It’s been a while. It seems like an age. But the wait is now over. I know, I’m excited too! So how about we all put the kettle on, close our emails, pause the Ashes for five and settle into the return of News, Views and Truths.
Timing. Like buses, you wait for newsworthy stories and then they all come at once. Infuriatingly whilst I was on my two week’s summer holidays! Last week offered two specific headlines which I was tantalisingly close to publishing whilst on my sojourn, however, I resisted this and as such, I’m furnishing this week’s publication with them now.
So, Monday 19th August. Pretty uneventful in the UK. Not so much in South America…
Argentina’s benchmark stock index tumbled a record 48% as President Mauricio Macri suffered a defeat in elections held over the weekend. As the S&P Merval Index fell, so did the Peso, which decreased 15% in value against the US dollar. To put this into perspective, according to Bloomberg, the 48% drop in the index in a single day is the biggest fall for any market since 1950.
Although regular readers will know of the rather precipitous nature of the Argentine economy, this fall came out of the left field. Investors had expected the election to be a tight affair, but Macri lost by a margin of 47% to 32%, sending the markets reeling.
And that highlights the risk of investing. Good times are followed by bad. Great segue…
A few weeks ago I wrote about yield curves; specifically the ability of these to predict a recession. Well, last week it finally happened, folks.
To recap, an inverted yield curve is where short term interest rates are greater than long term interest rates. History has shown that, when this happens, a recession is around the corner as the outlook for the short term is worse than the long term. Simple, right?
Well, not quite. Although yield inversions have been treated as a leading indicator, the backdrop for current markets must be a factor and again, this is lost on many, and most, market participants.
So why is it different this time? I’d suggest quantitative easing. For example, German bunds are offering negative rates across all terms. This is not a normal situation obviously and can be pinned directly on the ECB’s QE program, combined with Germany running a budget surplus.
The ECB insists upon buying government bonds in proportion to the relative sizes of the eurozone economy. But the number of Italian bonds in issuance, in relation to economy size, is rather different from that in Germany. Meaning that to buy some useful amount of Italian bonds means overbuying German bunds.
Certainly, no one thinks that long term government bonds would be offering negative yields if there was no QE. And the bottom line is that we’re not observing free-market prices here so we can’t take the same lesson we would from free-market prices found in history.
This is the same line taken by JP Morgan. “A surge in the stockpile of negative-yielding debt across the world has warped the pricing of U.S. duration and credit risk as foreign investors are forced into Treasuries and U.S corporate bonds”, JPMorgan strategists wrote in a note last Friday.
And the majority of developed market bonds are offering negative interest rates to investors, whereas the US and UK are still in positive territory, money flow into positive rates is still available. That’s not a recession indicator, surely?
Finally, taking the inversion of yields in isolation ignores many other, very positive areas of the economy. Yes, growth is slow, but at a far lower rate in both the US and the UK than the rest of the developed world, certainly the Eurozone. Employment is continuing its very positive trends and inflation is not an issue.
So, is this time different? I’d suggest that the backdrop is certainly different and as such, investors need to be aware of a much broader range of information than simply hanging on to headlines. Prices in rigged markets do not give us the same information as those in free markets.
However, the market continues to be an unforgiving place. But with the correct advice, tied in with thorough research and continual monitoring, you can make real returns across all market conditions.
And that’s what you get at Three Counties, obviously.
So, there we have it, the first one back from my hols. And in the usual style, a playlist to end. Have a great bank holiday weekend; the weather is forecasted to be great so I will certainly enjoy it. Oh, and the fact that my middle son Lewis passed all his GCSEs yesterday, securing a place at Durham Sixth Form to study A-Level Maths, Economics and Financial Studies, will simply add to that celebration.
Obviously, he gets his brains from his mother! See you next week!