Greenland
like this post, we'll get there in the end...
The topic du jour currently seems to be 1987 and as one who was there and remembers it well, a little history lesson might be in order. It all happened over the long weekend starting on Friday 16th October through to Tuesday 20th. In the UK, on the 16th, we had the infamous Michael Fish hurricane. The day before the poor chap had predicted that there would not be a hurricane as a viewer had suggested there might be. We woke up on the Friday morning to find that for most of southern England the hurricane had devasted the tree population. Down the road from where I lived, a tall cedar had fallen straight on top of a Rolls Royce, right down the middle. There were oak leaves in the drive; we didn't have an oak tree anywhere near our house. Elm Avenue in Effingham became ex Elm Avenue. The beautiful glade of trees was felled by the wind and all you could see was the silhouette of Croydon in the skyline.
The markets were on edge, we had peaked in July. We'd fallen quite substantially for the for the FTSE (-12%) and then started to rally again. The markets were closed that Friday as the rail network spent the day clearing the lines of fallen trees. I woke up on the Monday morning feeling like death with a bout of flu (you remember good old flu?) that my 18-month-old son had passed on to me. Thank you, Alex! I rang the office and they said don't bother coming in the market is going down the tubes and nothing to do here as we had pretty much already done it by being heavily in cash. I went back to bed.
I didn't wake up until about six o'clock at night and turned on the BBC News, which had the bold headline, “Dow falls 500 points”. My flu befuddled brain wondered why the BBC could put an extra zero on the number. It turned out it wasn’t a forerunner to fake news... There had been no fall by anything like 500 points in the Dow before, which was at the 2250 level at the previous close and 1740 by the end of Monday’s trading.
I went in the next day, and we sat by the Ceefax screen. Ceefax was a text-based system that you could only get on BBC Two. The index was only calculated on an hourly basis back then. We just didn't have the computer power, then, bear in mind this was 1987, and this was before Windows and before PCs really took off. So, we sat there and at 10 o'clock the price came through for the UK FTSE which was also down from Thursday’s close at 2300 to close that day at 1800. We rang a lot of Unit Trust groups, most of whom were as dumbfounded as we were. One notable exception was a group I won't mention by name, but they're still around now. They didn't answer the phone. They had rather heroic box positions which were holdings of units which had been redeemed by their clients, but which the fund management group hadn't liquidated; they were holding the funds as their own investment, because until now the market had been going only one way and they'd been making a lot of money. On that day they lost a lot of money and probably not too far off folding, but they survived, however the memory lingers on….
This of course is the salutary lesson that when the proverbial hits the fan, it’s very often a buying opportunity. As it happened, the UK market didn't actually hit a low until early November at 1515; a fall form the July peak of 940 points or 38%. And it was at that point with the market still falling on the day that the Bank of England did the rounds among the institutions and pretty much told them that if they didn't pull their finger out and buy some stock in decent size fairly soon, there wouldn't be a market left for them to trade in and lo and behold, that was the bottom. There was an inexorable push upwards, but it took a full five years before the FTSE actually peaked above the 1987 high. The market in 87 actually finished up on the year (by 33 points), which not many people remember with any great enthusiasm, because many of them piled in, cheering on the classic FOMO rally, (Fear of Missing Out) and that's what we've been seeing recently. We hit a low in October last year, 2022; we’ve had a really strong bounce, which has sucked a lot of people in, particularly into growth, NB the tech stocks, Nvidia being a classic example. But we then peaked in July this year, and the markets have come off. We're in perhaps the throes of a rally now There was some big buying last Friday so we may see another push higher, but the downside pressure is still very much there, mainly as a result of the shenanigans in bond world and the Israel/Palestine conflict wont help.
The Fed are extraordinarily reluctant to do anything other than keep their feet on the loud pedal on interest rates. They suggested there may be another hike, but they are certainly going to keep rates at the current level at least into the middle of next year. The economy appears to be resilient. We're getting some quite strong GDP numbers and some not unreasonable earnings growth in the US. But the labour statistics are frankly bullshit. The Bureau of Labor Statistics has made so many adjustments to the numbers that nobody really quite knows where we are, but it would appear that instead of unemployment actually falling, or jobs being created, there were actually jobs destroyed last month, so make what you will of the labour statistic numbers, but they are not something you should pin your hopes on.
The bond markets have been signalling for a long time, with an inverted yield curve, that a recession is on its way. And normally when the recession arrives, the yield curve goes back to its normal state of being, with the long end of the market being at a higher rate than the short end and that seems to be what is happening at the moment. The 10 year is catching up very fast with the two-year yielding just over 5% and the 10-year yielding 4.9%. Why is the market so afraid of what's coming?
The big issue the Fed has is that with higher rates the US Treasury's interest rate bill keeps rising as it has to raise additional funds to cover the enormous budget deficits at higher and higher rates. This in fact just adds to the inflationary burden as interest rates add more to people's costs in terms of doing business. So, whilst the generally perceived wisdom is that raising rates cuts inflation, at the stage that we've got to in the States now where the Federal Reserve is in effect printing money to pay to the interest on Treasury bills, the opposite is true. Rising rates actually increase inflation. It appears that they don't seem to realise this or at least they don't seem to mention that in any of their press releases.
If you believe something strongly enough that it's embedded in your brain cells, that higher rates beget lower inflation for example, then you believe it regardless of what you're actually seeing in the real world. So maybe the Fed are trapped in a belief system that no longer works.
The two options they have are to save the bond market by reintroducing some version of QE. They won't call it that, but that's what it will be. They may do that by ending the payment of interest on reserves held at the Fed, which will mean there'll be an awful lot of liquidity that will flood into equity markets, amongst other places.
The alternative to that is to let the whole thing go to hell in a handcart and have a cathartic moment so bond markets are clear of unproductive debt that can't be repaid. And the equity markets have a surplus of zombie companies that are barely covering their interest rate bill if at all and are completely unprofitable. That's unlikely to happen although it’s almost inevitable that it will happen at some stage unless we have an energy miracle like discovering how nuclear fusion works so we get free energy and that would make an enormous difference.
On that point, the whole ESG green debate is beginning to unwind. Without fossil fuels, we cannot create the infrastructure and the “weaponization” we need to actually go fully green. We can't just switch fossil fuels off; it ain't gonna work. Sunak gets this as shown by the fact that he's extended drilling in the in the North Sea for oil and gas. And even Governor Newsom in California, which is probably one of the most fervent states when it comes to greening the planet, has rescinded some rules on smog reduction which means that there will be more demand for gasoline for cars. The Canadians are “going nuclear” and even the Germans are beginning to realise that their energy policy may need some amending.
So, the political will is beginning to change, which in fact is an extremely good thing, because now we can start looking to pursue policies that will actually work, which will take us into Greenland proper. I said we’d get there in the end!😎