Brains for bull markets, cause of the crash, UK inflection and buying Finland

The Weekender offers my perspective on market developments and their potential broader implications, written most Friday afternoons. If you'd like this delivered to your inbox on Saturday mornings via Northern Trust, please sign up here. 

Brains or a bull market?

We all think – at least I do – that we’re quite smart during bull markets. But when they collapse, we’re quick to find fault, albeit that this can be a difficult task. Indeed the US government’s own commission identified the cause of the 1987 crash as ‘indeterminable’. But that won’t do. We need answers. We need someone – or something – to blame. For it can’t be our fault (see above: quite smart).

To me, the most credible explanation involves levered concentrated positions (think vol-targeting strategies, CTAs, quants and all copycats thereof) in a few momentum trades forced (by machines) to find exit liquidity during summer (when none exists). Less credible is the argument that: ‘it’s the Fed’s fault, they are massively behind the curve’ (the US is slowing but it hasn’t stalled).

Then we have the absurd: ‘Buffett’s had a margin call on his short yen position’. It’s true he’s borrowed yen to fund equities (aka carry trade), but he’s also short bonds which have fallen. The reason for his Apple sale may be as mundane as ‘taking profits’ and no one’s gone poor doing that. And Apple remains his biggest position; I’m more interested now in what he does with the cash: add to his giant T-Bill position (now bigger than the Fed’s)? Buy more Japanese stocks (which have become significantly cheaper)? Or maybe he visits the UK, where he’ll find lower valuations and higher starting yields in the FTSE. He could, for example, buy all of AstraZeneca (the UK’s largest company) and half its closest rival GSK for that sum.

In any case, while market liquidity tends to dry up in summer (ref: ‘sell in May’) global liquidity, least that proxied by Bloomberg’s global money supply chart, just hit an ALL TIME HIGH. This as the world (ex Japan) is now cutting rates.

Got gold?

The more accurate explanation?

After serious reflection and research I’m of the view this is what caused the sell-off (and subsequent rebound):

Source: Kevin Kallaugher in The Economist

Sell in desperation, sell cheaply

 With all the references to ‘Black Monday’ appearing in the wake of last week’s sell-off. I couldn’t help but think of Peter Lynch. In his fabulous book ‘One Up On Wall Street’ he describes having to cut short his first holiday in 12 years to return to his office during the ’87 crash. By the time he arrived back he’d lost a third of his clients’ money. When asked if he was sacred, he said ‘87 wasn't scary because I concentrate on fundamentals …and companies were doing fine’. I was reminded of such a week ago last Monday. I’ve held Japanese stocks for several years but on that Monday the Nikkei had its biggest fall since crashing 14.8% on October 19th 1987. However, those who embraced the panic then were rewarded. Or as Lynch would say, those who sold in desperation, sold cheaply.

So, unlike me, I’m hoping the fund managers I’ve entrusted and the corporates they hold utilized their record cashflows, bulging cash balances and expedited their buyback plans and used weakness to retire more equity. That’s what I would have done, had I been less desperate – or had any cash left after my recent holiday.

Olympic highlights

My holiday was consumed by the Olympics. What an occasion! Paris resplendent. Celine Dion transcendent and Tom Cruise: such beautiful skin. The sights, the struggles and success, all mesmerizing. Does anyone even remember the effluent in the Seine, the pee in the pool, arson attacks on French trains or who currently controls their parliament (answer: no one). For my family, there were few prouder moments than when a young Kiwi lad from my hometown, one I’ve known since birth and so aware of the enormous sacrifices he and his family have made, won gold in the kayak cross then placed his gold medal over his father’s head. His friend, another local girl, also won gold in the keirin. Should Malcom Gladwell or Mathew Syed like to study the curious case of sporting success from one of the most under-populated parts of the commonwealth (less than even St Lucia) they should visit Central Otago, New Zealand. There’s something (good) in the water there.

Elsewhere my personal highlight reel includes Simone Biles (OMG), Leon Marchand (a bright future, you might say?), Antonine Du Pont (confirmed as one of Rugby’s GOAT) and Tom Pidock who’s become the least-liked Brit in France since perhaps the Duke of Wellington circa 1815. Watch the last lap of the men’s mountain biking final to find out why.

Style drift

I was enthralled by the Egyptian fencer competing while 7 months pregnant, the Aussie hockey player who amputated his own finger so he could play and the break-dancer Raygun, who despite receiving nil-points for her efforts, probably did more for her sport (and for my signature dance move – the sprinkler) than anyone else, ever. While criticized for her performance I have a feeling she’ll do just fine, either as a social media influencer, or as a “researcher on the cultural-politics of breaking”, her current job. (True story). That said, I am not sure how breakdancing (or skateboarding) really fits the motto of citius, altius, fortius (faster, higher, stronger). Save more style drift, I’d like to see the return of former Olympic sports like ‘pigeon shooting’ and the ‘tug-of-war’ to accompany the likes of cricket (returning to the LA Olympics after 128 years).

At least cricket brings an extra billion or so of viewers to keep the advertisers happy. Although I don’t fancy the American’s chances much. They might have more luck in Lacrosse, a sport they actually have some claim on inventing. That and other iconic sports like ‘breaking’. And ‘ultimate frisbee’.

National identity in sport, politics and investing

The Olympics reminds us of the importance of shared experience and community. It unites us. The mixing of nations among spectators and athletes in the Olympic Village are a powerful metaphor for globalization. However, such lessons could likely be soon forgotten, for the Games espouse a more enduring counter-trend: national pride. An idea transcending sport to politics and over time and even asset allocations, as It’s clear: the world is fragmenting. Countries are becoming more self-reliant, less international and more national in focus. This may even be true of America, now less reliant on imported energy, and so less concerned about those regions exporting it (thanks to fracking). So as markets fragment may allocations follow? Maybe they already are. We’re starting to see more EM ex-China, ACWI ex US Index funds and single country ETFs emerge, like the recent Saudi ETF in China.

In time I expect to see more focus on country-specific funds, for if you want exposure to the extraordinary changes happening in places like the UK and Japan (and Finland?) you will not find these in the ACWI.

Redefining a ‘bad dad’ and buying Finland

I often threaten to drop my kids on the side of the road and make them walk home for fighting in the car. But before reaching that point, I’ll usually throw an iPad. My wife thinks kicking them out is an irresponsible idea, especially on the M4. The iPad one is more sensible. That was until she read Jonathan Haidt’s, the Anxious Generation. She’s now changed her mind. My kids are walking home. Haidt argues that parents have become too risk averse and over-protective of kids in the real world – presenting too few challenges, failures and stumbles to build character and resilience – and are too tolerant and under-protective in the online world. Kids have transitioned from a play-based to phone-based childhood, where there is now irrefutable evidence linking smartphone usage with teenage depression (suicide rates in girls have increased 167% between 2010 – 20). His solution; age-gating and banning smartphones in schools.

Now, as I’m clearly no social scientist what has this got to do with markets? Well, I think this is great news for Finland. Why? Because every parent I know is buying their kid a ‘brick’ (i.e. no social media apps) mobile phone called the 1104G. It’s made by Nokia. You know, the company that once had a market cap some 11x higher and controlled 70% of the Finish stock market. Imagine if that trend catches on. Or we get a peace deal in Ukraine 

Long patriotism

Rachel Reeves has been on a charm offensive to Canada’s pension funds, no doubt to entice them to export their money – and their ideas – to the UK. One idea she might return with is that of a ‘home bias’. Canadian pension funds invest 4.5x the amount in Canadian equities that are reflected in global indices. That number, roughly speaking is less than 1x in the UK. Indeed, Reeves’ own pension, assuming she’s part of the MP’s pooled plan, has only 1.3% of their assets in UK equities. That’s about half the index level! Her own pension. Short the UK. Staggering, I know. So if looking for some patriotism here’s a great place to start.

And given the UK is in a structural bull-market, she might look smart suggesting they go overweight. Leaders lead. 

Inflection

I believe we are very close to an inflexion for UK fund flows. And flows matter. To everything. Especially price. Having recouped most of the loses from the carry-trade unwind, global growth scare, the low-liquidity/holiday redux, the FTSE is back at all-time highs (in USD). At the time of writing, it’s up 11.8%% (TR) YTD. Not bad for the once most-hated market on the planet. And this despite no help from large sectors like oil and mining for they, like luxury (see Burberry -50%), have suffered at the hands of China’s collateral collapse, hurting confidence and so consumption (just imagine if that now turns?). I’ve noticed more investor interest in ‘dividends’ as a factor, which the UK is well-known for, and buy-backs continue at a pace meaning those dividends are compounding. In May, DC fund inflows outpaced DB ones for the first time, replacing a forced seller with consistent buyer (a la the Pension Put). Elsewhere, Australian funds like Perpetual Group have seen ‘strong’ interest in their UK strategies, a statement consistent with my own client discussions. And while domestic funds still see outflows, the pace of such has fallen to a three year low.

Could this be the sequential improvement that occurs just prior to actual inflection? It could be. Although I wouldn’t bother waiting to find out. This train is leaving the station.

At least the tourists will be happy.

NEITHER THE INFORMATION NOR ANY VIEWS EXPRESSED CONSTITUTES INVESTMENT ADVICE AND IT DOES NOT TAKE INTO ACCOUNT THE SPECIFIC INVESTMENT OBJECTIVES, FINANCIAL SITUATION AND THE PARTICULAR NEEDS OF ANY SPECIFIC PERSON WHO MAY VIEW THIS MATERIAL.

These are my own personal views, not those of my employer. This report is not intended for retail customers. Any further disclosure, use, distribution, dissemination or copying of this report or any of the information herein is strictly prohibited. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon information in this report shall be solely responsible for the consequences of such reliance. This report is provided for informational purposes only and does not constitute legal, tax or other advice nor does it constitute an offer or solicitation to purchase or sell any security, commodity, currency or other product. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining advice from their own advisors. Internet communications are susceptible to alteration and Northern Trust shall not be liable for the message if it has been altered, changed or falsified.

 Under no circumstances should you rely upon this information as a substitute for obtaining specific legal or tax advice from your own professional legal or tax advisors. Information is subject to change based on market or other conditions and is not intended to influence your investment decisions.

©2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit northerntrust.com/terms-and-conditions.