InterestingLeigh – It’s Alice in Wongaland
“But I don’t want to go among mad people," Alice remarked.
"Oh, you can’t help that," said the Cat: "we’re all mad here. I’m mad. You’re mad."
"How do you know I’m mad?" said Alice.
"You must be," said the Cat, “or you wouldn’t have come here.”
― Lewis Carroll, Alice in Wonderland
US Bond yields have been edging upwards for much of this year, the US government is currently seeing partial shutdowns, the US debt ceiling has been reached again, the markets are just shy of all-time highs, a UK housing bubble is looking possible – yet I note a survey from Liberum headlined, ‘Bears becoming an endangered species – 84% of fund managers surveyed are bullish!’ If this is not a chapter from Alice then what is?
I suppose that most of the above factors are known and investors appear to feel comfortable with them. Indeed, having operated in this altered state for many years, we now have a generation of business managers, politicians and investors that have experience in such an environment. Many Japanese know nothing else. As referred to before in these pages it is the stock market as a pricing mechanism that is key – how much of this doom is already priced in and, importantly, expected? From the upward moves in markets, there is clearly an expectation that the next ‘surprise’ news flow will be positive, hence investors are loading up with risk assets in their portfolios and investing further down the market cap spectrum into more Mid and Small cap stocks, hence why these indices are leading yet again.
I feel that in the near term the above points vindicate the moves in the portfolio to raise exposure to financial stocks, in particular Lloyds Bank and Legal & General, attempting to play the rising bond yields. Additionally, we have had significant exposure to the Mid & Small cap end of the market, ending September with over 70% of the Fund exposed to this. Very recently, however, we have been trimming this due to excess performance, not necessarily supported by earnings upgrades, perhaps simply down to technical over-buying, with too many investors wanting to play this market.
I remain nervous about the mechanics of recovery and moving the dials back to any sort of normality as this may cause extraordinary levels of stress in the markets. My quandary is: what is the norm? Is it what we believe used to exist prior to 2008 or is it the years since? We can pick many faults with the time prior to 2008. Recent history teaches us that as the US debt ceiling is reached, the limits are simply raised; so why should this stop any time soon? Does this stop next week or in twenty years’ time? Perhaps we are in the new norm. As I tried to suggest last month, it is in no-one’s interest to alter this, or at least no-one currently in power.
The recent market reaction, or lack of, makes me think that if no-one else is worried about this debt, why on earth should we? Ultimately, it must be down to confidence. Investors presently believe that the authorities remain in control and will simply print money to meet governmental or bond financing requirements. It is a change of confidence that we have to look out for. For me, this is where we take our lead from the US 10 year bond yield; this will dictate what happens. For the time being, strap yourself in and join the madness.
Perhaps though, amongst all of the other nonsense, one of my favourite quotes from Alice is:
“Yes, that's it!” said the Hatter with a sigh, “it's always tea time.”
― Lewis Carroll, Alice in Wonderland. Let’s put the kettle on.
Source: Wikipedia, US Public Debt Ceiling 1981-2010