Where are we in Walters world?

Portfolio managers will be on holiday however, markets are not, as investors continue to focus on news from 3 central banks and earnings, particularly those from the technology sector. Global government bond yields had been rising modestly ahead of the first of the central banks to announce decisions this week, the Bank of Japan, anticipating they adjust the cap on yields.  In the end, the policy did not change however they did introduce the possibility they could be more flexible than they had been in the past. Suggesting they could let yields rise modestly before intervening. 

US equity markets continued to cede ground on Monday, led by the tech sector as it reacts to a series of disappointing earnings reports. The sector had been on such a run it would not take much to knock it from its perch. Apple earnings one felt had the power to underpin or cause more disruption depending on the outcome. 

Walter Bagehot in the middle of the 19th century came up with a fine description of how the economic asset price cycle works. Starts with quiescence, then moves to improvement, confidence, prosperity, excitement, overtrading, then convulsion finally returning to quiescence. For those who would like to understand the psychology of boom and bust through history, where this quote was taken from, Manias, Panics and Crashes is a must. The seventh edition now covers the 2008 crash, the book is written by Charles Kindleberger and Robert Aliber. 

The book discusses the role of central banks and governments in asset pricing and their ability to be part of the catalyst for a fall in asset prices as they try and prevent excessive risk-taking and then provide the liquidity to start the next boom. Central banks have over the past few years introduced monetary policies historically that have created bouts of high inflation. The early 1970’s, even before the oil price shock, being an example, so far this has not been the case. The fact this has not happened is possibly an indication of how deep the economic fallout could have been for the globe in 2008 if the central banks had not acted so aggressively. 

So, the question that continues to tax most portfolio minds where are we in Walter Bagehot’s cycle? The technology sector one would suggest is closer to overtrading then the broader market. We think its fair to say we have reached prosperity as asset prices have risen, excitement, possibly, overtrading maybe at times. Answers on a postcard, please. 
Central banks continue to have a difficult balancing act, they know the risks that they run with these ultra-low interest rate policies and yet do not want to inhibit economic growth at this time. So far, they have executed this balancing act. The decision from the Fed later on Wednesday is all but a foregone conclusion, Jerome Powell’s comments will what causes a market activity. 

For those who follow the IG trading platform, Paul Sedgwick will be appearing at 730 am on their tv channel for the morning markets show. 

Posted on July 31, 2018 .