Roald Dahl’s mighty poem contains much useful advice to be passed down from father to son, but to the humble investor, Triumph and Disaster feel very different indeed. What is the future path of financial markets if not a constant journey to navigate towards one while exerting every sinew to avoid the other? If they’re the same, then why do we bother? Fear/Greed, Hope/Despair, these outcomes are reflected each and every day in asset prices. Those prices are the current equilibrium based on our expectations (rational or otherwise) of future outcomes including all current known information. And, as discussed yesterday, even as the US ambassador to the UN describes North Korea as “begging for war“, the next step will be to get the UN to vote on (that magic panacea) sanctions. So, no need for despair, panic, or fear. We have chosen the path to Triumph.
As it turns out, there are sound fundamental reasons to feel that way about the global economy. The JP Morgan Global Manufacturing PMI is at its highest in over 6 years:
And global GDP in general is also up at multi-year highs:
So growth is good, money is cheap, our favourite risk indicators offer no sign of any woolly mammoths on the horizon… suggesting that we haven’t quite hit peak exuberance yet. Yes stock markets are at all time highs, but if manufacturing is rebounding as strongly as it looks like it is, then risky assets like commodities can get even more of their mojo back. Copper is at 3 year highs, although given Blondemoney is now writing about it, it’s no surprise to hear that the long position on the CFTC is already at a record high. Maybe it’s not quite time to short the Australian Dollar just yet…the world can embrace Triumph at an exponential rate.
But what of its cousin, Disaster? We already warned that risk indicators are unable or unwilling to pick up the political risk premium that still abounds. Aside from nuclear war, we have a much more live war of words developing between the UK and the EU. Brexit fatigue means it’s being ignored as posturing for now, but if you knew two of the largest economies in the world were unable to strike a deal on trade, with one country currently lacking any real or effective government whilst also nursing a sizeable deficit, you would understandably be concerned. Political risk is not going away.
Indeed, as growth expands, the forces which blew apart decades-long political consensus will get stronger. Macron’s election didn’t end ‘the rise of populism’; it reaffirmed ‘the rise of anti-establishment-ism’. Trump and Macron have more in common than some might comfortably imagine, and it’s not just their make-up bill. Both have benefited nicely from being inside the establishment (real estate mogul / investment banker), but portrayed themselves as outsiders, as a new force in the political system. We see the same effect now taking place in New Zealand, where a 37-year-old woman no less (the audacity of it!) at the helm of the opposition Labour Party has seen them surge 20 pts in the polls to draw level.
An unequal recovery, where the asset rich benefited at the expense of the austerity-imposed poor, created these political shocks. With more growth out there, this is only going to cause more fissures, and not just of the nuclear kind.
For a less than 10 minute wrap on those two imposters, Triumph and Disaster, please click here…