A decade after Lehman Brothers failed, what do managers think about banks?
On Monday 15th September 2008, I remember walking into the office, not knowing quite what to expect....
Whilst some commentators (and the Federal Reserve) insist that there is no bubble in US equity markets, we can be in little doubt that Bitcoin is beginning to make the South Sea bubble episode of the 1720s look like a small blip in the share price.
From January to November, Bitcoin rose from $1,000 to $6,500. In the space of the past month it has soared to $11,380, plunged back to sub-$9,000 and in phoenix-like fashion risen again to $11,800 as of Sunday 3 December! By the time you read this it could be $20,000 or $200!
Quite how one puts a value on a cryptocurrency we have no idea, but that’s the last thing a speculator worries about and the returns on offer have revised the definition of greed. From a low in January 2015 an investment of $10,000 would now be worth $650,000. This year alone a $10,000 ‘investment’ would have reaped $110,000. Is it any wonder that people have been “betting the ranch”?
A futures contract is due to be introduced early in the New Year, which will almost certainly assist in redefining the word ‘volatility’. The blockchain technology that facilitates these cryptocurrencies is potentially a game-changer for many industries, and will have significant value. But as a serious payment system Bitcoin isn’t going to make the grade in its current guise. Who would take payment and see the value halve? It might of course double, but that just turns your business plan into a lottery ticket…
Meanwhile the US Senate has managed to cobble together a tax reform bill, complete with handwritten amendments. The main item of interest for markets is the reduction of US corporate taxes from 35% to 20%.
The Dow rose nearly 3% in the week preceding the vote, despite this cut seemingly having been priced in many months earlier. The original intention was to create a revenue neutral bill but, in the event, over the next 5 years the budget deficit will rise by a further $1 trillion. The major beneficiaries are of course corporates and the already well-paid. Tax cuts for ‘middle America’ are very modest by comparison – a category of employees who have not seen their real inflation-adjusted wages rise since 2010.
The FTSE 100 is still being pushed around as much by the pound/dollar exchange rate as any economic data. Sterling is pretty much back to pre-Brexit levels against the dollar but is still weak against the euro, which has had an impressive run against most currencies give the negative real rates on offer across Europe. The Budget was a non-event, as too it would appear are the Brexit negotiations. David Davies’ problem is that the EU negotiating style is ‘take it or leave it’ with zero movement from their opening gambit. The EU’s share of global trade has been declining for some time and they will eventually cut a deal.
The S&P 500, Dow Jones and NASDAQ all made new highs again in November. Given our comments in the overview, this is a time for caution especially as the Fed looks set to continue raising rates into a potential economic slowdown. The official growth numbers look strong on the face of it, but inflation numbers and employment data have been changed and manipulated to create the rosy scenario. This economic ‘recovery’ has been one of the longest and most ineffectual on record.
The recently enacted tax bill will have little economic impact, although we suspect any corporate savings will be used to continue the share buyback regime which has, in part, kept market valuations at a high level.
Elections are coming back to haunt European markets. Merkel has been unable to form a coalition and may have to hold a second vote. The AfD (the “right wing” Alternative for Germany) which took 12% of the vote last time could well improve on that, which is why the Chancellor is not keen to go to the polls again. In Italy, the opposition parties – most of which are of the Eurosceptic tendency – are gaining traction in the polls too. Renzi may end up with the same problem as Merkel although it would be the greatest irony if Berlusconi’s Forza Italia party end up holding the balance of power.
Abe’s win at the polls has propelled the Nikkei above long-term resistance at 21,000, which is now important support. We anticipate a pull back after a near 10% rise since the election. The next target is between 23,000 and 27,000 – levels not seen for more than 20 years.
Both market sectors are heavily influenced by the moves in the US dollar index. A weak dollar is generally good for these markets as we have witnessed so far this year, but there are signs that the dollar may be on the turn presaged by the anticipation of higher interest rates. Long term the demographics of this region are the big positive.
It is still early too early call the end of the 35-year bond bull market. However, the change in central bank rhetoric has added to the impetus for higher bond yields and a break above 3% for US Treasuries would be significant. In the short term any equity market weakness could well induce some risk-off buying of bonds and, if the Fed’s rate rises do tip the US into recession they have hinted at negative interest rates, which would keep the bond bull market going.