On Tuesday evening our managed account was named by The Institute of Managed Account Professionals as the best multi-asset class offering in Australia for the second year running! The award is a wonderful endorsement of the quality and rigour of Stanford Brown’s investment philosophy.
Markets trended lower this week, as investors took to the sidelines in anticipation of Trump’s meeting with Chinese President Xi Jinping at this weekend’s G20 summit in Osaka. Markets were buoyed by comments by US Treasury Secretary Steven Mnuchin that the trade deal is “about 90% of the way there”, which sounds like great news! The only issue is that the US said the deal was 90% done on the 2nd of April, the 7th of May, and the 9th of June. So they haven’t made any progress in almost three months!
Statements from US Fed Chair Jay Powell that a 50 basis point interest rate cut “would be overdone” took some further shine off markets this week, as some investors had bet that the Fed would be compelled to act aggressively in order to sustain America’s economic expansion. That wasn’t well received by El Presidente, who continues to question the Fed’s competence – despite the fact that he nominated Powell!
Finance 101 – Commodities
A staple of Australian business reports in the evening is an update on commodity prices. This is a result of Australia supplying 50% of the world’s iron ore, 38% of the world’s coal and billions of dollars of other raw materials such as natural gas, gold and aluminium. Around 60% of Australian exports are unprocessed, meaning that we are reliant on other countries buying our natural resources and doing something productive with them.
A commodity is a good that is highly fungible, meaning that it can be easily substituted. Because Australia is primarily in the business of exporting commodities, domestic growth is highly linked to the global economic business cycle. Although supporters of Kevin Rudd may claim his $42b stimulus package staved off a recession in 2009, China’s $875b stimulus program centred on infrastructure spending spiked a rebound in the prices of key commodities such iron ore, coal and aluminium, kickstarting economic activity in Australia. As long as China continues building ghost cities, the economy “should be right”.
Although some call Australia “The Lucky Country” as a term of endearment, the author who coined the term used it in the pejorative, claiming that Australia’s prosperity was a result of luck (abundant natural resources, distance from major theatres of war, inherited British political system, etc) rather than ingenuity or industriousness. In some ways it was unfortunate that Australia did not fall into recession after the GFC, as no impetus was provided to make major economic reforms – after all, if it ain’t broke why fix it? The great mining boom that started in 2003 has masked a number of structural flaws in the Australian economy, which are only now starting to be noticed as the boom wanes.
The great economic reforms of the 80’s and 90’s were borne from necessity, and fortunately we had leaders from both sides of the political aisle bold enough to implement them. When we inevitably fall into recession again, we hope our current crop of leaders will be able to follow suit!
Nonsense in the News is Nothing New
One of the highlights of writing the Market Wrap each week is the ongoing exposure to gibberish churned out by major media outlets to generate page views. This passage from a CNBC article published midweek was a doozy.
For starters, no serious investor cares about the Dow Jones Industrial Average as it only consists of 30 large US stocks, whereas the S&P 500 covers (you guessed it) 500 large US stocks and is thus more useful barometer of the US market. Secondly, the Dow Jones only fell 0.67% that day, but the editor used the change in points to make the Dow’s loss seem more dramatic than the S&P 500’s. Thirdly, when the article was written it had been three and a half weeks since May 31 – not exactly a lengthy time period!
The American writer Elbert Hubbard (not to be confused with the American science fiction author and founder of Scientology Ron Hubbard) once defined a newspaper editor as “A person employed by a newspaper, whose business it is to separate the wheat from the chaff, and to see that the chaff is printed”. Stay vigilant and keep those grains of salt handy when reading your periodical of preference!
If you flip a coin, there’s an even chance that it will land on heads or tail. In a game where player 1 wins when a coin lands on heads and player 2 wins when a coin lands on tails, we would expect that over time the score would be zero since both players have an equal chance of winning. To test this theory, we simulated 1 million coin tosses!
Even a simple process such as flipping a coin can deviate wildly from its expected value of zero. Imagine how far the price of share could deviate from its expected or “fair” value if we introduced fear, greed, human misjudgement, algorithms, government regulations, trading errors, etc. A common excuse for investing underperformance is to blame “market irrationality”. As we can see, even if the market was rational, it doesn’t mean it would behave as expected. It isn’t enough to have a great investment idea, one must also have a compelling reason to believe that the idea will pan out!
Best Places To Lose Your Wallet
Imagine that you lost your wallet/purse – do you think it would be more likely to be returned if it had no money in it or if it had money in it? Researchers dropped 17,000 wallets in 355 cities to find out! The overwhelming conclusion was that wallets were more likely to be reported as lost if they contained money in them, defying the conventional economic view that additional money would increase the marginal utility of dishonesty (or some mumbo-jumbo like that).
The researchers concluded that when there is money in the wallet, people are more prone to feel like thieves if they don’t report the lost wallet, which tends to outweigh the perceived benefit of stealing the wallet. Yet another good reason to carry cash with you!