I AM GOING to step on to some very thin ice now. I shall avoid writing anything at all about the outcome of the Greek situation – for all I know, by the time this piece appears on your desk or your screen, the Hellenic Republic will have either blown up or been granted a stay of execution and columnists who write for periodicals, even weeklies, know of the risk of being overtaken by events. It’s not without reason that the late Harold Wilson is remembered for his immortal words “a week is a long time in politics”.
What astonishes me is the way in which the travails of this little country (which, on a good day, generates a paltry 0.39% of global GDP – and it might be less by now) has hijacked the minds of some of the smartest folk on the planet. If Greece is economically irrelevant – which it surely is – then there must be something much bigger afoot that has billions, if not trillions, of dollars of investment capital sitting on the edge of their seats. Could it be, perish the thought, that Greece is more an excuse justifying the thin, volatile markets rather than, as broadly postulated, the cause?
There are, of course, a string of issues affecting markets and their behaviour and Greece is without a shadow of a doubt one of them. But I am prepared to suggest that there is something significantly more fundamental that has led to this collective state of clinical depression.
WHEN I ENTERED this industry – some wags would feel tempted to suggest that it must have been around the time of the introduction of the horseless carriage and the electrification of Long Island – there was still room for some fairly basic, gut-feeling, investment strategy. Do the fundamentals, buy what you like, leave what you don’t and stand by your performance at the end of the year. Some years would be better, some worse, but investment managers were able to do what they thought to be right, even if it occasionally proved to be wrong. The indices were guidelines of overall market performance, not infallible gods at whose temple investment managers and their clients alike had to humbly worship.
We would track the big economic data – quarterly GDP, monthly inflation, industrial production, housing starts and labour statistics and, above all, weekly monetary aggregates. Meeting by meeting, the monetary authorities would adjust central bank rates. Between January 1960 and December 1969, there were only three – yes, three – occasions on which the FOMC did not change the target rate for Fed Funds.
The way we manage money and treat markets now is way beyond the reasonable and rational
BUT THE WAY we manage money and treat markets now is way beyond the reasonable and rational. There is, I fear, simply too much information. How do you work in a world where every decision is hampered by such a deluge? Actually, let me revise that – there is not too much information. There are too many data but not enough information.
Instant trading, live pricing, daily mark-to-market (and in some cases real-time mark-to-market) make decision-taking virtually impossible. The master of investment used to be the one who could think ahead of the pack. Let us not forget that the most famous and also richest of all investors, Warren Buffett, is the one who doesn’t give a fig for any of the fashionable metrics and who looks at daily mark-to-market as something akin to teenage acne. Knowing where every price is every minute of the day might make us feel powerful and important but in fact it also seems to have blocked many cerebral ganglia.
Our entire industry is patently burdened not by the desire to get things right but by a pathological fear of getting them wrong. If something doesn’t go according to plan, there is nowhere to hide. In such a world, the best thing to do is not to take a decision at all and in modern investment parlance taking no decision is called being index neutral.
THUS, I ASK myself whether the problems that markets are currently experiencing across many asset classes in terms of both direction and volumes are not due to our not knowing enough to make an informed decision but because we know too much and that by the time we have sifted our way through the piles of data that hit us day in, day out, and by the time we have come up with something approaching a view and an opinion, we have found new data that conflict with what we have just applied? Microscopes aren’t much use when looking into the distance.
Hence the often posed question: “After Greece, then what?” Are we to expect to find a clearer picture? Are we then all going to go away with a bounce in our step, buy the living daylights of markets for risk assets and live happily ever after? Or do we appreciate that, if, as and when the free money is taken away we don’t have a lot else left? I have read more forecasts that we are irreversibly heading for the asset price crash to end all asset price crashes than there are rats in the sewers of London. Most of them are focused on the late summer of this year – funnily enough, they largely coincide with the expectation that the first move would be the Federal Reserve – but I have my doubts.
Markets are incorrectly priced for a strong global economic rebound followed by sharply rising rates but they do broadly look fair to those who see us all going nowhere in a hurry. Current volatility is possibly more a matter of investors trying to work out whether we’re in for another recession, whether we’re just about to take off or whether it’s “steady as she goes”.
Data support all variations. That, in my opinion, is why everything seems so uncertain. There is not enough room for investors to step back, have a quiet cup of tea and to ruminate. I used to have a client – he’s still a friend but no longer a client – who would take his investment decisions after climbing a mountain, sitting down in a meadow and having a jolly good think. Only there could he avoid the terror of endlessly flashing screens and the deluge of what purport to be economic facts. He has done well, career-wise, and has never “burnt out”.
