Hello everyone. I hope you are all well during this continued lockdown and keeping yourself and your family safe. Let me provide you with some light relief with this week’s News, Views and Truths.
Up until this most recent market fall and to be honest, since the Global Financial Crisis (GFC) of 2008, the subsequent bull market was referred to as “the most hated bull market in history”. Why? Well, it was due to the fact that so many participants felt that it was not built upon traditional fundamentals.
As many of you that have spoken to me over the past seven years will know, the synchronised efforts of global central banks flooding the global economy with cheap money has provided a “put”; an effective guarantee that, whatever happens, central banks will bail you out.
In 2008, this was innovative; interest rates were historically normalised at around 4% and central bank balance sheets were a lot smaller than today. The “shock and awe” tactic of Quantitative Easing – a term that none of us had heard of prior to 2008 – resulted in confidence being regained within the banking system, providing a solid base to the eventual recovery in late 2009.
However, this set a new paradigm. Interest rates did not normalise for fear of stalling the recovery. The global system essentially became addicted to increased levels of liquidity and although stock prices continued to rise, almost unabated, the impact was being felt socially.
Austerity measures bit; we can all remember the scenes of unrest during the anticipated “Grexit” of 2014 and the impact of the fiscal rules, handed down from the ECB onto the citizens of Greece. Closer to home, austerity measures in the UK officially ended only last year, after years of cuts to services.
Not only did stocks continue to rise, but bonds did also, benefitting from historically low-interest rates and also a growing feeling of disconcertion. If you used equities and bonds as a barometer of economic solidity, equities were telling you that the house was built on stone, while bonds were suggesting sand. Those two conflicting views resulted in the hatred felt by many for one of the longest bull markets in history.
And frankly, we are there again.
From the lows of 23rd March 2020, the equity rally, against a backdrop of historically high unemployment and fiscal measures that will no doubt bring a level of austerity measures never seen before, is confounding all expectations. Yet bonds have never been in such high demand as we revert back to an even more hated rally.
This week can provide an almost perfect microcosm of what is being played out. On Tuesday, two titans of the investment world, David Tepper, manager of the $13bn Appaloosa Hedge fund and founder of Appaloosa Management, along with legendary investor Stanley Druckenmiller, both stated that they believed that stocks were more overvalued than they have seen in their respective careers.
Tepper went on to say that the rally from the 23rd March was due to fiscal policies from both a governmental level and from the Federal Reserve and I would personally agree. The reactions have given much needed comfort to a market crying out for hope. The concern is, what if it does not work?
In my view, the markets are pricing in perfection; a gradual opening of the economy without any recurrence of the pandemic. This is what we all are hoping for, but is this the likely outcome? Everything hinges upon a vaccine, yet humanity has never before created a vaccine for a COVID; why will 19 be any different? And if it does not go by the playbook, what then? What options do the central banks have?
On Tuesday, the Federal Reserve started buying corporate bond Exchange Traded Funds (ETFs) as part of its balance sheet expansion programme. Think of these like the funds that you have within your investment portfolios; yes, the Fed is buying those now. The reason for this is to make sure that companies that generate funding via the debt market can have confidence in that, whatever happens, their debt, however poor, will have a buyer of last resort.
That is how extreme central bank intervention has become. Questions now arise as to “what if”; what if the market falls? What can the Fed do? Interest rates are historically low, but they can go negative. Federal Reserve Chairman Jerome Powell was asked this question at his monthly press conference on Wednesday, with his response being, “The committee’s view on negative rates has not changed. This is not something we’re looking at.”
For now. Not an outright refusal by any means. And if negative rates are not enough, what then?
In my eyes, the endgame. After the Fed has done everything in their power, they will buy stocks. They will directly intervene into the market and buy broad market ETFs and provide investors with the ultimate risk hedge. Many may baulk at my suggestion, thinking that I am somewhat of an extremist. But they said that in 2008 before QE was a thing and look where we are now after kicking the proverbial can down the proverbial road for that past ten plus years.
And that, ladies and gentlemen, is why the 2010-2019 bull market was not the most hated bull market.
This one is.
If you haven’t had the opportunity to hear my most recent webinar, focusing more on the performance of our portfolios, you can watch this HERE. Furthermore, my most recent fund manager interview can be seen HERE where I chat with Andrew Kellier of the Baillie Gifford Emerging Market Leading Companies fund. Investors in our portfolios all have holdings in this fund, so I would recommend taking 10 minutes out of your day to have a watch.
I’ve already recorded next week’s interview and it is focused upon UK equities and therefore will be relevant to you all; to make sure you do not miss out, sign up to the mailing list HERE.
And so to finish, our usual playlist. Stay safe, stay positive and I shall see you all next week.
The content of the above blog is for information purposes only and does not constitute advice. If you do not understand any of the content, we would recommend that you seek professional advice.
