Long time readers will know my own personal dislike of the terms “risk-on/risk-off”. They are, in technical jargon, total bollocks.
I was talking about risk with my old friend Alex “Moff” Moffatt of Joseph Palmer and Sons in Melbourne. Alex won’t be in as he has decided to forsake his clients and take the day off as today marks his 60th birthday. I first met Alex 30 years ago when he was in London trading Aussie guvvies for Transcity, a Melbourne primary dealer owned by the then-mighty American firm of Irving Trust which was famed for having its headquarters at 1, Wall Street.
In time Irving was acquired by Bank of New York, not for its world class international business but for its global custody division, at which point US commercial banking lost one of its finest and one of the few that understood that the world beyond America isn’t flat. Moff was always one of the most friendly, kind and level-headed of traders and he showed extreme patience with me as I transitioned from commercial banking to investment banking when already over 30.
After stints at the NAB and at Schroder’s, Moff exited wholesale banking malarkey and he has forged a second, far more successful, career in wealth management as principal of Joseph Palmer & Sons (Vic). Moff understands risk from both sides of Wall Street and his success is in gauging when and how to manage it.
We were talking about the world of next-to-nothing and less-than-nothing interest rates – or “disinterest” as I recently dubbed negative Bund returns – and Moff spoke of conversations he was having with clients. He explained that it is not the central bank’s role to make markets risk-free for investors by telling them months in advance what they were going to do.
Today, as Moff turns 60, I’m sure that all those out there who worked with him or generally had the pleasure of his always sunny presence and jovial mood will want to join me in wishing him all the best and many more years of health, happiness and rising AUMs.
He tells his investors that the process of investing is precisely about taking risk. Where there is upside risk, there is equal and opposing downside risk. One cannot have one without the other and those who believe that one can, and that it is the monetary authorities’ brief to reduce one side of that equation, are exposing themselves to another risk, namely that of unpleasant surprises.
Risk, I have always argued is like energy; it can be converted but it can’t be destroyed. We can swap credit risk for directional risk. Hedges don’t remove risk; they simply substitute one form of risk for another.
Down market
Markets might today be seeing something of a reversal after nearly a week of one-way traffic but I can, as yet, see nothing more than a dead cat bounce. Personally, I think the current sell-off is unjustified. One poor US nonfarm payrolls number doesn’t indicate that the entire economy is just about to fall off a cliff. It’s a long time until July 8 when we get the June release, which will hopefully show whether the May figure of 38,000 needs to be revised and whether it was an aberration. The economy might not be firing on all cylinders but it still a long way from displaying a seized engine block. Beware of getting too bearish.
Elsewhere, the Japanese administration is getting hot under the collar about the rising yen. Finance Minister Taro Aso has indicated that action will be taken to halt speculative moves in the currency although he has not revealed what he has in mind and, more to the point, at what level. Sorry, but if you want to scare the living daylights out of markets, why would one declare levels? We know what happened to the Swiss National Bank when fixed limits were declared.
There is another big event due next week, namely the German federal constitutional court’s ruling on the admissibility of the ECB’s Outright Monetary Transactions. Yves Mersch, the Luxembourg representative on the executive board of the ECB, has warned that a rejection “could throw Europe into very deep turmoil”. It’s not just over here that questions are asked. By the way, do I get brownie points for not having used the “B” word once today?
A bad day in the UK yesterday which saw the young mother and enthusiastic Labour MP Jo Cox murdered in broad daylight. Britain is not a country where this sort of thing is supposed to happen but you cannot legislate against madmen. The media are already trying to unleash a debate as to whether our MPs need more protection. As sad, unnecessary and tragic the death of Ms Cox is, life is fraught with risks and public life, a choice of the individual, occasionally carries a few extra ones.
Alas, it is that time of the week again and all the remains is for me to wish you and yours a happy and peaceful weekend. The weather has been bloody awful all week although there are promises of an improvement by tomorrow. It can’t get much worse. But who cares; a great weekend of sport ahead. England play Australia in the second Rugby Union test in Melbourne tomorrow and it’s the 24 Hours of Le Mans. There’s also the tennis at the Queen’s Club and cycling’s Tour de Suisse is also in full swing. I think that covers it; if I’ve missed anything, please be kind enough to let me know.