Hedge Clippings | Friday, 06 November 2020

"It has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time...." So said Winston Churchill on Armistice Day in 1947.

But Churchill's quote also included:

"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise."

Isn't that the truth!

And while we accept that the US system is democracy in action, one would have thought it is not what George Washington and his fellow founding fathers quite had in mind way back when they created the Constitution. They obviously hadn't allowed for Donald Trump, who, irrespective of one's liking or disliking of his policies, seems to be playing by his own rules.

It's been wall to wall, and minute by minute on the news channels, and if nothing else has pushed COVID, record low interest rates, and a record loss by the Wallabies to the inside pages. In the case of the Wallabies, thankfully so.

Amongst all the commentary and humour, we think this one sums it up best:

"A new analysis by some guy on Twitter has found that Donald Trump would have been re-elected with an overwhelming majority if none of the votes for Joe Biden had been counted."

You can read the full text here.

So there's nothing much that Hedge Clippings can really add to our comments of last week - namely that the polls might be incorrect, the result seemed to be up in the air, and that a tie or contested result wasn't out of the question. The sad reality is that whatever the result, the USA, as "leader" of the democratic world, will be at best divided, and at worst...

Back to interest rates, but more importantly to their "QE" program - namely buying $100 bn. of government bonds ($80bn Federal, $20bn State) over the next six months. While the new ultra-low rates won't make much difference to borrowers once the banks do/don't pass all the savings on, from the perspective of a depositor there doesn't seem to be much of a case for leaving any money in the bank. Unless of course you're worried about loss of capital.

While caution is required when reading glitzy ads (for example Mayfair 101 as reported by the AFR's Jonathan Shapiro) there are good opportunities to get both a reasonable return with acceptable risk. Check out www.fundmonitors.com.

We're living in strange times, and a strange economy. Major exports are under threat from China, who seem intent on punishing Australia for not kow-towing when told to, and having the temerity to have an independent opinion.

Domestic and regional tourism however seems to be going gangbusters, and with the opening up of state borders (more or less) likely to make up for much of the loss of overseas tourists.

Meanwhile Europe, and much of the rest of the world, continues to suffer with little end in sight to a long (indoor) winter.

As the old Chinese curse goes, "May you live in interesting times".

News & Insights

Video interview with Richard Ivers from Prime Value

ESG INSIGHTS Biden's most critical investment by Nikko Asset Management

Hedge Clippings | Friday, 30 October 2020

Next Tuesday - well, it will actually be Wednesday in Australia - the world as we've known it for the past 4 years or so will have changed, or not as the case may be. In any event, the US election will be all over bar the shouting, and there's been plenty of that.

Or will it? While the polls are pointing to a Biden victory, we all know that polls can be misleading, (just ask Bill Shorten). However in the US there is a greater chance of the polls getting it wrong (refer Hilary Clinton) partly as voting is voluntary, and partly due to the "system", whereby whoever wins in each State effectively receives 100% of that State's vote.

As such, from what we understand of it, Florida could hold the key to the White House, although an interesting spectacle may arise if Trump decides he does not want to hand the keys over. Further complicating the pollster's task is the record level of pre-election day voting, and further complicating that is the complexity of the pre-polling rules and regulations.

A result that seemed clear cut a few weeks ago would appear to be up in the air with just three or four days to go, so Hedge Clippings is going to hedge our bets, and predict it could go either way, with a tie, or at least a contested result, not out of the question.

This week we had the opportunity to run a webinar to canvass the views of three fund managers, namely Rodney Brott from DS Capital (Australian equities), Robert Swift of Delft Partners (Asia), and Chris Wheldon from Magellan (US/Global). The discussion was not so much on the politics and personalities behind the election (although that's difficult to avoid), but on the economic and market effect of the outcome - win, lose or "draw" - to either side.

What was interesting was that, in spite of the different strategies involved (or at least their geographical focus), while there were different views, there was also a broad overall consensus. A Trump win would mean more of the same, Biden would see a marginal move to the left, particularly given the hard left views elsewhere within the Democrats, and a "draw" would lead to uncertainty, and markets hate uncertainty.

Other key themes to emerge were that, whoever wins, the US is waaaay overdue increasing spending on infrastructure, and that the race for the White House is only part of the issue, with predictions that the Senate could well change to Democratic hands, potentially giving them the trifecta of the Presidency, Senate and the House of Representatives which they already control.

Whichever way, possibly excluding a Trump victory and a Republic Senate victory, volatility was expected to increase. To the average investor volatility is a negative, but as Chris Wheldon from Magellan pointed out, to a fund manager volatility can create opportunity - namely to buy stocks that are oversold, that were previously overpriced.

Another theme to emerge was that even though Trump's persona (narcissistic personality disorder) alienates many of his countrymen and women, and seemingly a majority of Australians, from a policy perspective (up until COVID) he had some significant achievements: No war on his watch (in fact, troop withdrawals), increased employment, reductions in taxation.

Meanwhile in the foreign policy sphere: Standing up to North Korea (and Iran), confronting China's threats to security (and particularly  IP theft), moving the US embassy to Jerusalem, leading to the recognition of Israel by the UAE.

If you have the time (45 minutes) you can watch the recording here. 

One other topic canvassed was the recent move upwards in US 10-year bond yields, as highlighted last Friday in Longview Economics' weekly report, headlined "Bonds - the BIG SHORT?". As Longview's research states, "Bond yields dictate and determine key big picture sector allocations. Getting bond yields right, therefore, is critical for most money managers/investors."

Longview point out that having made a record low on 4th August, 10-year bond yields have been edging higher, and more recently accelerating such that they have broken the 50 day moving average and have now reached their 200 day moving average, a key technical resistance level.

Longview conclude that the level of stimulus in the pipeline is especially large, and the case for a global economic boom is growing - assuming a vaccine can be successfully developed and released. And finally, the potential for further fiscal stimulus post US election (and presuming increased infrastructure spending) could see an increase in medium term US inflationary pressures, and thus higher bond yields.

Watch out!

Of course, also in the diary next Tuesday is the Melbourne Cup, which this year will be spectator free and therefore presumably silent. At least Victorians will be able to party, even if not at Flemington itself. Congratulations to all Victorians for their patience (even though we've heard a few grumbles from some quarters) while under lockdown.

News & Insights

Webinar: Fund Manager Roundtable on the US Election

The Presidential Volatility Kink by Arminius Capital