Starting with the UK, the negative rhetoric and rumours around the Budget have undoubtedly been unhelpful for financial markets and wider confidence, a “naïve own goal” by the new administration as one fund manager put it. Yet there are positives.
Long term research highlights that any initial stock market caution on the election of a left-leaning government is typically an opportunity. Following the July General Election, any such caution has merely stalled market progress rather than something more serious. One reason for this is the clear recognition that the UK is cheap, which has put a floor under prices - barring a collapse in the US bubble of course.
Although the UK indices might have been dull, there has been considerable stock-specific activity. For example, one fund manager tells us that 10% of his holdings have received a M&A approach this year.
Valuations got so attractively cheap because of outflows from domestic investors over more than 20 years, and the support of global investors collapsing after 2016 (Brexit). This trend has been slowly turning, and should be supportive of UK equities for a number of years to come.
It could also be that the new Government has inadvertently managed Budget expectations down to such low levels that there is scope for a positive surprise. On balance, the Budget could also be expansionary, which will encourage some investors, so look out for analysis on this point in the days following.
Financial markets in the US, and the dichotomy with China, its twin financial Super Power, gets more intriguing, especially when you add in “the mystery” of the gold bull market.
It is US government bonds which have grabbed the headlines from the Magnificent 7 in recent days. Inflation is meant to be coming down, and interest rates in tandem. But these bond yields are heading up, and telling another story. One of inflation volatility, where US rates might not go down much more if at all, with Trump and the Republicans winning not just the Presidency but also both houses, government spending up, mountainous deficits climbing new heights, dollar falling (collapsing?), and an even bigger dent in US credibility.
The action in gold has shone an interesting light on these shenanigans. For a re-cap do go back to the 13th September Friday Note, since when gold has barely paused for breath. What is going on?
Over the last week the media has sought the view of “experts” and you could have separately spotted each of these simple reasons “explaining” what is happening: “heightened Middle East tensions”, “US election uncertainty; “US rate cut expectations”.
Most of the time no one really knows what drives the gold price, not with any useful precision, which is what myself and the team have been saying for many years, even Trigger. Yet ordinarily very astute individuals, for whom we have great respect, never tire of telling us: it’s insurance, an inflation hedge, safe haven, deflation hedge - it goes down when bond yields go up, it goes up when the dollar goes down etc.
They proffer simple explanations for what might be the most enigmatic financial asset in a financial universe which is already highly complex. As said in “Complex world, simple rules, no clutter”
“If investors insist on trying to understand the causes for market moves
in simple cause-and-effect ways, and trying to predict,
they will continue to be disappointed with their results.”
Nonetheless, one or two articles broke new ground in recent days, admitting that everything they thought about what drives gold is wrong, and that something else is going on…
…A breakdown of trust in the global financial order which has been dominated by the US since 1945, perhaps going beyond mere financial matters and to US leadership generally. Some will point to the labyrinth of greed to which US regulators turned a blind eye in the years before 2008, others to the likes of Obama’s fake “red line” against the use of chemical weapons in Syria in 2012. Trust has been breaking down for some time.
As the very conservative Mohamed El-Erian put it in the FT, there is a “broader phenomenon which is building secular momentum… As it develops deeper roots [it will] have an impact on the US’s ability to inform and influence outcomes, and undermine its national security.”
Next day the Telegraph took this theme and went a bit hysterical headlining “Gold’s stratospheric rise signals disaster ahead for the world’s financial order” and spotlighted a “fast-fragmenting world”. This was followed by The Economist telling us “What the surging price of gold says about a dangerous world.”
Warren Buffet says a rising gold price requires fear and a belief that fear will spread. Which brings us back to the behavioural reason to buy gold which we have often discussed.
Over the last week, only China and the tech-centred NASDAQ went up, up 3% and 0.2% respectively. The Dow Jones, Japan and India were down most, in the region of 2%. The domestically-focussed FTSE 250 came off 1.5% ahead of the Budget, and long-dated gilts were hit by notable losses in excess of 2% - if the Budget is regarded as a success, both of these measures need to turn around and up over the next fortnight.