Have We Missed Out?
Skerritts View - April 2016
In February’s edition we stated that, having witnessed the worst January for markets for twenty years or so, “we’re going to play it safe and treat any rally with suspicion, preferring to play safe and let others play the “buying opportunity” game in the short term.” Well, right on cue, on February 11th 2016 the very areas that we have been avoiding – Emerging Markets, commodities, FTSE 100 companies and high yield bonds – each erupted into a strong rally that made us look rather silly as we sat on the sidelines and watched it go. It’s almost as uncomfortable to miss a rising market through being cautious as it is being caught in the brutality of a capital-destructive correction. There is a very strong link to each of the sectors that we’ve just mentioned, namely, the oil price.
As the oil price bounced from its $25 a barrel low, so did other commodities, the Emerging Markets that are so commodity-dependent, the FTSE 100 with its plethora of global oil and mining companies that have little or nothing to do with the UK economy, and the energy-saturated high yield bond market. As we see major reasons for the oil price not recovering above $50 a barrel (ask us for these if you’d like as space prevents us from going into detail here) then our position remains one of not chasing the recovery in prices, preferring to wait for them to settle lower once more before being tempted. Time will tell whether we’ve chosen the correct strategy. As we also illustrated in February, the dips are getting deeper while the bounces have been getting shorter since April 2015.
We are fairly convinced that the Dollar has been oversold since Janet Yellen’s doveish comments at the Fed’s March meeting which seemed to confirm our view that the rate rise in December was a policy error based upon looking at the wrong data. Expectations were tempered with regard further rate rises this year, and April was specifically removed as a potential date for an increase.
However, we are finding it difficult to envisage anything other than a weakening of Sterling as we approach the June 23rd Referendum date as we expect the possibility of an out vote to increase in the coming weeks, whether or not the result is to leave. At the same time we expect attention to return before the Summer to the possibility of a July rate rise in the US. If you can find a way of going long the Dollar and short Sterling during this time you should be rewarded (in our opinion).
We’ve consistently argued that since the 2008 financial crisis, things have actually changed significantly, yet economists, politicians, policymakers, fund strategists and many others still struggle to come to terms with the new environment and hark back to old models and theories that worked during the 1979-2008 era of unlimited credit and its associated inflationary backdrop. As a consequence, Dhaval Joshi (Managing Editor, BCA Research) suggests that “conventionally-trained economists and mainstream politicians are making a dangerous mistake” (his underlining, not ours).
We’ve said for a few years now that if you had little or no debt, and a job, since close-to-zero interest rates came in after the crash, you’ve rarely had so much disposable income to play with as in recent years, but that it was a bit vulgar to acknowledge this. This explains high hotel prices, packed flights,fully booked restaurants, record new car sales and so on. Our view has been challenged at times and we thank Joshi for his recent piece that backs us up. He refers to the Superstar economy to describe the recent phenomena whereby a disproportionate few are doing fantastically well, while the vast majority are seeing and feeling no improvement in living standards and wages despite the “official” figures telling them otherwise.
To illustrate, let’s twist an old joke. How do you raise the average incomes of the locals in a Manchester pub several thousand percent? By asking Wayne Rooney to walk into the bar.
As soon as he enters, the mean income of everyone present shoots up. But the mean has been grossly distorted, whereas the median has remained fairly static. Now, for this pub, read the economy. And you start to understand why so much dissatisfaction simmers among the majority (look at the rise of extremism across Europe and within the United States) where living standards are stagnant at best and there is no room for inflationary pressure (making targetting inflation a pointless execise – see last month’s bulletin) while the markets in top end property, classic cars, luxury hotels and such like are booming.
Conventionally-trained economists and politicians are left scratching their heads as their statistics that they follow are not gelling with what the old rules are telling them. It seems that there is full employment so why doesn’t it feel better for everyone?
Add to this mix the fact that in recent years productivity growth has slumped in most economies (see below)
And we’re left in a situation where the big keep getting bigger, the rich keep getting richer and policymakers will continue to misunderstand the information that they are receiving.
This could explain why, despite the ECB effectively bribing the banks to lend more, the majority of potential borrowers are not taking them up on it because they feel such insecurity themselves. It is the interpretation of the data that is wrong but, politicians being politicians and economists being economists, it is going to be mighty hard for them to accept that they might be wrong.
And if politicians remain out of touch with what is actually going on at grass roots level, it should come as no surprise to them when the electorate respond in a surprising manner at the ballot box. Which is why we think Sterling will weaken as we progress towards voting day, and anyone who thinks that the result is already in the bag because of economic reasons should maybe think again.
Sources: BCA Research –March 2016
These are our views, as always, and don’t constitute advice in any way.
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