A small Alpine village in Switzerland, Brienz, is moving downhill. Literally, at a glacial speed of one metre per year. For many years already.
The village is not devastated by mudslides, avalanches or rock fall. No casualties. It just moves, slowly, with cracks showing on many houses, and doors which don’t open anymore. The villagers go about their ways. Haying, milking their cows, mending their tools. They know that they are doomed. Yet they cannot relocate anywhere else, because selling out and moving on is too costly. No one in her right mind would buy into a life which sooner or later will come to an end. These farmers therefore have to carry on regardless. They all know how it will all end, but nobody knows when.
Like those citizens of Brienz, after 10 years of energetically rising stock markets and ever higher bond prices, we all know that the day of reckoning will come. We just don’t know when.
In my outlook for 2019 I had advised my readers to be cautious and to take some money off the table. To stay fully invested looked dangerous. As it turned out, the stock market wobbled a few times and interest rates looked set to rise, thereby threatening exuberant bond prices. But then in the end, despite all that had happened, not much happened at all. No crash, no panic. Just gains. Shares moved upwards benignly over the year, mostly in the US.
2019 was the year when politics took over from the central banks as the most decisive factor for asset prices. After years of bond and stock buying by the monetary authorities in Japan, the EU and the US, their programmes to lift the economy looked increasingly toothless. To shrink their bloated balance sheets was not much of an option either, alas. Attempts to do so, as the FED has demonstrated, was a risky undertaking. In the last months of the year interest rates in the US repo-markets, the place were banks raise cash, shot up alarmingly.
Quantitative Easing was here to stay. My prediction that interest rates would have a hard time to meaningfully rise proved prescient. For them to fall much further into ever more negative territory was unlikely too in the face of growing political resistance. Such “tax on banks” was increasingly viewed with suspicion. After having reached a peak of $17 trillion in August, negative yielding corporate and sovereign bonds fell to less than $12 trillion now. My warning that buying into some of them might make sense for professional investors, but not for us retail investors, even when healthy gains looked tempting, had cautioned readers correctly.
The biggest influencer on investor sentiment over the year was of course Trump’s war on trade, aimed at friends and foes indiscriminately, threatening duties, imposing them, ratcheting them up, postponing them, or lifting them at whim. Russia, the Americas, Canada, the EU, South Korea, or Japan – every nation was in Trump’s cross hairs with China taking centre stage.
The surprising thing was not how markets wobbled with the announcement of ever more outlandish measures, but how little in the end share prices really suffered.
The “most unloved bull market in history” proved surprisingly resilient. US companies losing out in China? Hurray. Boeing’s 737 Max never to fly again? Never mind. Apple selling fewer iPhones? No worries.
Of course there were many losers. European bank shares, the Americas, protest-shaken Hong Kong; Uber, WeWork and Softbank coming down to earth; Russian shares in permafrost from embargoes and political interference. Yet unemployment is still dropping in the US, Europe and even the UK and stocks ticked upwards over the year.
My warnings not to invest in shares of Maltese companies still hold
Many a time did experts ring the alarm bells. “The yield curve is inverted”, they shrieked, meaning that longer-dated bonds were yielding less than short-term paper – by many seen as a dead-sure sign of economic fatigue. Or “the VIX index is up”, indicating that rising option prices which form the basis of the index calculation signal not only volatility but fears of a downward movement in the stock market. A recent survey of asset managers reported that 35 per cent of these professional investors predict a market crash by the end of 2020.
Signs of alarm are on the increase. Many shares fluctuate a great deal more than in the past, in amplitudes which would once have signalled major corporate developments while now it seems to be down to rumour and sentiment. Fads change more rapidly. Tech is in-is-out-is-in again. The world’s most famous investor Warren Buffett is so disturbed by what to him looks like terribly overpriced businesses that he has no clue what to buy with the ever increasing cash pile at his investment vehicle Berkshire Hathaway. He and his partners prefer to sit on a fence of $128 billion – growing by approximately $8 billion every three months – than to waste it on over-priced investments. Do we really believe we are smarter? And should we buy expensively into Amazon or Apple as Buffett did in his utter desperation?
In January I refuted the idea aired by UK pundits that shares in domestic UK businesses presented a buying opportunity. The election ended in a disaster for Britain, carrying to victory a prime minister and a party which had made the absence of convictions and disregard for the economy their main political principle. But equally disastrous would have been any other outcome. The future relationship between the UK and Europe cannot “get done” like Brexit. It is a costly, time-consuming exercise..
Even if there were some sudden sparks of economic hope for the UK I still think it wise to stay on the sidelines until we understand if our former overlord will become Singapore on Thames, the henchman of the US, or a small and insignificant country called Great England. In the meantime readers should be reminded of the fact that the LSE lists many international businesses which have great appeal. Just skip the Wetherspoons and Marks & Spencers.
My warnings not to invest in shares of Maltese companies, as they embodied the same economic risks as our income-generating day jobs on which we already depend, still hold. We have in the meantime learned that our political leaders are not only corrupt, collaborating with crime internationally and domestically, but also completely indifferent to murder. This will leave our businesses and investors bewildered for quite some time to come. We have to engage in nation-building from scratch and pray that “strangers will treat us with kindness”.
The most remarkable stock market debut in 2019 was doubtlessly the IPO of Saudi Arabia’s state oil company Aramco this month. It was a telling example of our time, a symbol of the ills of our short century, in Malta and elsewhere. A murderous prince summons the bankers of the world to solicit their help in launching the biggest listing of the biggest company for the biggest cash take in the entire universe. The bankers and the stock exchanges fall over themselves to accommodate the absurd wishes of the despot. They offer to waive rules, to achieve fairy-tale valuations and to sell the dubious shares to every pensioner on earth.
The bankers were hoping for the fattest commissions ever paid as the despot was sure to never pay a penny. In the process it turned out that all these international finance lackeys were quite useless and the prince had to do everything himself. He had to list the shares on his own stock exchange in Riyadh and had to order all his subjects to buy them. His state coffers were ordered to buy, buy and buy.
In the end all wishes of the despot came true. His company was the biggest, his valuation the truest, and his power undisputed. Except that a little child, somewhere in fairy-tale land, whispered defiantly: “But he is terribly naked”. And all of a sudden everyone else had to admit that the child was right.
Happy 2020 to you all.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com