Tuesday, 25 September 2018

War ain't what it used to be

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Peters reminisces about buying in the crises.

Peters 475px June 2014

Anthony Peters

Source: IFR

SwissInvest Strategist

I was out and about in my old stamping grounds in Switzerland yesterday when I received a Bloomberg message from a London-based friend of mine, the global head of rates sales for what was once euphemistically termed an “international bank”.

He had been tickled by my reference in yesterday’s column to an exchange between Alex and Clive of cartoon fame in which the latter asks what Alex would recommend his clients do in the case of thermo-nuclear war and the former replied “sell everything”.

 My friend joined the City as junior Gilts geek with Morgan Grenfell Gilts in the late 1980s, formerly and before the consolidation which followed Big Bang known as the legendary Gilts broking house of Pember & Boyle.

Sitting there at the desk was an old hand and a member of the Bevan family, the same bunch as in the brokers De Zoete Bevan and also one of the original seven families which owned Barclays Bank. In fact, when I joined Barclays in the late 70s, a Tim Bevan was chairman.

 Anyhow, my chum was a young and eager chap and one day asked his very, very senior colleague what the best trade recommendation was that he had ever given. The old man replied – he must have been at least 50 – that his best day had come during the 1962 Cuban Missile Crisis when all asset prices were collapsing and he had suggested that his customers buy everything in sight. His reasoning was, so he explained, that if the crisis were to go nuclear and the bomb were to go off, it wouldn’t make a ha’pence worth of difference. In the event, it didn’t. Gilt prices bounced back and the customers who had bought in made out like bandits. Job done.

This dovetailed with a dinner I had in London last night with a major US investor. He was in a meeting at the mother ship on the East Coast back-end of last week where the question arose how much of the current Ukraine crisis had already been priced into emerging market assets. My man, not a natural EM beast, opted to disagree with the EM strategist by suggesting that nothing had been priced in because nobody knew how to price the risk – not even whether to buy or sell – and that therefore caution might be of the order. The sub-text was of course that markets could easily take a leg lower and, as we know, that’s what they did.

If in double doubt, don’t forget to buy Bunds

On Friday – I was out – the Bund made a new cyclical low of 1.1360%, less than 1bp above the June 2012 all-time low yield 1.127% and although back above 1.1600% this morning, we’re arguing about the flapping of a butterfly’s wings. It is obvious that investors don’t know which way to jump and in the past, the rule was always “If in doubt, get out!”, it has become “If in doubt, best do nothing but if in double doubt don’t forget to buy Bunds….”

Benchmarking, a recurrent subject again over the past few days, determines there is safety in numbers and that being fully invested and neutrally weighted is the hiding place of default. Losing clients’ money is so much less important than losing face.

German GDP

Meanwhile, in the more immediate vicinity, the IMF has raised its forecast for German GDP from 1.7% to 1.9% for the current year and from 1.6% to 1.7% for 2015. The Japanese authorities have lowered the forecast for their own economy for this year from 1.4% to 1.2% but they’re hanging on to their hope for 1.4% GDP for fiscal 2015/2016. This might all be well away from negative growth and recession but it will not go very far when it comes to generating the sort of self-sustaining recovery which the UK appears to be experiencing and which is also beginning to take hold in the US.

Many of the secondary indicators in the US still look a tad shaky but the jobs figures do look encouraging and, as we know, nothing does more for recovery than a working population which is working and which has a bit of cash in its pocket. Hence, no surprise to hear Pierre Gattaz, head of MEDEF, the French business federation, call for an end to the ridiculous 75% marginal tax rate and, far more to the point, the 35-hour working week.

All the while, markets are quietening down. In the past, such events as MH17 and the Gaza unrest would have had markets going up and down around like a rollercoaster but it appears as though nobody is prepared to move too far away from home. Such a shame that the world no longer belongs to the young and the reckless.

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