Timing & trends
Bill Gross runs PIMCO’s $252.2 billion Total Return Fund. With such a massive fund investing in income bearing instruments during a collapse in interest rates, its no wonder many call Gross the world’s pre-eminent bond fund manager.
As for Gross’s calls on the stock market, the chart below shows that that he was consistently wrong on his macro stock market calls. He was negative throughout the 6000 odd point Dow Rally from the Stock Market bottom in 2002. Negative again for most of another 6000 point Dow Rally from the early 2009 stock market bottom. .
Specifically Gross says that “The cult of equity is dying”, that stock investors should rethink the age-old investing mantra of buying and holding stocks for the long run. He says consistent, annual returns from stocks are a thing of the past.
Gross makes the case that stocks have averaged a 6.6% annual gain on an inflation-adjusted basis since 1912. That said he thinks that the 6.6% return was a “historical freak” that is unlikely to occur again because of slowing economic growth around the world. He says that return “belied a commonsensical flaw much like that of a chain letter or yes—a Ponzi scheme.”. In short that with growth on the US economy averaging 3.5% over that period of time, “investors were “skimming 3% off the top each and every year.”
Of the $1.8 trillion Pimco has under management in its various funds, only about $6 billion is in active equity assets.
With Gross’s track record in calling stock market moves so negative, one has to wonder if its not time to buy. Be sure to click on the chart below and view his track record.
Click on the Chart or HERE for Larger Image. To read Bill Gross’s entire commentary “The cult of equity is dying” go HERE
Here is the reality. We have intense uncertainty on US fiscal, energy and health policies. Nobody knows what their effective tax rate is going to be next year so they cannot plan.
When you model that uncertainty in economic terms, you end up with higher liquidity ratios in business and rising savings rates in the personal sector. This damps spending growth and spending is what gross domestic product is all about.
On top of that, we have an export shock from the spreading European recession that is only now starting to show through in the data, such as the plunge in US purchasing managers’ orders.
Now, if the baseline growth trend in the US economy was in the old paradigm range of 4-6 per cent for this stage of the cycle, we could certainly absorb these negative shocks.
But the underlying trend in the pace of economic activity is somewhere between 1 and 2 per cent, so there is little margin for error: the cushion is razor-thin.
….read more HERE
So I wasn’t unduly surprised to read recently that he believes Burma to be “the best investment opportunity in the world, with North Korea not far behind”.
He exaggerates to make a point, but his comments gave me pause for thought because I am as guilty as anyone of lazily describing the investment world as a three-legged stool, as if the US, Europe and China were the only markets that mattered. In particular, his interest in Burma and North Korea is a reminder that there is a lot more to Asia than the Middle Kingdom.
Some of the countries that make up the ASEAN region have been among the best places to ride out the financial crisis. Stock markets in Indonesia and Thailand, in particular, trade at a healthy premium to their pre-crisis levels, while the world average remains deeply in negative territory compared with five years ago.
South-east Asia as a safe haven is a novel concept for anyone who remembers the region’s own devastating financial crisis in the late 1990s. I have a cartoon on my wall from a newsletter I published at the time showing a row of sick-looking tigers in hospital beds with thermometers in their mouths. The region has never really shaken off its image as the riskiest of emerging market bets.
But confidence is growing in a region of 600m people, with a fast-expanding middle class driving consumption and economic growth. The International Monetary Fund recently downgraded growth for the ASEAN region, showing it cannot completely buck a slowing global recovery. But it has still pencilled in 6.1pc growth next year, compared with 0.7pc for the euro area and 2.3pc for the US.
The ASEAN should not be underestimated. With a combined stock market capitalisation of more than $2 trillion and trade with China expected to top $500bn by 2015, the region is grabbing the attention of increasing numbers of investors. In the first half of this year, almost as much money flowed into ASEAN funds as flowed out of China. Having been the first investments to be liquidated in an emergency, they are taking on the characteristics of a port in the storm.
Many of the region’s attractions are familiar to China bulls. Rapid urbanisation and infrastructure build tell a similar story, for example, as do the robust government finances that make a high level of public investment possible. But there are differences, too. China’s one-child policy is leading to a rapid ageing of its population, but in South-east Asia more than 40pc of the population is under 25, putting the region in a demographic sweet spot. The ASEAN region is extremely diverse, however, so it is not possible to generalise beyond the obvious themes of higher consumption and investment. Vietnam and Singapore share membership of the economic organisation, but little else. Some of the region’s countries are rich in natural resources that others lack. Inflation is a problem in some places and not in others. Local knowledge is key.
One of the most interesting markets in the region is Thailand, and not just because it might be the best way to tap into the opening up of Burma. Thailand’s stock market has risen by 16pc so far this year, beating all the other main indices in Asia.
In part that reflects a quicker than expected recovery from last year’s floods. But it is also a consequence of a raft of pro-stimulus policies from the country’s populist government, including a 40pc rise in the minimum wage and a sharp reduction in corporation tax from 30pc to 23pc, with 20pc in the pipeline for next year.
Foreign investment is pouring into Thailand, with Japanese car makers seeing the country as a safe destination for companies seeking to escape the high yen and energy shortages following the Tohoku earthquake.
The government is playing its part, too, spending heavily on dams and flood defences as well as rail and road projects to help promote the country as a distribution hub for the region, linking China with frontier markets such as Cambodia.
Thailand might seem a bit mainstream for someone weighing up an investment in North Korea, but less adventurous investors than Jim Rogers probably won’t mind that.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63
“Exciting times. Sovereign debt issues have been under severe pressures as long-dated US treasuries are working on an “Eiffel Tower” top.”.
SIGNS OF THE TIMES
“Spanish banks’ bad loans jumped to an 18-year high in May.”
– Bloomberg, July 18
“Speculative-grade corporate debt in Europe is the most expensive to insure in
1 1/2 years.”
– Bloomberg, July 20
“Wall Street’s five biggest banks reported the worst start to a year since 2008.”
– Bloomberg, July 20
“Landlords are piling the most debt onto commercial properties in five years as Wall Street bundles the loans into bonds to meet rising demand from investors seeking high yields amid record-low interest rates.”
– Bloomberg, July 17
This is getting intriguing. Conservative money, and lots of it, has been finding comfort in the liquidity of US treasury bills. This has been enough to drive yields to Depression lows. Longer-dated corporate bonds are not at Depression-devastated high yields. But, are working on a momentum and sentiment high for prices.
Wall Street is again “bundling” securities, and “investors” are again reaching for yield.
What’s next?
PERSPECTIVE
Last week’s Pivot concluded that the Dollar Index was having trouble getting through the 83.5 level and that any decline would prompt some “Positive vibes”. The shelf-life was good until Friday, and Ross got onto the change with the two ChartWorks on Sunday.
The change was Spanish yields going to new highs, as the DX rose to 84.10 on Tuesday. Yesterday’s updated ChartWorks reviewed that the near term tendency will likely be down.
Overall, this works with the likelihood of choppy action through the summer.
However, as each week goes by events continue to reinforce our view that Mother Nature is adamant about keeping financial history on a fairly typical post-bubble contraction. Benighted policymakers don’t stand a chance – again.
The inability to really service sovereign debt is shown by Spain’s 10-year notes rising to 7.50% (new high) on Monday.
Hope over reality has brought relief, otherwise known as positive vibes, that could run for a week or so.
Stock market advice has been to sell the rallies.
CREDIT MARKETS
The hypocrisy of the establishment is something else again. Agit-propaganda about Barclays “manipulating” Libor has more to do with politics than improving interest rate markets. Terry Corcoran at the Financial Post has had some good pieces on the story. Yesterday’s is the latest and here is the link:
http://opinion.financialpost.com/2012/07/25/terence-corcoran-the-u-k-libor-coverup/
There are comments going back to the 1500s about a businessman complaining that some agent is deliberately setting rates too high. Then there is the seemingly endless record of “intellectuals” speculating or boasting that some agency can lower rates at will. Such examples usually appear during financial crises.
For the record, successful traders, such as Thomas Gresham (1519 – 1579), seem to be able to understand a crisis and merely observe that there is no money available – even “with double collateral”.
By a process of learning the hard way, successful traders get liquid or defensive at a speculative high. Thus Gresham’s dispassionate reporting, rather than despairing for some agent to wave a credit wand.
Sadly, the notion that some gifted agency can manipulate interest rates for the public good or relief has become dominant. And no matter how hapless the behaviour of the Fed has been it still has its admirers.
The speculative boom in commodities that culminated in 1919 was followed by an equally outstanding crash. The objective of the Fed during the 1920s was to prevent commodities from falling further. The real price of copper plunged from 663 to 148 and spent most of the 1920s around 175. The high in 1929 was 323 and the Depression low was 84.
The attempt to prop up commodities (old losers) was not successful as excess funds roared into the stock markets (new winners). The excitement of inflation in financial assets was discovered – again. Current policymakers still do not understand inflation in financial assets during a great bubble and that great depressions have always followed.
As head of the Fed in 1927, Ben Strong, knew about financial asset inflation with his “coup de whiskey” remark. We elaborated on this in November 2007 and the piece follows.
The problem is that interventionist economists have read economic theories, not market history.
The point is that Fed manipulations have not materially changed financial history, but have exaggerated the urge to speculate.
Why does the establishment grant central bankers the privilege of manipulating interest rates, and recently condemn what appeared to be interest rate manipulation of the non-government Libor?
In this regard, the Fed provides a special irony. It attempts to regulate economic behaviour through interest-rate manipulation via the official “Fed Funds”. Special is that the Fed is owned by a small group of large private banks.
The story gets worse. Talk to anyone who was on a Canadian bond trading desk in the 1960s and 1970s when the laws applied to traders did not apply to their equivalent at the Bank of Canada.
Offences such as wash trading to “increase” trading volume, focusing on one maturity to push the whole market up, and timing news releases to favour the market would put a private trader in jail. The central bank did it with no regard for common law.
The noise about Libor is purely political as control freaks are looking for another item to run. Perhaps part of Robert Diamond resignation from Barclays has to do with the nonsense of government functionaries impractical intrusions. Who needs it?
At one time, call money was a benchmark interest rate. This was the rate at which private banks loaned funds to brokers, who in turn provided margin to customers. Then in the insanity of yet another “new” financial era banks became brokers and putting it glibly; call money became Libor.
Now the empty suits want to take it over.
BOND MARKET
Exciting times. Sovereign debt issues have been under severe pressures as long-dated US treasuries are working on an “Eiffel Tower” top. The action is similar to the magnificent high for silver at 48.35 in April 2011.
Technically, the long bond has become another asset play that has little to do with interest rates. Representing investment-grade corporates, the LQD is carrying on with impetuous buying, impetuous enough to register some daily Upside Exhaustions. In the past these have led the high by a few weeks. We have had our eye on the top channel-line at 122. Of course, precision depends upon the thickness of the trend line.
The reversal will be interesting as most corporates could then be heading to depression-high yields.
Link to Friday, July 27 ‘Bob and Phil Show’ on TalkDigitalNetwork.com:
http://talkdigitalnetwork.com/2012/07/saving-the-eurozone/
INSTITUTIONAL ADVISORS
WEDNESDAY, AUGUST 1, 2012
BOB HOYE
PUBLISHED BY INSTITUTIONAL ADVISORS
The following is part of Pivotal Events that was
published for our subscribers July 26, 2012.
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