Either stay put and ignore the market volatility or maintain a
core long risk position while lightening up on rallies, thereby freeing
up cash to reinvest on sharp downturns. The current strong global rally
provides an opportunity to reduce risk (while maintaining a core long) as the
uncertainty regarding the Fed’s rate rise in December
resurfaces."'core long risk position while lightening up on rallies, thereby freeing
up cash to reinvest on sharp downturns. The current strong global rally
provides an opportunity to reduce risk (while maintaining a core long) as the
The irrepressible and maverick fund manager Hugh Hendry usually has
interesting views and his occasional letters, steeped in relevant lessons
from financial history, provide much food for thought. His latest
newsletter follows in that tradition, advising clients not to panic in
the face of market volatility. To summarise:
-The current financial environment reminds him of the scene from the 1964
Stanley Kubrick movie Dr. Strangelove, where a deranged US general orders a
first strike on the Soviet Union as he is convinced that the Russians had
been adding fluoride to the water supply in the US, thereby depriving
Americans of their “precious bodily fluids”.
-Similarly, the bears today argue that QE policies by central banks QE
have distorted the market pricing mechanism resulting in high asset prices
with low growth and inflation. They fret about the inability of central
banks to raise rates, with rates in the US having been kept unchanged for
longer than during the Great Depression.
-The bears also argue that if only global policy makers had stuck to the
1930s approach of maintaining “hard-money”, the developed world would
already have experienced a depression through the process of creative
destruction, and a full recovery would be in place by now with inflation
and rates rising. However, this approach was a policy of mutually assured
destruction with a devastating impact on the real economy and the populace.
-A policy of not intervening to support the economy, or worse, a
tightening monetary policy to foster the process of creative destruction
is not the preferred method to produce a diverse and vibrant economy.
Rather, the current policy of supporting the economy while allowing the
explosion of free services from Google Search to Skype and Wikipedia,
thereby forcing a reallocation of capital within the economy, would over
time create a more diverse and durable economy.
-The current environment is dominated by predictions of a future much worse
than today, much like Jack Schwager’s first book *Market Wizards*,
published after the October 1987 crash. Then (as now) the best financial
minds were convinced that the future was bleak, adding further credence to
the view that capital markets harbour innately pessimistic views,
providing an opportunity for risk takers.
-Anxiety is deep rooted in the human psyche (and *the* disease of the 21st
century), driving the market panics in August (with VIX spiking above 50)
and in September (causing a dramatic re-pricing of the year’s winners and
losers). Being anxious can sometimes be useful (especially when one is
anxious before the herd), but being anxious at the wrong time (like
today) can be very painful.
-Markets do not crash when everyone is anxious, and investors are very
concerned about today’s elevated prices and the potential lack of a policy
response to ward of further weakness in the global economy. There is little
appetite to take risk and panic abounds at the nearest sign of danger.
Ironically, by withdrawing the “Greenspan put” and using QE policies to
support elevated asset prices, *policy makers have created a safer but more
paranoid market.*=
-Crisis fears have driven markets this year , starting with Europe, then
the US high yield credit market with worries about shale oil borrowers,
then back to Greece, and finally the big one – a China hard landing, with
its falling stock and property prices seemingly adversely impacting
economic growth and raising prospects of a sizeable devaluation. However,
no crises have transpired – with no observable bankruptcies in China,
continued production of shale oil, and no bankruptcies in the EMs by
issuers of US dollar debt despite the sizeable currency devaluations.
-Perhaps this is a premature view and the cards are about to fall, or
alternatively there are no dead bodies in the system and the global economy
is a lot more resilient to shocks. Being forewarned a few years ago of a
50% appreciation of the US dollar versus some EM currencies, and a 50% fall
in the price of oil and iron ore, no one would have expected the current
relative calm at both the corporate and sovereign level, with the turmoil
having being contained to financial markets. *“Perhaps it’s time to
stop worrying and love the bomb.”*
*-Great piece which highlights the key feature which has governed
markets since the 2008 financial crisis : *“*policy makers have created
a safer but more paranoid market.” * *To operate in this volatile
environment one has to make note of the fact that every time a potential
crisis begins to unfold, global policy makers have blinked and intervened
aggressively to ward of the crisis, and the strategy has worked in terms of
restoring confidence each time. While at some point this feature will
undergo change, there is no reason to expect it to change anytime in the
near future. *
*-So what do investors do in this environment? As noted in previous
newsletters, either stay put and ignore the market volatility or maintain a
core long risk position while lightening up on rallies, thereby freeing
up cash to reinvest on sharp downturns. The current strong global rally
provides an opportunity to reduce risk (while maintaining a core long) as
the uncertainty regarding the Fed’s rate rise in December resurfaces.
Meanwhile, the China stock market is now officially again in bull territory
(having risen by 20% in the last month or so) making it perhaps the only
market in history to have experienced two bull and one bear markets all
within the space of a year! As a noted China financial analyst has
observed- “there is no bull market like a China stock bull market”.
Ironically, Chinese stocks could provide a safe haven in volatile markets
during the coming months.* (above sent to me by Biharilal Deora CFA)
interesting views and his occasional letters, steeped in relevant lessons
from financial history, provide much food for thought. His latest
newsletter follows in that tradition, advising clients not to panic in
the face of market volatility. To summarise:
-The current financial environment reminds him of the scene from the 1964
Stanley Kubrick movie Dr. Strangelove, where a deranged US general orders a
first strike on the Soviet Union as he is convinced that the Russians had
been adding fluoride to the water supply in the US, thereby depriving
Americans of their “precious bodily fluids”.
-Similarly, the bears today argue that QE policies by central banks QE
have distorted the market pricing mechanism resulting in high asset prices
with low growth and inflation. They fret about the inability of central
banks to raise rates, with rates in the US having been kept unchanged for
longer than during the Great Depression.
-The bears also argue that if only global policy makers had stuck to the
1930s approach of maintaining “hard-money”, the developed world would
already have experienced a depression through the process of creative
destruction, and a full recovery would be in place by now with inflation
and rates rising. However, this approach was a policy of mutually assured
destruction with a devastating impact on the real economy and the populace.
-A policy of not intervening to support the economy, or worse, a
tightening monetary policy to foster the process of creative destruction
is not the preferred method to produce a diverse and vibrant economy.
Rather, the current policy of supporting the economy while allowing the
explosion of free services from Google Search to Skype and Wikipedia,
thereby forcing a reallocation of capital within the economy, would over
time create a more diverse and durable economy.
-The current environment is dominated by predictions of a future much worse
than today, much like Jack Schwager’s first book *Market Wizards*,
published after the October 1987 crash. Then (as now) the best financial
minds were convinced that the future was bleak, adding further credence to
the view that capital markets harbour innately pessimistic views,
providing an opportunity for risk takers.
-Anxiety is deep rooted in the human psyche (and *the* disease of the 21st
century), driving the market panics in August (with VIX spiking above 50)
and in September (causing a dramatic re-pricing of the year’s winners and
losers). Being anxious can sometimes be useful (especially when one is
anxious before the herd), but being anxious at the wrong time (like
today) can be very painful.
-Markets do not crash when everyone is anxious, and investors are very
concerned about today’s elevated prices and the potential lack of a policy
response to ward of further weakness in the global economy. There is little
appetite to take risk and panic abounds at the nearest sign of danger.
Ironically, by withdrawing the “Greenspan put” and using QE policies to
support elevated asset prices, *policy makers have created a safer but more
paranoid market.*=
-Crisis fears have driven markets this year , starting with Europe, then
the US high yield credit market with worries about shale oil borrowers,
then back to Greece, and finally the big one – a China hard landing, with
its falling stock and property prices seemingly adversely impacting
economic growth and raising prospects of a sizeable devaluation. However,
no crises have transpired – with no observable bankruptcies in China,
continued production of shale oil, and no bankruptcies in the EMs by
issuers of US dollar debt despite the sizeable currency devaluations.
-Perhaps this is a premature view and the cards are about to fall, or
alternatively there are no dead bodies in the system and the global economy
is a lot more resilient to shocks. Being forewarned a few years ago of a
50% appreciation of the US dollar versus some EM currencies, and a 50% fall
in the price of oil and iron ore, no one would have expected the current
relative calm at both the corporate and sovereign level, with the turmoil
having being contained to financial markets. *“Perhaps it’s time to
stop worrying and love the bomb.”*
*-Great piece which highlights the key feature which has governed
markets since the 2008 financial crisis : *“*policy makers have created
a safer but more paranoid market.” * *To operate in this volatile
environment one has to make note of the fact that every time a potential
crisis begins to unfold, global policy makers have blinked and intervened
aggressively to ward of the crisis, and the strategy has worked in terms of
restoring confidence each time. While at some point this feature will
undergo change, there is no reason to expect it to change anytime in the
near future. *
*-So what do investors do in this environment? As noted in previous
newsletters, either stay put and ignore the market volatility or maintain a
core long risk position while lightening up on rallies, thereby freeing
up cash to reinvest on sharp downturns. The current strong global rally
provides an opportunity to reduce risk (while maintaining a core long) as
the uncertainty regarding the Fed’s rate rise in December resurfaces.
Meanwhile, the China stock market is now officially again in bull territory
(having risen by 20% in the last month or so) making it perhaps the only
market in history to have experienced two bull and one bear markets all
within the space of a year! As a noted China financial analyst has
observed- “there is no bull market like a China stock bull market”.
Ironically, Chinese stocks could provide a safe haven in volatile markets
during the coming months.* (above sent to me by Biharilal Deora CFA)
See what the CFAs of the world are thinking & doing !!
And what are CAs doing?
Do we CAs have a bright future investing in the stock market?
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