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Hedge Clippings | Thursday 09 April, 2020
It doesn't take a genius to know, or for that matter to write, that markets have been unbelievably volatile, not only over the past two months, but weekly, daily, and intraday as well. However, making sense of markets, or for that matter the longer-term effects of the unprecedented disruption and dislocation caused by COVID-19, is a whole different matter.
There are obviously varying views in this regard. On the one hand, the market is speaking, rallying sharply off the lows reached on the 23rd of March. At a recent presentation by Longview Economics, CEO Chris Watling quoted Benjamin Graham who said that "In the short run the market is a voting machine, but in the long run the market is a weighing machine".
So, having rallied almost 1,000 points, the market is clearly suggesting that it was oversold. However, as Watling also points out, this merely reflects a voter-registration test that requires only money, not intelligence or emotional stability. In the longer term, the market as a weighing machine will determine how much damage has been done to the global economy, and specifically to individual sectors and companies.
The unprecedented level of government and central bank support is obviously influencing the market's short-term voting machine characteristics. However, this is also influencing its longer-term weighing machine characteristics, which is a trend that is simply continuing (albeit to an even greater degree) the distortions which exceptionally low interest rates have had on markets over the past 3 to 4 years.
While certainly supporting what governments globally have been doing to ensure there is no repeat of a 1930's type depression, the risk is that the capitalist system which should let companies sink or swim based on their merits - both management and balance sheet - won't operate efficiently, at least in the short to medium term.
Eventually, the question will have to be answered whether capitalism in its pure form still exists. In the meantime, we should all be thankful for government intervention.
Turning for a moment to the performance of funds where the range of returns remains extreme. As might be expected (although forgotten by many during the flood of investors and their capital into low cost, low fee index tracking ETFs), Absolute Return funds as a group have outperformed the index after fees by 13% YTD since December 31, and by 11% over 12 months to the end of March.
There will always be an argument about fees, and value, but the old adage that quality is remembered long after cost is forgotten would seem to hold true.
On that note, have a safe, if somewhat unusual, Easter long weekend.
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