After a quietish Monday – it was Martin Luther King Jr. Day, which sees both bond and stock markets in the US closed – things can return to normal again today, assuming that there is anything left that could be deemed normal.
Even the new normal, it would appear, is no longer normal. But with the highly anticipated speech by Theresa “kitten heel” May, prospectively sketching out her opening stance on Brexit, with Davos, for all its worth, and Donald Trump’s inauguration on Friday, even the not-very-normal new normal will struggle to be normal.
Sterling had taken yet another turn for the worse ahead of May’s announcement of her, so I understand, 12 key policy objectives. That she will be basing her opening shots on a hard Brexit is, to be truthful, not all that surprising. She made it perfectly clear from the outset that she would be taking things steady while playing her cards close to her chest.
There is little doubt that a hard Brexit at the end of March 2019 will hit the EU pretty hard too and they, also tacitly, must be thinking about ways to soften the blow. But negotiations haven’t yet begun and nobody in their right mind, other than the centre-left press, the BBC included, maybe, would expect her to lay all her cards on the table. I have for some time had access to a hardcore “Remain” Facebook group. That there is much unhappiness with respect to the goings on is clear and parts of some of the discussions have been of a very high standard. Sadly, the most commented on issue so far has been a multicoloured coat which Mrs May was photographed wearing and the childish vitriol and personal insults that this brought out has deeply undermined my respect for group as a whole. Not only do we have a disconnect between the elite and the mass – I think that is where populism grows – but the elites are deeply and seemingly irreconcilably divided within themselves and everybody is blaming everybody else for everything that isn’t working.
Smell
They say that money doesn’t smell and on that basis alone markets should be able to rise above the stench from the political mud-wrestling. But after a decade in which the authorities have been meddling, whether through their swamping of the system with cheap money or by way of interventionist regulation, which they seem to believe can make risk go away, we all seem to have lost touch with the skill that enabled us once to values assets based on organic risk and return. Having noted yesterday that I can still remember where I was when President Kennedy was shot, I got a call from a senior chap in New York who commented laconically that half the people on his trading floor – we’re talking Wall Street bulge bracket - couldn’t even remember the fall of the House of Lehman in 2008.
Back to sterling. On the open yesterday and in the aftermath of Downing Street news over the weekend, it fell below US$1.20 but, aided by a bit of weakness in the greenback itself, it has now bounced back to, at the time of writing, US$1,2110. Chronic sellers of the pound should be cautious here for it is a pretty crowded trade and at these levels possibly more prone to a snap to the upside than to the downside.
On that note and coming back to my American caller yesterday, he suggested that leveraged money is flat US equities and that where nobody is long, nobody can sell either and he sees nothing major standing in the way of a 2,300-point S&P 500. He reckons American investors are still overweight bonds and that it will take a while before the underlying flow reverses.
We might think ourselves to be in a bear market in bonds but the real numbers are surprisingly benign. Over the past 12 months 30-year yields have only backed up by 13.5bp and the 10-year only by 31.5bp. The big hit has been taken in the fives where yields are 40bp higher than they were a year ago but in terms of total return that marks a loss of “only” around 1%. The total return in 30s computes closer to a loss of 5%. That said, the huge post-Brexit flight to quality bond rally in the summer, which took the long bond down to 2.10% would BY NOW have the last buyer nursing some pretty chunky losses.
Follow the money
Much has been written about the dislocation of bonds from equities – traditionally when one went up, the other went down – but I struggle to buy into that theory. Sure, on a day-to-day basis they might no longer move smoothly against one another but at the end of the day and when all the white noise of algos and hedgies has been blanked out, investors have two core choices of financial assets and that is bonds and equities; money has to go either one way or the other. Try to understand how asset allocators are thinking, then follow the money.
For choice one would, in as much as one has to buy fixed income into balanced accounts, forced buyers on the back of the equity rally, not be criticised for focusing on shorter-duration paper. Key borrowers, however, are keen on locking in low long-term money while the going is still reasonably good and we look to be facing a developing gap between demand and supply at the back end of the yield curve. In Europe, the ECB might find itself obliged to extend duration and risk in the purchasing programme if it is intent on keeping long-term money cheap. Look for indications in that direction on Thursday.
Incidentally, on the subject of money not smelling, my late mother used to say that although money doesn’t smell, too much money stinks. There have been reports in the papers here that Oxfam, the third-world charity, has revealed that the eight richest people of the world have as much money between them as the 3.2bn poorest on the planet, half of the total population Oxfam reckons the eight are worth around US$425bn between them. So why don’t we take all their wealth away and give each of the 3.2bn US$133 each and see how much good that would do.
Finally, I’d like to welcome back my fellow “teenage scribbler”, Bill Blain of Mint Partners. He underwent some pretty serious cardiac surgery late last year but seems to be on the mend again. Many of my own readers are also fans of his “Blain’s Morning Porridge”. With him back in the ether, I’m going to have try that much harder again… oh, bugger!