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Archive for the ‘Banking crisis’ Category

The truth about future economic growth

Rob Arnott, the chairman of Research Affiliates, is one of the most articulate and interesting market analysts in the States, and someone whose ideas and research I have followed for a number of years. In my latest 30-minute podcast, I discuss with him the outlook for investment returns – and how they will be dramatically influenced by what he calls the three Ds now hanging over the world – debt, deficits and demographics. All three are conspiring to drag down likely future rates of economic growth in the developed world. Investors need not despair however, Rob argues: better returns are available if investors switch their focus from conventional benchmarks to a multi-asset strategy based on broad economic, rather than purely financial, criteria. Before listening in, click the link below to download a copy of the slides he used to develop his arguments at a recent presentation to a London Stock Exchange seminar. The podcast can be downloaded from here. Recommended.

Arnott LSE Presentation July 2012

Written by Jonathan Davis

July 29, 2012 at 5:30 PM

The Eurozone revisited

The latest Eurozone summit, the19th or 20th, depending how you count, has so far been well received by the financial markets. As always, however, this is not quite what it appears. The biggest mistake you can make is to impute approval or disapproval of recent developments to instant market reactions. You always need to take into account the context.

In this case the context was that few observers expected anything postiive to emerge from the summit and therefore the limited progress that was made can be classified as some sort of success, if only when compared to those low original expectations. The truth is that nothing much has changed, despite the optimistic noises coming out of various interested European parties.

Mrs Merkel made some apparent concessions at the summit, but they do not amount to much, when examined in the cold light of day. She is confident that she had not conceded much, and while subject to a range of domestic political pressures, there is no sign that Germany is ready to give in on the substantive measures that would be needed to give the Eurozone a chance of survival in its present form.

And that of course is to make the heroic assumption that even if Germany did agree to mutualisation of sovereign debt across Europe, and the fiscal and banking integration that would be needed to make that enforceable, it still might not solve the problems of banking weakness and lack of competitiveness that are the underlying causes of the current crisis. There is no magic wand to put those things right and it will take years for the necessary reforms to be shown to work in Italy, Spain and Greece.

Written by Jonathan Davis

July 5, 2012 at 8:03 PM

Posted in Debt Crisis, Eurozone

Looking beyond Greece

We don’t know whether the Eurozone agreement on Greece will hold – let alone for how long. My guess is not for long. In any case, for investors this long-awaited deal looks like a classic case of buy on the story, sell on the news. Financial markets have run up so strongly in anticipation of such an outcome that equities now look massively overbought, implying that the short-term reaction is more likely to be negative than positive. Longer term it is still impoosible to know for certain how this great drama reaches its endgame.

My view remains, as it has done for some time, that the best outcome now, as Bill Emmott was saying in The Times yesterday, is for a managed default (and probable exit) by Greece at some point in the course of this year, as it becomes apparent that the country cannot meet the demands which have now been placed on it. I suspect that this is the outcome which the Germans have been after for quite a while now, without of course being able to say so in so many words. It is also in the best interests of the Greeks themselves over time.

Read the rest of this entry »

Written by Jonathan Davis

February 21, 2012 at 9:45 AM

New Year hopes

My suspicions back in the autumn that a market rally was on the way have, I am happy to say, been borne our by events. Not for the first time, the peak of rhetorical despair – this time about the dire outlook for the world economy should the Eurozone crisis not be resolved – has turned out to be the moment to turn bullish. The rally since the failure of the Cannes summit has been impressive.

The MSCI world index is up by more than 20 per cent since its October low and has risen for seven straight weeks in a row, something that has not happened since the spring of 2009, according to the equity strategists at Societe Generale. Equity markets have made an even stronger start in 2012, with January producing one of its best monthly returns for many years. Contrarian sentiment indicators, such as the venerable Investors Intelligence survey of investment advisors in the United States, once again proved invaluable in identifying a turning point back in the autumn.

Read the rest of this entry »

Talking markets: Jim Rogers

Global investor Jim Rogers thinks that the world is heading for an economic depression unless political leaders finally grasp the nettle of the debt burden they have accumulated over the past decade. He is not optimistic about the outcome. Bankrupt countries such as Greece need to default – and soooner rather than later. The longer they leave it, the worse the eventual outcome will be. Hear more of this – and how Jim is seeking to protect his own wealth in these difficult times – in my latest podcast, a 30-minute interview with one of the smartest investors I know. It is available to download from the Independent Investor website now. An edited transcript will be available in the New Year.

Written by Jonathan Davis

January 3, 2012 at 5:56 PM

Mark Mobius on the Eurozone crisis

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How does Mark Mobius see the outlook for investors in the light of the ongoing crisis in the Eurozone? You can find out by listening in to my latest podcast interview, which can now be downloaded from the Independent Investor website (link). Dr Mobius, who next year celebrates 25 years running the Templeton emerging markets funds business, with $40 billion of assets under management, discusses the threats and opportunities which the crisis has created.  This is the first of a series of podcast interviews with leading professional investors and advisers. Other to be interviewed in the series include the global investor Jim Rogers, author and economist John Kay and Guy Monson, the Chief Investment Officer of the Swiss private bank Sarasin.

Written by Jonathan Davis

December 11, 2011 at 6:58 PM

Forecasts be damned

If someone told you that the end of the world was coming tomorrow, and the day passed without incident, would you be inclined to believe the same person the next time they came out with a piece of radical advice? I doubt it.  Yet one of the wonders of markets and economics is how quickly even sensible investors will switch their assumptions about the future without missing a beat.

The latest example of this bizarre phenomenon was evident in the Chancellor’s Autumn Statement. The independent Office for Budget Responsibility, run by Robert Chote, a formidably bright former economist colleague of mine on The Independent, has drastically reduced its forecasts of future economic growth. They are radically different from the forecasts the same body presented just a few months ago. Yet by some magical process they are already being treated as gospel truth. Read the rest of this entry »

Written by Jonathan Davis

December 3, 2011 at 11:30 AM

Good news, bad news for equities

Why have I mentioned more than once the possibility of a strong stock market rally coming soon? There are several factors at work here. The normal end of year experience of markets finishing strongly is one of them. The oversold technical position in many markets, allied to very low trading volumes, negative headlines in the media and deeply bearish sentiment, is another. More fundamental though is the possibility – which I now rate quite high – that Germany will in due course sanction some kind of ECB involvement in the Eurozone crisis that will provide a trigger for all the investors currently sitting nervously on their hands to rush back into the market. It may not yet happen – the politics of the Eurozone remain fragile and complex, and nothing is certain – but if it does the effect in the short term could be very powerful.

Read the rest of this entry »

Written by Jonathan Davis

November 24, 2011 at 3:15 PM

The Eurozone crisis: not insoluble

The Eurozone crisis is a political mess that can only be solved by a political solution, which you don’t need a degree in politics to see is not proving easy, given the variety of interested parties involved – 17 eurozone member countries, 10 other EU member states and the governments of every other major economy on the planet also feeling the need to have their say. Much to the chargrin of some Eurozone leaders, voters too have to be consulted.

Given how many warnings there have been of the risk of a depression and financial meltdown if the Eurozone is not saved, the wonder is that financial markets have not been more affected than they have been by the failure so far to arrive at an agreed solution. The equity markets in particular have been surprisingly resilient. How can that be explained?

This is how one sensible wealth management firm, Saunderson House, is addressing the issue in its client comunications. Implicit in this view is that there will be an endgame in which the Eurozone survives, at least for now, without triggering an economic crisis, which must mean Germany eventually sanctioning some action by the European Central Bank once the various peripheral countries with the worst debt problems (Greece, italy, Spain) have their new governments in place. Read the rest of this entry »

Written by Jonathan Davis

November 21, 2011 at 1:45 PM

Views on Europe

Back from a two-day trip to Paris, it is no surprise to find that the markets are still obsessing about Europe. In the absence of elections political change is rarely a straightforward business, as this week’s tortuous attempts to form new governments in Italy and Greece are demonstrating. The markets remain volatile, but as yet nothing has happened to change my view that we are moving towards an endgame that will ultimately prove beneficial, howver messy it becomes in the short term.

What is noticeable is how opinion is at last slowly shifting away from arguing over how the eurozone in its present form can be saved towards the (more sensible) view that the eurozone cannot continue exactly as it is, whether or not it survives the immediate crisis.. See for example an excellent piece by Lord Owen, the former Foreign Secretary, writing in The Guardian on Monday which begins:

A eurozone may survive, but it will not be the present 17 member state eurozone. What will emerge, if it is to survive, will be smaller and more focused around German financial and monetary disciplines

Read the rest of this entry »

Written by Jonathan Davis

November 10, 2011 at 3:02 PM

Bye bye, Berlusconi

The word now is that Berlusconi is on his way out in Italy, as I predicted on this blog a week ago. Assuming that happens, as I am sure it will, it means that we have lost two credibility-shorn prime ministers in the troubled countries of the Eurozone in just 24 hours. In this long and tortuous process, nothing is certain, but I can’t help thinking that this is good news for the markets, as indeed in time the failure of the Cannes summit will also turn out to be.

Why? Becuase it means that the Eurozone is finally getting ready to deal with ugly reality, rather than utopian and impractical dreams. The one premise that has only rarely been challenged throughout this whole drawn out charade has been the belief that the Eurozone could not survive unless it continued exactly as it is now, with all its members on board and Greece and others facing permanent but unsustainable austerity.

That was – and is – a pipedream. What we are seeing now is a process by which failed incumbent political leaders are having to face the consequences of their past errors, not least clinging to such a dogmatic and unproven assumption, which has never been put to the popular vote. Having done more than anyone to talk the Eurozone into recession, with his doom-laden warnings about the consequences of a Greek default, M.Sarkozy faces his own rendezvous with the voters next May. Mrs Merkel, now calling the shots in Europe, probably has until the following year to face the electors.

Whether the new Governments in Greece and Italy can do any better than their predecessors remains to be seen, but the markets are driving the Eurozone to a less worse outcome than wasting all its firepower on saving a bankrupt country, uncertain and potentially disruptive though the consequences may be in the short term.

Written by Jonathan Davis

November 7, 2011 at 12:56 PM

Posted in Eurozone, Greece

Those damned voters…

Did I say there was a need to take these markets one step at a time yesterday? Make that one day at a time. The unexpected decision yesterday by the Greek Prime Minister to call for a referendum on the eurozone package clearly introduces a whole new element of uncertainty into the outlook for financial assets. It almost certainly brings forward the date when Greece defaults and leaves the euro (as eventually it must).

It has never been obvious to me that staying in the euro is the best option for the Greek people, and that may well turn out to be what they think too.  They may opt to take the Icelandic route and vote for the devil they don’t know in preference to the one they do, which has little obvious to commend it.  The decision of the Eurozone to go all out for monetary union without waiting to establish the necessary fiscal  and political regime that was needed to make it workable has always been its most serious flaw, but sadly not the only one.

A consistent failure to consult or carry public opinion has been another hallmark of the whole EU project, and one that may now prove very costly to its architects. Markets hate uncertainty, but if the prospect of a referendum in Greece now forces the Eurozone leadership to start planning properly for the consequences of at least a partial breakup of the single currency, instead of trying to do everything to avoid even thinking about such an outcome, it will be no bad thing. Look out next for the departure of Berlusconi.

Written by Jonathan Davis

November 1, 2011 at 10:31 AM

Nose out of book

After several weeks immersed in completing the book I have been writing on the investment methods of Sir John Templeton, to be pubished in the spring next year, this week sees the return of this blog to active duty. The past three months in the financial markets have been amongst the strangest and most volatile I can remember for some while - certainly since the great crisis of 2008. Two main things (the Eurozone crisis/horror movie and an apparent slowdown in the recovery of the US economy) have dominated market sentiment throughout these months, leading to a huge amount of displacement activity by anxious investors, and a good deal of hyperbole amongst the commentariat.

Suffice it to say that the news on both counts appears to have improved in the last few days. Although the Eurozone crisis is clearly still a long way from being resolved, the US data does appear to point to things picking up on the other side of the Atlantic, which should silence the most extreme prophets of doom for a while, at least.  Having broken out of their trading range, it will be surprising if equity markets do not finish the year on a relatively strong note, perhaps even crawling their way back to the level at which they started the year. The prospect of new bouts of quantitative easing by the Federal Reserve and Bank of England have dampened yields on long term Government bond, but the sovereign debt of overborrowed developed countries continues to look a/the most vulnerable asset class on any but the shortest of time horizons. Read the rest of this entry »

Written by Jonathan Davis

October 31, 2011 at 4:04 PM

Mr Bernanke, Japan and the US debt problem

Today saw the start of a significant rally in the US stock market for the first time in several days, and a significant day for the UK stock market, where the yield on the equity market briefly rose above that of the 10-year bond yield, traditionally an early warning signal that equities will deliver good returns over the medium term. It still looks like being a long hot August, however, with the Eurozone crisis showing little immediate signs of easing.

It was naughty - but oh so pointed – of Albert Edwards, the very bearish  market strategist at Soc Gen, to point out what Ben Bernanke, the chairman of the Federal Reserve, had to say in the now infamous “helicopter Ben” speech nine years ago. That was the speech, made well before he succeeded Alan Greenspan in the top job at the Federal Reserve, in which he expressed absolute confidence that the US would never again be allowed to experience a deflationary recession.

The Fed, he said, quite unequivocally, had the tools, in the shape of the printing presses, with which it could be sure of preventing deflation (and boy, you might say, has he used them already!).  But then, he asked – rhetorically – in his speech: Read the rest of this entry »

Written by Jonathan Davis

August 9, 2011 at 4:17 PM

Time to watch that basket closely

An interesting range of views from market-watchers in this story from the Financial Times today.  Investors are slowly waking up to the lopsided nature of the currrent global market dynamics, in which there is an apparently real risk of a severe negative market event – either in Europe or in the United States – but one which still falls short of being a likely outcome.

How to position yourself  if you rate the probability of this occurring at say 20%? Is that high enough to justify taking extreme defensive action in anticipation of just such an outcome? That will ultimately depend on your tolerance for risk. A number of well regarded fund managers whose opinions I track have taken their holdings of cash to higher than normal levels in recenet weeks, although few have taken it as far as George Soros, whose Quantum Endowment Fund,  as I noted yesterday, is reported to be 75% in cash (although this is likely to include a range of currencies, which these days are often treated as proxies for other types of investment).

Read the rest of this entry »

Written by Jonathan Davis

July 29, 2011 at 6:08 PM

A $100 billion dollar warning

There is an interesting profile in the latest issue of the New Yorker about Ray Dalio, the founder of Bridgewater Associates, one of the world most successful macro hedge fund businesses, in the tradition of George Soros and Julian Robertson. Mr Soros has meanwhile just announced that he is closing his Quantum Endowment Fund to outside investors, ostensibly because of the impact of new regulations, and will in future run it solely as a family office.

Bridgewater Associates has around $100 billion under mangement and both anticipated and weathered the credit crisis with some success. Unlike the Quantum Fund, which until it changed its objective in 2000 from aggressive return-sekking to wealth preservation was famous for its big concentrated bets, the firm’s Pure Alpha fund is up around 10% this year while most hedge funds have struggled to make any money at all. Its style is to make a wide range of bets, many of them paired – buying platinum or selling silver, for example – in an effort to do what hedge funds were originally designed to do, which is to reduce correlation to the market’s overall movement. Dalio’s speciality is making calls on bond and currency markets.

While a lot of the New Yorker article is devoted to the unusual way in which Bridgewater Associates is run, it also contains Dalio’s judgment on current market conditions. “We are still in a deleveraging period” he says, and “we will be in a deleveraging period for ten years or more”. The article continues:

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said.

Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”‘

But he also makes the obvious point that timing is the key to getting these big calls right. “I think late 2012 or early 2013 is going to be another very difficult period” is his reported view. That has always been my expectation too, but recent events – the muted response to the latest Greek bailout plan and the ongoing stalemate over the US debt ceiling (which Soros dismissed last week as “theatre”) -  may of course be bringing the point of crisis nearer.

That may of course also be one reason why the Quantum Fund is currently reported to be sitting with 75% of its assets in cash. However if the debt deal is done, which still looks the more likely outcome, there could be a decent rally in risk assets over the last few months of the year.

Written by Jonathan Davis

July 28, 2011 at 12:31 PM

A right old mess

The risk that the sovereign debt crisis could spiral out of control in the face of inadequate political will to resolve the crisis is clearly growing the longer that the impasse in the Eurozone (over peripheral country debt) and the United States (over lifting the debt ceiling) continues. Suggestions that we are in danger of a rerun of 2008 are not, alas, fanciful, and are growing by the day.

This is how the hedge fund manager Crispin Odey summed up the situation today, noting first the standoff in the United States, where both political parties seem blissfully unaware of the stakes for which they are playing.

The markets should be scared of such political madness, but instead the dollar benefits from greater madness emanating out of Europe. Greece is bust. Easy. However Germany and the Netherlands need to realise the necessity of recirculating the savings flows back into Spain and Italy. This current malaise provides an anvil upon which those countries can be hammered. A Euro in which deposits from southern Europe flood to Germany and are not re-exported except reluctantly by the ECB is ultimately doomed to expire. The timing of this is dangerous. Politicians are going away on holiday, but the markets will not wait. Read the rest of this entry »

Written by Jonathan Davis

July 19, 2011 at 10:48 AM

Mixed messages from the markets

Two contrasting views today that neatly sum up the current rather feverish market dynamics. This link summarises Deutsche Bank’s view that the worst case outcome the Eurozone crisis could be a 35% fall in global stock markets. And here, on the other hand, is the latest weekly view from fund managers Artemis, citing six reasons to be cheerful.

Of course the whole world could still go to blazes in debt’s handcart. It might well. But on balance, we prefer to remember that the FTSE 100 is (just) above its level as 2011 began. And that’s despite, it’s worth remembering, Japan’s tsunami, war in Libya, Arabian unrest, nemesis in Greece and the end of American QE.

Corporate health. Sure, there’s more bad news to come, we reckon, for most UK retailers. But there’s still much less credit risk in most companies than there is in governments. Take a stock like Hunting (oilfield services). It has cash of £300 million, a third of its market cap. Or publisher Reed. It’s priced at 11.5x, has a 4% yield, diversified earnings and improving margins. Japan’s NTT Docomo (mobile telecoms, 3.8% yield) has more cash than it knows what to do with.

M&A. Weaker sterling makes UK assets even more attractive to foreign (war) chests. Negative real interest rates in the west. These force investors, reluctantly or otherwise, into (high yielding) equities. Pessimism. It’s pronounced. If history has any predictive power, the gloom suggests this is a ‘buying signal’. Emerging markets. China seems to be Goldilockian. The prospects are patent, and the growth is good. The best western companies will continue to make their money there, not here. QE2. Its positive effects will take time, but will benefit the US economy.

What all this confirms to me is that the market, as always, has great difficulty in finding a level when there is a wide range of potential outcomes, some of them extreme. The Eurozone crisis is a good case in point.  The way the crisis has evolved is as much an indictment of the inadequate way that Europe’s political class have responded to the new threat of sovereign debt default as it is about the underlying gravity of the potential problem.

Meanwhile, the interesting part about Mr Bernanke’s recent testimony, to my mind, is the reaffirmation that his whole approach to running the Federal Reserve is rooted in his paramount desire to avoid deflation at any cost.  if he does restart a further round of printing money (quantitative easing), it will be because the Fed sees a real risk of deflation once more.

The odds are still against a worst case outcome at this point, but there is no denying that it is a possibility, and that is what sends risk-averse investors scuttling for protection. In these circumstances remember all those stories about a big turn in sentiment towards gold and other commodities in the early part of the year? Gold’s continued ascent to new highs tells a different story.

Written by Jonathan Davis

July 15, 2011 at 2:00 PM

Economists and banks

Some observations on economists from veteran US investor Laslzo Birinyi, writing in the Financial Times.

In my experience, economists are not equipped by training or discipline to provide insight and guidance on stocks. As manifest by an number of cliches, the bond market is about here and now, while stocks are always looking ahead. Hence economists, almost by definition, “lead from the rear”.

Their recent concern regarding the banks and the implication for the financial system may indeed be correct, but I would note that the recent weakness of the traditional banks is actually the norm. In the nine bull markets back to 1962, 48 per cent of banks’s ultimate gains was made in the first two months of the rally. In the last two bull markets, after the first two months, banks not only underperformed, they were actually down the rest of the rally.

US bank shares certainly have been going nowhere for some time.

Meanwhile, as the market has been indicating since the weekend, the narrow Greek vote in favour of the austerity programme – although it does nothing but defer the country’s inevitable sovereign debt default  - looks likely to be the trigger for a reversal of the straight line fall in equities and bond yields which has been such a striking feature of the last two months in the markets.

Written by Jonathan Davis

June 30, 2011 at 6:41 AM

The horror movie continues

I am not a great fan of Professior Nouriel Roubini, the economist who made his name by predicting the global financial crisis (or so it is said). However it seems to me that his analysis of the  Eurozone’s problems in today’s Financial Times is spot on. This is his conclusion:

Debt restructuring will happen. The question is when (sooner or later) and how (orderly or disorderly). But even debt reduction will not be sufficient to restore competitiveness and growth. Yet if this cannot be achieved, the option of exiting the monetary union will become dominant: the benefits of staying in will be lower than the benefits of exiting, however bumpy or disorderly that exit may end up being.

Most economists, and particularly those from North America, have always underestimated the extent to which the political elite in Europe is determined to keep the euro project alive, seemingly regardless of cost. However the debt crisis, which stems directly from the foolish desire to expand the Eurozone too quickly, is not soluble without greater fiscal and political union, as Prof Roubini observes. This is something which – whatever their political leaders might wish – electors in many countries are not minded to vote for in normal times, let alone ones of economic crisis.

The Eurozone will therefore fragment in due course, most likely back to a smaller group of core countries with competitive economies, although when and how is by its nature unknowable. As Warren Buffett remarked last year, the Eurozone debt crisis is like a horror movie – you know it is going to end badly, and only masochists will want to watch it through to the end. Unfortunately this one is compulsory viewing.

Written by Jonathan Davis

June 14, 2011 at 4:41 PM