When the behemothian dollar positioning becomes problematic, other positions have to be curtailed because of it.
Treasuries have (surprisingly) remained almost unchanged this year, despite the strong run in equity markets. One fears (for bond bears) that if there was a setback in equities, bond markets could rally strongly. Fed Governor Charles Evans, the “dove-ish dove” on the Fed Committee has recently suggested that three rate rises in the U.S might be required this year (a rise in March might be looking more likely now than market prices imply). Meanwhile, bond prices remain relatively unmoved. Perhaps the fear of reverse QE and the fright of inflation is too winning a combination.
Mr Trump has inherited a lot of debt and it is fortunate that he fears it not. Ronald Regan had a government debt to GDP ratio of 30% when he took over, while Trump is inheriting a ratio of closer to 120%. We are now 92 months into a business cycle and earnings have been down 15% in the last two years, despite strong promises from ‘the Street’ of different outcomes each past quarter.
Baker, Bloom and Davis’ US economic policy uncertainty is an entertaining chart -below. This comes at a time when the
U.S.economic surprise index charts are very high. Absolute Strategy tell us that it’s important to note that most of these positive surprises came from the so-called “soft” indicators – mostly survey data (such as the ISM and
Chart 2
Markit measures). Hard data (official figures) have been pretty much in line with consensus. Soft data is far more timely and could be forecasting a sharp improvement in the official figures. Or it could be that the rapid increase in economic optimism has clouded reality.
The financial press has suggested that passive investing will outstrip active investing, in funds under management, by 2023. Passive computer- based investing is cheap and in recent history, has been more successful. However, it does create a dangerous mis-allocation of capital to the biggest market cap stocks. It is a massively inefficient distributor of funding and favours those stocks that have benefited extensively from globalisation. Smaller, domestic indices and their component companies, have been starved of cash and left behind by passive investment. “De-equitisation” has also occurred because of it. Although one might not need fund management guile to invest in high market cap tracking, one is more likely to need so in small cap investing. If the “Trump trade” is as real as the markets are suggesting, the unwiniding of globalisation is going to cause sizable ripples to investment style at a time when retail investors have abandoned all hope and resorted to the colourless computers. A reversal of passive investing is likely to occur only when rotation gives way to wholesale equity selling. That might be a way off, but when it occurs, the computers won’t cry or see it coming... .they have no emotion.
Andy Ash E:
andy.ash@
admisi.com T: +44(0) 20 7716 8520
Source:The Daily Shot
21 | ADMISI - The Ghost In The Machine | January/February 2017
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