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Hedge Clippings | Friday 16 August, 2019
Turmoil takes hold!
Turmoil in equity markets as bond yields invert, triggering recession fears. Turmoil on the streets of Hong Kong as protesters up their anti-mainland push. Turmoil amongst sections of the financial sector as AMP turns the screws on advisors.
Let's take the inverted bond yield and the potential for a recession first:
Inversion in bond markets has preceded the last nine US recessions, hence the panic on equity markets. However, it's not a failsafe indicator, as shown in 1966 and again in 1998. On this occasion there are other forces at play - both for and against - which may confirm or deny the norm. We're in an unprecedented environment of ultra-low and, in many parts of the world, negative interest rates, hence it's no wonder that 10 year bond rates are so low. On the other hand, inflation at close to zero, China's inevitable slowdown after over 2+ decades of mega growth, the US/China tariff standoff, and the risk of that spilling into a currency war, and the potential for a "no deal" Brexit have all added to the seeming inevitability of the "R" word recurring.
Expect the turmoil to continue. Inflation doesn't look like re-appearing in a hurry, central banks are more likely to cut rates before they raise them again, and neither Trump nor Xi can afford to lose their credibility, or lose face. If anything, this is looking like a slow train wreck in motion.
Our friends at Longview Economics in the UK published a piece last week outlining Charles Kindleberger's "Framework for Defining Asset Price Bubbles" which lists his four factors for defining a bubble, and which we've taken the opportunity of including below:
1. Cheap money underpins and creates the bubble;
2. Debt is taken on during the bubble build-up, which helps fuel much of the speculative price increases (e.g. buying on margin);
3. Once a bubble is formed, the asset price has a notably expensive valuation; and
4. There's always a convincing narrative to 'explain away' the high price. Reflecting that, there's a wide acceptance in certain quarters that the price is rational (and that 'this time it's different').
Sobering stuff.
Hong Kong's turmoil however is travelling at a much faster pace, and one wonders how much longer the Chinese government will resist the inevitable crackdown if the protesters don't back down. Once again there's credibility at stake, with significant economic damage gathering pace.
Closer to home turmoil in the financial services sector continues unabated with both NAB, and particularly AMP, moving to restructure their advice and distribution businesses. Although this may seem to be a tipping point, the move from the aligned to a more independent advice model has been gathering pace for some time. Driven in part by regulatory change, in part by the fallout from the Hayne Royal Commission, partly by the high cost of retail distribution channels (which at the end of the day the investor often ends up paying for) and partly by the rise of technology, the trend is going to continue.
Change, they say, is inevitable - if you don't embrace it before it occurs it is likely to devastate you. Throw in a solid dose of turmoil, and the odds get shorter that it will. |
