I’ve just returned from a trip taking in London, the South West of England, Barcelona and Majorca. Time out of the office is where most useful thinking gets done and having just spent some of the former I thought I’d jot down some of the latter while still fresh. Whether ‘useful’ or not though only time will tell..
Summary Conclusion
Markets around the world, credit, asset or equity appear to have run out of puff recently. Since June 30th the S+P-500 has declined by 1.5%, the Nikkei-225 is virtually unchanged and the FTSE All-share is down by 1.7%. The HSI has notably bucked the trend but has been such a lousy performer relative to other major markets it’s move has more the feel of a catch-up rather than a countercyclical breakaway.
A lot has been achieved since the GFC in restoring confidence in markets and institutions but I sense a collective apprehension about where we go next? Asset values and employment levels in the developed world have been restored to something like those prevailing before the GFC but can these gains be built on? This is the question, to which we have no answer presently, that now vexes ‘Wall-Street’ and ‘Main Street’ alike.
I try to hope for the best while planning for the worst but believe, on balance, the answer to the above question is yes, we can move on; but it may take another six to nine months before unequivocal proof of bottom-up improvement is forthcoming. The cautious then can be forgiven for keeping their powder dry given where we’ve come from in recent years.
What holiday thoughts specifically lead me to this conjecture?
Reason to be cheerful #1
Three years on and the Euro has survived, and thrives. Three years ago Greece was sinking threatening to take down a large part of poorer Europe and the Euro with it. It was as if the GFC were being re-run, but with imploding sovereign borrowers taking the place of imploding banks. We don’t need to dwell on history but just look at where we are today? Few now doubt the viability of Europe’s single currency and it’s been a remarkably steady store of value over the three years since the crisis. Moreover, experience from my recent trip is that repricing (in Spain at least) has taken place at the country level which was part of the problem in the first place. Goods in Greece should always be cheaper than in Germany but for a time they weren’t. I was in Madrid before the Euro-crisis and found then shops and hotels pricing at London levels; but Barcelona and Majorca today are (where you can do like-for-like comparisons) as much as 50% cheaper. Confidence and competitive pricing in the Eurozone can only be good things which, though not sufficient for recovery, are most certainly necessary.
Reason to be cheerful #2
Governments will get their stimulus policies wrong; but only in one direction. Travel allows for more reading and I renewed my acquaintance with The New Yorker on my trip, in part on account of an in depth profile of Fed Chairman Ms. Janet Yellen (you can read it here if you care http://www.newyorker.com/magazine/2014/07/21/the-hand-on-the-lever, I think you should BTW). What I kind of knew before reading the piece is that the Fed under Ms. Yellen will not be taking chances rolling back monetary easing too soon. In the UK there’s mumble about home prices and the need to nip a potential problem in the bud but with an election just around the corner what do we think the chances are there for bold action? Europe may or may not be leaving the recovery room but there’s no chance there of a rate rise in the foreseeable future. No politician or even ‘independent’ central bank will now dare roll back present accommodative policies until a recovery is significantly redder in both tooth and claw than it is today; and I don’t believe markets have quite got that yet.
Reason to be cheerful #3
In the UK at least a capex cycle has manifestly re-engaged. My younger brother is involved, at the sharp end, of the concrete business in the South West of England. We managed to meet on Saturday morning after he’d come from four hours of work. He’s regularly doing a day lasting from 0700 to 1900, six days a week and this has been going on since the beginning of the year. London has more cranes on its skyline than I’ve ever seen and our journey back from Majorca to the City Airport took us then on a cab ride through London’s East End which appears to be a massive building site (an article from this week’s Economist ‘Bodies, Bombs and Bureaucracy’ provides some useful context). Pessimists will counter that this is merely the harbinger of the next bust but, as the economist article points out, the last time development (in London) was carrying on at this pace was in 2003; and what came after 2003 was a very nice time for investors indeed (yes, yes, until it wasn’t).
In Conclusion
Anecdotal evidence can never fully support an argument; but, together with reports in the public domain that suggest the global recovery is continuing, seem to lend weight to the view that post GFC improvements are, at the very least, sustainable. The issue that can’t be settled decisively is whether or not this platform can be built on? If not, markets are fairly priced and therefore vulnerable; but if we can progress from here, and I believe the chances to be better than 50%, then markets are now merely taking a justifiable pause for breath.