Is Friday the 13th an explanation for unnatural events in financial markets?
These events range from central banks spending billions to bring rates down despite bond yields being at an all time low; to the average holding period in UK equities falling from ten years in the 1950s to twenty two seconds in today’s markets.
1. The financial situation of many developed economy governments has never been worse….yet the rates at which they can borrow money have never been lower. The US has 3.3 times more debt outstanding than a decade ago and yet the yield demanded by the market has fallen from 6.1 per cent to 2 per cent.
2. Investors are lapping up corporate bonds (P&G 10-year yield is at 2.3 per cent and McDonalds 30 year yield at 3.7 per cent) whilst selling the same companies' equity, where the well-covered equity dividend yield is higher than the corporate bond yield.
3. Bond yields are below 2 per cent indicating that there is a very low probability of inflation, and a high probability we are turning Japanese. Meanwhile, gold races onwards and upwards as central bank money printing points to a probability of inflation.
4. Bond yields are at all time lows, and no one wants to borrow money even at this rate, but central banks keep spending billions to try to get rates down just a little bit more.
5. Some of the smartest investors in the world (Warren Buffett, Seth Klarman, Jeremy Grantham) think bonds are hideously over valued and yet most pension funds are looking to increase their allocations to bonds and bond funds continue to top the best-selling fund tables.
6. Corporate earnings are at their all-time highs, and in the long run, grow at about 5 per cent nominal. So of course for this year, the sell side forecasts 10 per cent growth and fund managers and strategists continue to talk about how cheap equities look on one year forward price to earnings ratios.
7. The average holding period for a UK share has fallen from 10 years in the 1950s to only 22 seconds. Note to David Cameron, if you are expecting shareholders to exert greater influence on management remuneration, owning a share for 22 seconds makes attending the AGM quite tricky.
8. The European Central Bank, backed by European sovereign states, is lending money to European banks at 1 per cent so that they can lend money to sovereigns by buying government bonds of European states, or put it back on deposit with the ECB. Everyone seems to think this is great, but when Bernie Madoff did it, he was arrested.
9. Articles about how hedge funds swallow up 85 per cent of their client’s investment gains in fees continue to appear alongside articles about investors’ intentions to increase exposure to hedge funds.
10. During the credit crisis the ratings agencies rated over 50,000 sub-prime credit default swaps as AAA….and yet the markets still hang on their every word.
11. Luxury goods used to be the first thing to go in an economic decline whilst basics would hold up. But now we have Tesco posting its worst sales for 20 years, while Burberry grows sales at 20 per cent and new orders of Bentleys are up 50 per cent.
12. The vast majority of economists and strategists have proved hopeless at forecasting anything, and yet continue to be hugely over confident in their ability to predict the future.
13. Most investors would choose pile A (enough gold to fill the field of a baseball pitch) in this year’s letter from Warren Buffett over pile B, which includes a) all the farmland in America with output of $200 billion annually and b) 16 Exxon Mobils generating $640bn annually and c) $1 trillion of cash, because ‘gold is the only true store of wealth’.
By Ian Lance, portfolio manager of equity income and value at RWC Partners