The ideas of March
Credit conundrum, long-term, defining the 2000s, calling extremes, Buffett in 2023 and technology shapes art
Well hello there, market mavens! Good morning, afternoon or evening depending on your time zone and level of caffeination. It's time for your fortnightly fix of finance news, delivered straight to your inbox with all the energy of a toddler in a digger-themed candy store. Are we sufficiently caffeinated? Well then let's dive in, shall we?
In a fortnight that brought a lot of mumbling about interest rates, a Windsor Framework, a Stormont brake and SNOW in the UK in March but also …
Honestly not sure if that’s real or meme or satire at this point (or if there’s a difference?).
Anyway that cold snap though! Those springtime soft-shell down jackets are firmly back in the closet and the chunky knits are here for an extended run.
The herb garden did not love it. Turns out I maybe should have listened to those books saying planting herbs in October was not the way forward. I think maybe 50-60% has survived, which is not nothing, and a lot better than our flowerbed that’s gone from hard landing to recession to depression with no signs of a growth rebound. I’ll keep you updated but don’t hold your breath. Hot tips and miracle cures gratefully received.
Markets mumble
Huffing and puffing about rates is not new news and mainly noise - since an early-Jan bump stock markets have more or less been zigzagging sideways, they are still 4-5% up for the year. Stocks have actually been pretty resilient in the face of latest moves higher in rates I think. Maybe the market thinks the big reset in discount rates is behind us.
The hiking cycle started a year ago and folks were wondering if “tighten till something breaks” was the best way to think about the Fed actions, and the markets did **not** like that.
But here we are, there’s a lot of tightening in the system, asset markets have had a whole reset and things did not break, not yet anyway. A good lesson that the “A leads to B” theory of markets and economic forecasting is often not right.
Assessing where things are the latest Guide to the Markets from JP Morgan (UK version) is a great asset. For me it’s not about constructing more new narratives out of all those charts, goodness knows we have enough of those already, but it does help assess what’s priced in, and that’s valuable. Here’s my take:
Market rates expectations are lining up with what Fed saying for maybe first time (maybe a little less since Jerome Powell woke up and chose violence this week but…)
Markets have more than unwound all the peak-pivot story of late Jan
Because … recession worries have now been pushed out beyond 2023
Market thinks new normal is 3% rates for main central banks, once we’ve got the peak in and eased off a bit
Did someone say, inflation? Yeah, duh. It matters
On the way down across the board, pretty fast really, economists think (see chart below). Should be within shouting distance of 2% by year end
Markets - perhaps oddly - continue to price inflation returning to normal equilibrium and do not embed structurally higher inflation (chart again)
No recession priced in corporate bonds
Or in stock markets where consensus earnings forecasts have a flat year in 2023 then a return to business as usual in 2024.
Credit where its due …
There’a a bit of a conundrum in credit: on the one hand, juicy yields on offer (5-6% in high grade bonds), on the other, spreads over government bonds have gone all 2013-era skinny jeans style. As an investor, which is the right way to look at it? A mix of both probably, for more on that check out this week’s podcast with Jeff Boswell of NinetyOne (web | apple)
Yields both long and short are up a decent amount this month, and have more than unwound those January falls. Short dated one and two-year rates in the UK and US are through the highs from last year, and back around their pre-07 peaks.
“Yield curve inversion” strikes me as one of the worst jargon offenses regularly committed in our industry, but there you go. That. We have one of those. Does it really matter? It seems to have, historically been followed by pretty bad times. The least bad of those may have been the 1980s Volker-era recession which many folks (including John Authers) are looking to as maybe the most likely analogue here.
… episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. - Warren Buffett (2022 shareholder letter )
things I'm reading
Credit Suisse equity yearbook 2023 update! (web link)
Now this gets me excited …
The bottom line: it’s the long term, stupid! In finance, the overused phrase "long-term" is often used to refer to 10 or 20 years of data, which is not truly long-term. By analyzing real longer-term data, such as returns experienced across generations, more interesting relationships and behaviors emerge.
The yearbook contains evergreen takeaways and new data, including:
equity returns are pretty great for the long-term: should be the base case starting point for growth allocations
No, stocks don’t “hedge inflation” though
Recent market falls and high inflation have knocked a chunk off bonds' long-term returns, but they still look surprisingly healthy - been one hell of a bond bull market
Last year's reset has made future returns look more normal, unwound some of the ZIRP impact and something close to the last 30 years' returns seems possible in future. This depends on one's forecasting model.
Tonnes of insight in this little chart below (last year’s on the right for reference)
I love Noah Smith on how the 2000’s should be remembered (substack)
stories about our country … help bind us together as a nation, by giving us a common mythology about our collective past that helps us coordinate our response to the challenges of the present. Second, they serve as simple mental models that allow us to quickly encapsulate key features of the real changes that have occurred in our economy and culture. (And third, they’re just plain fun!)
Sure, it’s a bit US-centric but I like what Noah is trying to do here. I agree that a cohesive idea of the 2000’s is both important and a little lacking (compared to say, our ideas about the 1990’s).
Broadly his view is a decade of golden times for society, culture and happiness (pre the ravages of mobile internet) set against the backdrop of a handful of big disaster events. And with a big fault line running through it of 07/08. A good take, if you’re interested read the piece.
2 things I’m listening to
The Memo Rewind - Calling the Market with Howard Marks ( apple)
Marks reflects on a small number of macro calls over his career, all of them at truly extreme points.
Some useful reflections on the role of psychology, forecasting and the power of extremes.
On the Margin (apple) - Warren Buffett expert Yun Li shares her top takeaways from this year’s letter.
A knowledgeable analysis of Buffett's shareholder letter focuses on his strong defense of stock buybacks and support for taxes. The letter's folksy yet serious tone and absence of jargon and empty language are a masterclass in communication for fund managers.
Buffett also consistently repeats core beliefs, a practice other managers should adopt. However, the letter reflects his conflicted stance on ESG, as he resists shareholder efforts for more disclosure while also praising the emissions reductions of Berkshire's energy business.
And can we just take a moment for the late-90s-early-internet style branding of the Berkshire website (2023):
Grab bag
No, it wasn’t the pension funds wotdunnit! If I had a tenner for every headline I’d read lamenting the decline of the London stock market then … well I might have enough for a new venture growth fund. Folks are too quick to blame the wrong culprit though. My Linkedin post on this seemed to catch a moment (tl;dr: look to government and corporate stagnation before pension funds, we’re in a world of global companies and global asset owners).
Technology shapes art. Something happened to pop music in 1991. More specifically to the way the charts were compiled. For the first time, actual sales rather than estimates could be tracked. This revealed some interesting preferences that had previously been hidden: country and hiphop music were both far more popular than previous charts had us believe, and songs were naturally far stickier, with much longer runs at number 1.
This is just one of many fascinating facts around the music industry on Derek Thompson’s podcast (apple). The conclusion: technology shapes art.
Take your pick. Neat piece in The Actuary (link) on the current jobs market which will probably resonate with readers a little. It’s a war for talent out there, a candidate’s market and - the article claims - it’s now usual for candidates to line up multiple offers.
Hey google, time 6 minutes! I’ve been wondering, is the AI hype really real, this time? Remember how we all had that big AI spin-out about 6-7 years ago. Well it does seem like ChatGPT has really moved things on I have to say, it’s even helped a little with this newsletter. Could you tell?
Big weekend of rugby games coming up, how are we all feeling about England / France?! Always a big day in our household. You have to go back to 2005 for the last French championship win at Twickenham and the last ten meetings overall favours England 6-4, but somehow I don’t feel as confident as that record would have. The boys have both England and French supporters tops available …