Searching for analogues

Wow, that was a short week. Everyone in the UK yesterday trying to get 3 days work done in 1:

???? Who knew Edinburgh weather was so good in May! Fantastic few days up at the PLSA conference last week, great to run into so many of you face to face. We even managed to navigate our way *just about* through all the smalltalk and networking chitchat like proper functioning adults, didn’t we? If you missed it you can catch up quick with my micro-summaries here: day 1 | day 2.

Lot’s of fan feedback on some of our recent podcast episodes such as the one with Deb Clarke (listen here). Last week we also spoke to professional trustee Naomi L’Estrange on models for making better investment decisions among other things (here).

So it’s a jubilee special, what has changed in 70 years? Maybe the surprise is how much is similar?

sources: ONS, Our World in Data, Nationwide, BSA

Happy and glorious …

A pound in 1952 is equivalent to ￡33 now adjusting for inflation. Taking that into account we’re roughly four times better off on average, but more unequal, live for twelve years longer and produce about half the carbon emissions. For comparison our national income per head in 1952 was similar to Indonesia or Albania today (adjusted for inflation - source OWID). The early 1950’s was a period of high inflation like today, and could even be a useful analogue for the best positive case of how the next decade or so might play out (more below).

Long too-o reign ov-er us….

I was surprised to find that in an invesment world full of short-termism and latest trend fund launches there are actually 36 listed investment trusts on the UK market that go back longer than the queen has been on the throne [Laith Kalaf of AJ Bell writes].

The biggest stock market sectors in the FT 30 index of the 1950s were carmakers, shipbuilders and textile companies, and returns in the UK market have annualised 12% per annum which compounded over 70 years for a gain of more than 2000x [per Duncan Lamont at Schroders].

Let’s do markets.

In the last fortnight stockmarkets have both hit new lows for the year and seen a decent rebound of over ~7% which meant overall returns were flattish in May. The S&P 500 just about clipped into “bear market” territory down more than 20% from the highs although we’re still quibbling about whether this is a true “bear market”, a “valuation reset” or a “healthy correction”.

Sterling is still cushioning the unhedged sterling investor in global markets (orange line below) and the UK stockmarket is still well ahead thanks to the energy sector. There shalt be no bear market getting in the way of the Platinum Jubilee for us Brits.

Bonds are in a bit of a holding pattern, with the benchmark US 10-year yield a little shy of the 3% mark now as we approach the June start of QT (quantitative tightening).

UK 20-year gilt yields have surged to a 6-year high around 2.4%. Roughly where they were a decade ago. Defined benefit pension schemes are in pretty good health with real yields hitting the giddy heights of -1.4%. So while US investors might be sweating the bear market, there’s quite a different perspective from the UK, especially for liability-relative investors.

Jurrien Timmer has a neat visualisation of what’s priced in for the Fed and wonders if the peak rate for this cycle might now be into view.

Like it’s ‘99?

In a changed world everyone’s searching for the right market analogure here. "History doesn't repeat, but it rhymes" being one of the favoured market cliches. There's good reason of course: human behavior is a constant, but there's also the desire to try and ascribe more confidence than is warranted to future outcomes.

I’ve seen a lot written and said likening today to the late ‘90’s / early 2000’s. Jurien Timmer also likens it to the 1968 top (speculative bubble ended by Fed tightening). Ben Carlson looks to some of the mini-bear markets experienced during the 1940-1950s - a boom time which nevertheless included multiple small recessions and market falls. It was also a period of high inflation, extremely low interest rates, supply shocks and a period of rebuilding.

It'll all make sense in hindsight ...

3 things I’m reading

1. In the week of the platinum jubilee AQR have identified the golden parameter: the stock bond correlation [AQR piece]

This is of vital importance to almost all investors as it goes to the risk-management properties of a balanced portfolio.

There’s important news - the lovely negative stock/bond correlation we experienced these last 20 years, well it isn’t actually the norm and there’s a good reason we might revert to a more positive correlation as both markets are driven more by response to inflation rather than response to growth in a low inflation world (and they have all the maths n stuff to back it up).

2. Ok fine, let’s talk about the World Economic Forum if you must. Davos was on, CEOs doing CEO-things. Did anyone care? [quartz]

3. **Friendshoring** is a thing. Maybe one reason they don’t care about Davos, as Kyla Scanlon lays out well, is that everything the wef stands for is slamming hard into reverse: the world is going from a complex globalised system to “friendshoring” (a technical economist term whereby you offshore stuff, but only to .. well … your friends) via a series of interrelated shocks that have caused parts of the complex global puzzle to *go missing*.

4. Everyone loves a map. If you haven’t already seen it Quietroom’s map of the entire investment world is worth a look (link)

Two things I’m listening to

1. Oddlots with Greg Jensen. A full length interview with Bridgewater’s co-CIO Greg Jensen is a rare treat and an instant must listen. Thoughts on what the markets are pricing in today in terms of macro risks, why the markets don’t submit well to AI analysis and getting to grips with secular changes. (apple | web)

2. Standard Deviations: Daniel Crosby with Herman Brodie - Trust. (apple | web)

System trust. Role trust. Interpersonal trust . In healthcare higher trust is strongly linked to better outcomes: patients submit to treatments and stick to program when trust higher. The same may be true in investing. A trusted relationship allows investor to hold riskier portfolio, one that might be more suited to their goals.

Bonus froth

What are we all watching over the jubilee weekend then? We’re at a weird place in our house having finished Queen of the South (rare example of a show landing a great ending after 5 series), quickly got through Anatomy of a Scandal and … now … although I can’t quite bear to admit it have finally got to the end of This Is Us after 6 series. No spoilers but I guess it was the right ending, although season 6 was all round a bit underwhelming for me, maybe not surprising and shouldn’t detract from the overall quality of the project. This series was with us through all of the lock downs as we discovered it and caught up, and I also turned 40 and had children on the same timeline as the main characters so there was quite a lot of resonance to put it mildly. It makes you re-interpret family and time in a new way, right? And highlights how the little things can actually be the big things.

On that note, have a fantastic long weekend, here's One thing to brighten your day - “Inflation? It’s your problem mate …” I’ve had some awkward meetings in my time but …. when Jay met Joe, what was said? Bad, bad vibes.