Now Showing Japan ?????

Happy Thursday folks!

Gosh these balmy spring days have got me caught between that winter parka and those lighter spring/summer overcoats. Wednesday evening felt like it had more than a little whiff of summer in the air and those light mornings have definitely made those early starts more do-able (not for long though).

So I didn't yet get chance to take the victory lap for my correct call on the England-Ireland rugby result, so I shall be doing that, now.

We've got a first-time visit to Center parcs with the boys coming up this weekend for a birthday (mine, no not a big figure) so I am looking forward to that and of course easter is just around the corner.

Markets mumble and the dots drop

Markets are doing well - up at new highs for the year (again!) with your global stocks up around 7-8% depending on your currency positioning. European stocks a little less with EM and the UK in the back of the pack. What might come as more of a surprise is that Japanese stocks are up MORE than the US so far in 2024 (in dollars). The Federal Reserve's meeting Wednesday night has been the big event with the hotly-anticipated "dot plot" more or less reflecting market expectations of "about" 3 interest rate cuts this year, somewhat less than the start of the year. Stocks loved to see it. Also, the coins are back.

Nvidia held a conference in what was described as "The Woodstock of AI" which can only have been written by a boomer and surely needs updating to "The Eras tour of AI" for 2024. Anyway they make chips (you may have heard about that) and from the sound of it they are going to make lots and lots more chips and bigger ones too. Bigger chips are cool.

Economist Claudia Sahm on her excellent substack (more below) has come out as a dot-plot hater, while also noting that the Fed's excessive focus on data-dependency may have created some of the volatility we've seen in rates markets as unsurprisingly mixed economic data is wrestled with by a market placing too much emphasis on it. Maybe the market hopes for too much in looking to the Fed meetings every time for certainty.

UK inflation came in a little bit cooler with annual CPI now down to 3.4% over the last year, within shouting distance of other countries, and of the target. As with other countries like the US the biggest part of that inflation remains services rather than goods. Your 10 year gilts are yielding c4%, roughly where it's been since early Feb. The Bank of England held rates today, cuts are coming but not yet. 10 year treasuries at 4.3% are close to their high this year.

Three things I'm reading

1. Forecasting is hard and we are not good at it what should investors do? [link]. Joe Wiggins .

Well this is a great reminder of some important truths - the bottom line: in a new study 16,000 professional forecasters were analysed and while they had on average a 53% confidence in their forecasts they were right only 23% of the time.

Between the lines - this leads to a couple important points. Not only do we not forecast well, we greatly overestimate our confidence in doing so, opening ourselves up to worse outcomes when we turn out to be wrong.

Needless to say this happens all the time in investing but there are some things we can do. Position sizing needs to be re-evaluated in light of this, we probably should take much smaller positions relative to whatever we judge our baseline as than we think. We probably should take positions less often and fiddle with them less and spend less time thinking about them and more on the strategy.

One area where I think this has manifested in practice for a lot of investors is in too much exposure to the value factor. Because it is so persuasive too many investors wrongly overestimate their confidence in predictions based on naive measures like the price earnings ratio, then build this in quite deeply into their allocations and positions. Nothing wrong with it, but it's easy to place too much confidence in it. We should weigh all our positions with a lot of humility. I am always reminded of the great Howard Marks quote - "it's ok to have opinions, not ok to behave as if they are correct".

2. Claudia Sahm is anti dot-plot (link)

Super short read of interest to anyone who follows the Fed cycles (that's all of us right) from someone who worked deep inside the Fed machinery for many years.

She thinks that the dot-plot is far overrated by investors, as these are anonymous, unaccountable forecasts arrived at with little challenge or process, which can immediately influence the rates of mortgages and other costs of capital.

But, some of the blame is laid at the Fed's door here with what she perceives as an over-emphasis on data dependency which is bound to lead to unnecessary volatility as the market is forced to over-squeeze every data point in a noisy world where data is often a little mixed as it has been in recent months.

3. The Japanese Stock rally may have more room to run. Kristina Hooper on Linkedin (link)

Always one to zag while others zig, the Bank of Japan’s small interest rate hike this week, the first in 17 years was historic, ending the era of negative rates.

But more broadly, there has been a hell of a rally in the Japanese stock market in the last few years, looking at it in dollars takes the edge off a little but in pure local currency terms the Nikkei is up slightly more than the S&P over 3 years. Why?

Kristina points to the "three arrows" of Abenomics, and I daresay it might offer a blueprint for other governments struggling with stagnant economic growth and a moribund stock market. Those three were: Fiscal stimulus, Very accommodative monetary policy and Structural reforms to improve economic competitiveness and growth. Even with the strong run up in the market, allowing the Nikkei to finally surpass those 1989 highs there is still optically value there with stocks trading on lower multiples than elsewhere.

2023 real GDP growth in Japan was just a touch behind the US, well ahead of Europe and the UK.

And corporate earnings growth in Japan is expected to be almost as strong as the US this year (from Schroders). While valuation ratios there are just a touch above the 15 year median.

Two things I'm listening to

This short video on "good growth" is well worth 6 minutes of your time - does a realistic job of showing how profits and purpose can exist in balance and that purpose is good for the business itself and companies can add shareholder value through stakeholder value (and no it's not empty win-winism).

I had a minor life goal unlocked as an email of mine was read out on my fave investing podcast Animal Spirits (here). It's all to do with this long-running discussion point that I agree with that regular pension flows into stock markets support the markets at higher valuation levels than in the past, but particularly in the US which is the only market where those flows go almost entirely into the local market 100%.

Grab bag

Apparently us Brits pay more attention to storms when they have names. Who'd have thought?! Lessons here.

**Interested eyebrows raised ** at this FT piece - Pension funds snap up real estate at steep discounts.

There's been a surprising beef in the quant investing world, with a key dataset, often considered of unimpeachable quality (The legendary Fama French data), being found to have been revised several times, changing historical results. Not sure there is a true smoking gun here, but the professors should have been clearer the impact of the revisions to the data and more transparent that it was being changed, but it's obvious why they weren't isn't it: they know full well that ex-post revisions to datasets that change the results eat away at the credibility of results and the investing strategy based on it.

Shareholder activists call on Nestle to tackle unhealthy food sales. Nestle might be one of the companies that has the highest influence on human health, and here's an example where shareholder value might not run entirely counter to stakeholder value.

Tangentially related - Unilever is spinning off Ben & Jerry's. Apparently it's been a rocky road these last few years and management are looking to slim down.

Could the UK really be the second most unhappy country in the world?!

The Taylor Principle -

Ray Dalio tweeting selfies at a Taylor Swift concert is a whole vibe - come for the selfies stay for the comments.

Till next time folks!