A Different Perspective
Asking the Right Questions
Football Philosophy: orchestra vs heavy metal
When assessing active fund managers we talk about investment philosophy, those guiding principles which frame the decision making process and drive the investment strategy. The football world is no different, every manager has his own philosophy, some better than others. The skill of the top managers is being able to convey that philosophy to their players, in order to win football matches and ultimately trophies.
In the past, Jurgen Klopp, manager of Liverpool FC, described his football philosophy as ‘heavy metal football’. Comparing his philosophy to Arsene Wenger, Klopp once said ‘He likes having the ball, playing football, it is like an orchestra, but it is a silent song, I like heavy metal more’. (See link) Sadly for the Gooners, the silent song was met by a cacophony of boos at the Emirates yesterday, as Liverpool’s attacking rockers, including a sublime solo effort from new signing Sadio Mane, stole the show.
I have already been accused of getting carried away with my comments on Liverpool winning the league. Still, Klopp’s natural enthusiasm, something which I have touched on before as a quality that differentiates the best managers (see link), makes me believe. As well, I think he has the emotional intelligence needed to keep improving. He will hopefully have learned two things from yesterday. To win the league his team needs more balance, some defenders must be signed before the end of the month. Second, the game is never over, celebrations are best left to the final whistle!
What do you want?
Over the weekend I watched Good Will Hunting, without doubt my favourite movie. I must have watched it well over a hundred times at this stage. The movie which earned two Oscars, Best Original Screenplay for writers Matt Damon and Ben Affleck, and Best Supporting Actor for Robin Williams, follows the personal struggle of the troubled boy genius from South Boston, “Southie”, Will Hunting (played by Matt Damon). It is a masterpiece, so brilliantly written that it really makes you think about all facets of life and the choices we make, from education, the job we take, friendship, and love.
The turning point in Will’s life is the introduction to Dr. Sean Maguire (played by Robin Williams), a psychologist, turned teacher, who helps him to break down the barriers caused by his past – a tough life, much of which was in state care and correctional facilities – and to embrace the future rather than focusing on what might go wrong, a defence mechanism which holds Will back from developing relationships and fulfilling his potential.
There is a great scene (see link) in Sean’s office when during a therapy session he questions Will on what he really wants from life, challenging him to move beyond the safety net of his Southie friends. “You are always afraid to take the first step, because all you see is every negative thing 10 miles down the road”, Sean says to Will. “What do you wanna do?” he asks bluntly. “You can do anything you want, you are bound by nothing…what are you passionate about? What do you want?” The scene ends with Will storming out; for all his genius he is unable, or too fearful, to answer the question.
Of course, the reality is that even without the troubled past, the question “What do you want?” is extremely difficult to answer. Be it relationships (I’m aware actor Ryan Gosling owns the question in the Notebook, a tearjerker if you like your chick flicks), career, or more broadly what people choose to do with their lives, the natural tendency is to just float along. People either find it hard to know what they want or are too afraid to go for what they want. When I say people, I am not excluding myself, I am guilty at times too. It is fair to say that the growth of the self-help industry has been driven by the promise of helping people define and achieve what they want.
Now, while I can’t help you figure out what you want to do with your life, it struck me that the question “What do you want?” is just as relevant when it comes to investments and planning for retirement. Ask this question of most people and the answer will be ‘the highest return with the least amount of risk’. However, this answer fails to address the heart of the question. As financial advisers our role is to help people move beyond the abstract and develop concrete goals, in order to better define the level of wealth required and when it is needed to meet those goals. Read More
The wait is over, the English Premier League returns
We go again. The wait is finally over, with the English Premier League season kicking off this weekend. The European Championship filled the gap over the summer, but it is merely a distraction from the real excitement, the English Premier League. The likes of Barcelona and Real Madrid may make the English teams look average on the pitch but there is no debating the fact that the English league is on a different level for entertainment, benefiting from a fairer distribution of TV money across all teams in the league.
While the government bond market, drowning in negative yields, might have you questioning the soundness of the financial system, the football transfer market makes you wonder has the world gone completely mad. Manchester United, a club who have adopted a ‘throw money at the problem’ strategy since Alex Ferguson left, are paying £89 million for Paul Pogba a player they left go on a free transfer in 2012. Forget about buying low and selling high! Read More
Central bank liquidity keeps everyone dancing
While the Bank of England (BOE) surprised markets by holding interest rates steady in July, the Bank announced an aggressive package of measures at their meeting on Thursday that had financial markets salivating once again. This package, intended to lower the cost of borrowing for households and businesses, comprises:
- a 25 basis point cut in Bank Rate to 0.25%;
- a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate;
- the purchase of up to £10 billion of UK corporate bonds;
- and an expansion of the asset purchase scheme for UK government bonds by £60 billion, to £435 billion over a six month period
Gold, scarcity and supernovas
“There is something a bit odd about the value we attach to gold. Throughout history people have gone to extraordinary lengths to get their hands on this most precious substance which is strange because it is isn’t particularly useful for anything…but it has got one thing going for it and that’s that it is incredibly rare”. Professor Brian Cox, Wonders of the Universe
Gold is one of the best performing asset classes in 2016, up +26.99% YTD to $1,349.09. The yellow metal has regained its shine this year as more market participants have become concerned about the monetary policy endgame, with increased volatility in financial markets adding to its allure as a safe-haven asset.
Determining an intrinsic value for gold is next to impossible. Its value lies in its scarcity. Consider the fact that all of the gold ever mined in human history would only fill three Olympic sized swimming pools. What is even more mind blowing is the origin of gold and the reason for its rarity.
As Professor Brian Cox explains in his amazing documentary series, “Wonders of the Universe”, heavy metals like gold are scarce because they were formed at extreme temperatures – 100 billion degrees – when stars multiple times the size of our sun died in a giant explosion known as a supernova, the most powerful explosion in the universe. (See video clip)
Of course, while the most valuable characteristic of gold is its scarcity the price assigned to this precious metal is a function of demand. This year gold prices have risen on increased investor demand, implemented in some portfolios as a safe-haven alternative to negative yielding bonds.
Gold is also perceived to be an insurance policy against central banks and governments eroding the value of paper currency. Like the universe, the global debt bubble continues to expand, meanwhile central banks are moving deeper and deeper into experimental territory. In effect, gold is a hedge against an economic supernova, a bursting of the global debt bubble.
Irish GDP data; no leprechauns in Ireland Paul
The National Accounts released by the Central Statistics Office last week caused quite a stir, with Gross Domestic Product (GDP) up a whopping 26.3% in 2015. US Economist Paul Krugman’s tweet made the headlines, putting the increase down to “Leprechaun economics”. Ah such a brilliant mind; Ireland, leprechauns, I’ve got it “Leprechaun economics”. Genius! Of course the media loved the catchy put down, informing us that we are being viewed as a laughing stock by international investors.
There is no doubt that it doesn’t look great when economic data changes so dramatically from previous estimates. Also, the number is outrageously large that it bears no significance in terms of explaining how the economy is performing. However, this is not the fault of the Central Statistics Office. They are merely complying with international standards in producing this data. As they made clear in their press statement: “The CSO, like all National Statistical Institutes, must publish the key economic indicators of GDP and GNP in accordance with the international rules.”
Gross Domestic Product (GDP) is designed to capture the value of all goods and services in an economy, a measure of the health of an economy. However, the evolution of the corporate structure – made worse in Ireland by our tax haven status – has meant that its relevance is becoming increasingly questionable.
The challenge for the Central Statistics Office is to provide additional reporting and indicators that can assist people in understanding the data, in order to more easily decipher between the once off corporate shenanigans and the actual performance of the underlying economy. This is something the CSO appear to be committed to with the developing of a new working group.
“Notwithstanding the fact that we will continue to comply with international data standards for compiling and reporting GDP and GNP, due to the highly globalised nature of the Irish economy and the continuing challenges that this presents, the CSO intends to convene a high-level cross-sector consultative group. The group will examine how best to provide insight and understanding of all aspects of the Irish economy including:
- development and expansion of existing indicators within the National Accounts framework
- identification of where additional detail would best help to provide insights
- the potential to develop new indicators
- Whether new presentations of existing information would improve understanding.”
Looking beyond GDP data in 2015, retail sales, personal consumption and employment were up 8.2%, 4.5% and 2.6%, a better reflection of the growth experienced on the ground. While the recovery has still not been felt by everyone, the Irish economy is doing relatively well. Net expenditure by central and local government on current goods and services increased 1.1%, which points to a government watching the finances.
The bottom line is that everyone knows that GDP is a flawed measure buts it is still considered attractive to have one indicator to highlight how an economy is doing. The reality is that it is impossible to find one economic indicator that can encompass the inner complexities of all its stakeholders in an economy.
While Paul Krugman implied that the outlandish 26.3% increase in GDP is a product of Irish fairy dust, which is most definitely not the case, the distorted figures pose a wider question to the profession of economics on how best to measure the health of an economy and the welfare of its citizens. The old measures no longer suffice.
Weekly Market Update: July 11th 2016
Market Recap
Global equity markets were mixed last week as the major indices in the US outperformed their counterparts in Europe and Asia. Core government bond yields continued to confound, with the 10-Year German Government bond yield falling to -0.18%.
Stronger than expected monthly US jobs data from the Bureau of Labour Statistics on Friday helped spur a relief rally that pushed the major US equity indices into positive territory for the week. The report was heralded as “goldilocks jobs report”, not too hot, not too cold, just right! The report was strong enough to suggest the US economy is not headed for recession, but yet not strong enough to suggest the US Federal Reserve will be forced to raise rates in any material way in the near term. Read More
End of an era, the legendary Gilsey retires from RTE
While the final of the European Championship was a let-down, RTE’s tribute to John Giles, on his retirement from his pundit role at RTE, was a fitting send off for a man that has been a fixture of many a sitting room over the last 30 years.
Watching the montage last night, it struck me that it is not just a reflection of his moments but it rekindles memories of years gone by that we have all shared, another time of your life that is locked in the past.
The arrow of time only moves one way, and in the end all we are left with is our own internal montage of our stand out moments, filled with the people we shared them with. Best make it a good one!
Mind the gate on UK commercial property
Liquidity is defined as the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price.
Investors in UK commercial property funds have been given a lesson in liquidity over the last ten days, as the gate was abruptly shut to those looking for their money back. The BREXIT result sparked concerns about the outlook for the UK economy and the commercial property sector, which in turn caused a wave of selling. With investors all looking for the exit at once, liquidity dried up as cash reserves were depleted and so the gates were shut to those looking to get out.
In the face of increased sell orders, fund companies have also been forced to mark down the value of their assets, with Aberdeen Asset Management reportedly cutting the value of their UK commercial property fund by 17%. Of course, this all serves to feed investor panic and increased selling pressure at a fund level will force fund companies to offload the underlying properties at the very time everyone else is trying to sell. A lethal cocktail.
The funds in question are open ended funds with daily pricing, and therein lies the problem. The availability of daily pricing on a fund provides the illusion of liquidity, but the underlying liquidity is a function of the asset that makes up the fund. In this case the funds are made up of illiquid commercial property. The panic selling we have seen suggests that many so-called long term investors missed this point.
Weekly Market Recap: July 4th 2016
Market Recap
After a miserable Monday which saw large declines across all of the major equity market indices, soothing words from ECB President Mario Draghi and his counterpart Mark Carney at the Bank of England helped spur a relief rally for the remainder of the week.
Concluding his speech on Thursday, Mark Carney gave markets a lift with his reassuring ‘I’ve got your back’ message: “In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.” Party time for equity markets! Read More
