How mild is mild ??

Hi there, wow, **arctic** start to the week here in London wasn’t it. I’m leaning heavily into those ski baselayers and chunky knits. If anyone has tips on how to get a toddler to wear a wooly hat I’m all ears.

Is it too late now to say?….?securitization??Everyone’s favourite artist of the 2010’s (cmon, admit it) has?reportedly? sold the rights to his music catalogue for $200m. Coming soon to a hedge fund portfolio near you …

Well it might not feel like it, but Europe more generally is having an?unseasonably warm winter ?-which of course matters hugely economically this year for all the reasons you’ll know. The weather is a key economic indicator. Zip up your puffy puffa, grab a coffee and lets dive in ...

Ok can we talk?MILD?

It was the buzzword du-jour on every outlook and bank earnings call (bank CEOs being well known for their originality).?

kyla scanlon ?has this in her newsletter -

Careful though, could it be peak mild?

Jurrien Timmer does as good a job of anyone of trying to assess what’s priced into markets, he reckons that right now while the Fed is going “blue in the face” saying they are hiking to 5% and staying there the market is just not believing it, pricing in swift cuts.

Inflation

It’s still?**the**?question, as JP Morgan strategist Karen Ward flags in?her new newsletter (well worth a follow!). It’s starting to take quite a different shape in the US vs UK vs Europe, with a higher and broader peak in the UK. Understanding the services component of it now seems key. (Chart from?Goldman ).

One technical detail that I easily forget is that it’s easy to treat the year-on-year inflation stats like they are wholly “new” numbers each time, but of course 11/12’ths of the “number” is already known which is important to bear in mind as we think about how inflation might evolve. In particular the two big monthly “bumps” in the UK series corresponding to the rises in the energy price cap roll out of the 12 month number in April and October.

Markets mumble

Stocks are up, bonds are up, because …?mild (or is it mild becaue stocks are up?). We’re partway through the earnings season and while they haven’t exactly been great, as is often the case a lot was already priced in and moves so far suggest relief that "meh" results weren’t a lot worse. Interestingly Jurrien Timmer has some?intriguing charts ?that suggest earnings results really don’t tend to matter all that much, as they are largely priced in advance and while the market broadly moves higher in tandem with earnings over the long term, it can easily move in exactly the opposite direction for significant periods during the cycle.

Emerging market equity is having a moment so far in 2023, up ~11% (in $) But there's a ways to go to make up for a long stagnant period. the index is down over 3,5 yrs & up only 15% over 10 years, & 17% since '08 peak. Relative to developed markets it is down 50% over a decade. Non-US markets are also on the up so far in 2023.

Global stock markets: Emerging markets in orange, developed in purple and non-US in blue.

Three things I’m reading

1. Approaching Peak Passive and the Implications for Active, Man Group?(report )

The bottom line:?by looking at active share, you can cut through the black/white active passive delineation that is no longer helpful. Man do this and conclude that on average one in every three dollars invested into the?US?market is invested actively today, down from half pre-08.

Their analysis of active manager performance does not make pretty reading over recent periods - but is it cyclical?

The big picture.?It will shock no-one that an active manager is wondering about peak passive and the conclusions here aren’t radical : active performance might be cyclical, index concentration could be something to worry about, indices got a performance headwind from flows, the sharp fall in active fees lowers the bar for active managers and the flow to passive may have weeded out the more mediocre actives already. And they don’t make tonnes of headway on the question of what’s the upper limit in passive, just saying “we may be approaching an upper bound”.

I think a couple of other conclusions are worth noting, that managers and allocators should worry a lot about active share (no-one likes a closet hugger), and the implications of a market dominated by passive are worth continuing thinking about. Reminds me of a piece I discussed a while ago which wondered whether a greater proportion of passive makes things harder for active managers as opportuinities appear, but lack the catalyst to revert to fair pricing.

2. Shareaction Voting Matters 2022 Report?(link )

The bottom line: Mind the Gap. We’d seen this starting to emerge before but it’s surprised me how fast this apparent gulf has emerged between European and US managers voting support on core responsible investment issues (everyone loves a bubble chart):

Yes, but.?They’ll say that the resolutions were too prescriptive or too strategic … but were they really ? A few comments from me in?this piece ?which explores the fall in support for resolutions a little more.

3. Boring Money “Robos and ready-made funds review”?[link ]

Boring money are on the money here calling duration, currency and energy as the three big performance drivers for portfolios over the last year (and interestingly, these apply as much to passive portfolios as they do to active). Low risk portfolios have fared particularly badly for reasons you might expect (Narrator:?it was duration). Most higher risk portfolios ought to have still done reasonably well over the 2 year view but there’s a lot of variation, even where out and out active management isn’t a factor. Some useful benchmarks here for anyone running or advising on risk-graded portfolios for individuals.

Two things I’m listening to

1. The One Decision Podcast?-?Has Britain lost its seat at the table? (web? |?apple )

This is just one of those brilliant conversations, which ranges through politics, geopolitics and international relations with Rory Stewart and Richard Dearlove (ex-head of MI6)

2. General Patraeus talks to the Money Maze?(web ?|?apple )

When the General talks geopolitics, it’s worth a listen. He covers NATO, China, trade, Iran, cyber and of course, the Russian invasion of Ukraine.

Grab bag

Asset managers, there’s no easy way to say this but your sentences are too long! This is some great data here from fintext.io (link )

Allison Schrager went to Davos (not to brag), she liked it (blog ). The tl;dr is that everyone from the US to Japan is having the same labour market issues that you are:

Their employees don’t want to go back to the office, people don’t want to work more than the bare minimum, and it is extremely hard to find good people to hire. … this sounded different: it seems like workplace norms have changed. And it was true in every country.

One thing to brighten your day - Alex B Sheridan (a great follow on video content on Linkedin) imagines Social Media News ... have a great rest of week!