equities added to the strong performance. From spring onwards, however, performance hit the skids, and only recently have returns started to improve. Slumps in General Electric, Xper have been the primary drags, but the dumpster fire has been more broad-based than that. A 15% allocation to gold and commodities—industrial and soft—for example, haven’t done me any favours either. Neither have exposure to producers of generic medicines and other small-cap pharma firms. Finally, various attempts to hedge out impending, but ultimately non-existing, sell-offs in the market as a whole also have hurt. Syntel and Urban Outfitters have been rising from the ashes in recent months, and I am hoping that further mean reversion will reach the rest of the portfolio next year. Given where we are in the cycle, the risk of a balanced equity portfolio losing money is rising. But let’s see whether I can’t come up with some ideas.

Markets and Tradingclaus vistesenDecember 10, 2017growth stocks, value stocks, yield curve, equity sectors, Equities

Searching for a new Narrative

Everyone is now talking about the flattening yield curve in the U.S., and it appears that a consensus is emerging for a Fed-induced recession—or severe slowdown—in 2019. The rationale here is simple. If the Fed hikes three times a year and 5y-to-10y yields won’t get traction, the curve will invert at some point in the latter part of 2018. This, in turn, has historically been one of the best pre-cursors for shift in the U.S. economic cycle. It warms my heart to see that attention has turned to the 2s5s. Forget about the 2s10s and 2s30, the 2s5s is all we need. If markets truly believe that the Fed is about to steer the U.S. economy into a slowdown, 5-year yields won’t go anywhere as the fed funds rate edge higher. If, on the other hand, markets think the economy will keep trucking despite higher rates—perhaps because the Fed gets behind the curve on tax cuts—they will move to sell 5-year notes, in size. Alternatively, markets could take the position that the Fed is unlikely to push too far on the short end in light of still-record low policy rates in Europe and Japan. If that’s your tipple, you are buying 2y notes, and selling the 5y. I have to assume that this month’s Fed meeting will give markets some guidance on these questions.

Eulogy for a cycle

This essay is full of contradictions and loose ends, so I might as well start with one in the title. This cycle is not over yet, and I am not sure that I have the definitive answer for when it will end. It is, however, well advanced with some themes and narratives. I am writing this in an attempt to make sense of and to explain, a world, which to my despair is increasingly devoid of reason. As a finance geek, I can’t get anywhere without first establishing the state of play in the economy and markets. The most salient feature since the financial crisis has been the unprecedented activism of monetary policy. In 2006, Alan Blinder described central banking in the 21st century. It is a brilliant paper but in dire need of an update given actions taken by policymakers since 2008. Central bankers were first called into action to prevent a collapse. The destruction in markets after Lehman’s failure showed that timidity or firmness in the face of moral hazard risk was impossible. Interbank markets were seizing up, banks were running out of liquidity, and the chaos quickly was spreading to the real economy. Decisive action was needed to avoid the situation spiralling out of control. Central banks had to take their role as lenders of last resort seriously.

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