The first day of a shiny new half year and one which begins with our transatlantic cousins, in as much as they show up at work at all, headed home at lunchtime ahead of tomorrow’s July 4 holiday.
Despite the very outspoken St Louis Fed president James Bullard having thrown a few dovish sticks into the Fed’s hawkish wheels over the weekend maybe it’s time to put Europe in the spotlight.
Helmut Kohl
On Saturday the great and the good assembled in Brussels for a testimonial to the late Helmut Kohl, the great unifier of Germany, who died on June 16. Kohl, who was chancellor for 16 years, from 1982 to 1998, was remembered for his greatness and his vision. My memory is slightly different as Kohl bumbled into the developing situation of the collapse of the Soviet Union into a pile of dust and who, by insisting on a one-for-one exchange rate between the GDR’s worthless Ostmark and the powerful Deutschmark very nearly brought the German economy to its knees. As we fiddle around with Bund yields ranging between 0.24% and 0.45% and stand in admiration of the economic power of Germany it is easy for even those who were there at the time to remember when they were north of 9% in late 1990 as the vacuum of a nearly-dead Eastern Germany economy sucked the life-blood out of the West.
Were it not for the British-inspired push to expand the EU to the East, albeit for reasons of Franco-German power dilution, and integrating nearly all of the former Soviet satellites, the euro might not be so weak today and thus the German economy not quite so strong. Kohl, at best, had greatness thrust upon him.
Simone Veil
More significantly, Friday also saw the death of Simone Veil who was, in my mind, a European of a completely different calibre. Born in Nice in 1927, Veil survived both Auschwitz and Bergen-Belsen where she lost all of her family bar one sister who herself survived Ravensbrǘck. She returned to study at Sciences Po and went on to serve on prison reform at the Ministry of Justice and eventually from 1974 to 1979 as the Minister of Health. In that role she furthered and legalised the causes of contraception and abortion. In 1979 Veil was elected to the European parliament, the first time the body was directly elected and she was immediately elected its first president.
Veil was a true European and a servant of the people, which was recognised in 1981 when she was awarded the Charlemagne Prize – or Karlspreis to give it its proper name, the most highly valued recognition of a person’s contribution to European unification and integration. Were the EU still being steered by people of Veil’s calibre and less by pocket Napoleons such the brandy loving Muppet-in-Chief Jean Claude Juncker – how he picked up the 2006 Karlspreis baffles me - then my vote in June 2016 would most certainly have been to remain. Some are born great, some have greatness thrust upon them. Helmut Kohl was of the latter but Madame Veil most certainly one of the former. I bow my head in respect. Incidentally, Madame Veil was the first of only five women to win the Karlspreis in the 67 years since its inception…. and Margaret Thatcher was, unsurprisingly, not one of them.
So back to practical matters.
The slash-and-burn brigade, which hailed the wobbles of last week as the beginning of the end of asset prices as we know them, have seemingly still got it wrong. Momentum remains against them. For every piece that is published decrying the overvaluation of asset prices there is one declaring that there is plenty more to go. Stats have it that if the S&P makes more than 8% in the first half, it continues to rise in the second…or so I’m told.
Cash call
On Friday I attended the quarterly asset allocation meeting of a London-based investment management company where I figure as an external adviser. The themes discussed are by and large the same that are highlighted in most research but there was one point that struck a note in my head: the question of where cash figures as an asset class.
Actively managed funds can choose to hold or not hold cash and how and when to time when to put money in the market. Passive funds, whether managed passives or simple ETFs, don’t have that luxury. The argument that cash is not an asset class is based on the assumption that investors will only hand over to the investment manager the amount of money they wish to see being put to work and that the cash element of their overall investment strategy is managed by them. Both arguments have their merits but unless we understand the level of cash holdings among net investors as part of their overall asset allocation, we will not be able to properly gauge money flows. Weekly reports of net inflows and outflows to and from mutual funds gives some indication but it is a pretty incomplete and hence inaccurate science. Thus it is that the cleverer we get, the less we actually seem to understand about what the thinking is behind the trades.
What people do in the investment market is nice to know but without an understanding of why they do it that knowledge is near as dammit worthless as it affords nothing more than a peep into the rear view mirror, Making that rear view mirror larger and more sophisticated does not alter the fact that it offers no view into the future. The closer the implementation of MiFID II creeps, the clearer it becomes that potential cost of expressing an opinion of what one thinks might lie ahead is becoming so high that few can see the risk/reward ever being in their favour. So sad that MiFID II is driven by the “political will” of those for whom talking much and saying nothing is a way of life.
The other recurring theme over the week-end was the extraordinary 100-year bonds for Argentina, which attracted US$10bn in interest for US$2.75bn of bonds. Who in his or her right mind would buy a 100-year bond in a credit that has defaulted three times in the past 25? The answer my friend is blowing in the wind. I guess it must be the same people who bought mezzanine tranches on sub-prime mortgage bonds either in the belief that they were being given off-market coupons because they were so nice and such good clients or, more probably, because they knew they were sitting on a volcano but thought that they would be the ones who would be able to get out just before it all went wrong. As PT Barnum is alleged to have said, there’s a sucker born every minute.
Given what’s going on in Brazil and given Argentina’s past, what’s the betting they’ll be doing an exchange in the not-too-distant future from the 100-year 7.125% 2117 into some zero-coupon perps… Only this time they won’t quite as easily be able to blame the bankers for their own yield greed as they did in 2008.
Have a good week.