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Sudden, but not entirely unexpected

1 December 2017

It has been a week full of surprises and sudden turns of events, with the main unchanged parameter continuing to be the consistent and synchronised progress in global economic growth.

For the UK public and economy, the most import development was the apparent breakthrough in the Brexit negotiation on the subject of the divorce bill. While many will be staggered and perhaps appalled by the many 10s of billions of £-Sterling being thrown around, it is important to note that this move does not constitute a caving-in by the UK’s government to the EU27’s demands. Instead, by agreeing that liabilities arising in the future from joint decisions of the past, will be honoured, both sides have accepted that it is sheer impossible to know now what they may be. On the other hand, it is abundantly clear to both sides that an unamicable Brexit would cost both sides 100s and not just 10s of billions of £-Sterling and €-Euros in lost GDP.

That then leaves the Irish issue to be resolved, but where there is a will, there should be a way.

We have dedicated the next article to a more detailed discussion of the Brexit divorce bill approach, with a particular focus on the potentially positive impact on the near-term development of the UK economy should most of the Brexit trade uncertainties dissipate.

The next surprise from a current affairs point of view was North Korea’s firing of another ballistic missile, with the potential to cross continents. Capital market action, however, judged it as another non-event and robbed “little rocket-man” Kim Jong-Un of the pleasure of causing any wider disruption.

Instead, stock market investors took note of a rare episode of one major US stock market declining while the other two continued to rise. This one day unsynchronised fall of the tech and growth stock heavy NASDAQ, versus the Dow and S&P could be seen as an indication that investors finally begin to believe in a broader economic growth dynamic. This would decrease the attraction of those technology and growth stocks which investors have pushed up relentlessly over the past years in the belief that they will be able to grow healthily, regardless of anaemic general economic growth. If this episode heralds indeed a rotation from growth to value stocks, then this could provide stock markets with further upside potential, given value stocks like banks and many industrials have been unloved and are thus not yet displaying stretched valuation metrics. Please read our third article for more.

On the side of truly remarkable market events has been the disruption in the meteoric rise in the aggregate value of the cryptocurrency Bitcoin. We have written here before about these internet based value exchange mechanisms which lack most features of effective currencies, but are loved by the ‘net’ and regularly become object of speculative frenzy. Last time we reported at length, the Bitcoin had suffered a massive bout of hyper-deflation, which saw its value in US$ terms rapidly rise 100 fold from $10 to $1,000 only to subsequently decline back to $200. This time it has ‘only’ risen 11-fold since the beginning of 2017 – from $1,000 to $11,000 last week. Since then Bitcoin speculators appear to have lost their nerve and at times the cryptocurrency lost as much as 25% of its value within hours, before recovering almost back to where it was.

Does it matter if internet geeks create and subsequently destroy intangible or even imaginary value positions? Well, to a point, or as an old friend of us noted last week “when your Uber driver tells you he is getting a second mortgage in order to ‘invest’ in Bitcoins, then you know that a bursting of the bubble will cause collateral damage in the real world”. This would be the reason why there have been so many warning voices in the media about the Bitcoin mania recently. Together with last week’s volatility nobody should be able to say they didn’t realise that the value of Bitcoins is just as uncertain as winning persistently at the races. We will be watching the next stages of this mania unfold with interest but at a collective value sum of now over $100 billion it will matter how much of this was just theoretical book gains of historic Bitcoin holders and how much real cash has flown to push up the (crypto) value.

Back in the tangible world, stock markets took a breather after hitting new highs last week, despite the global economic dataflow evidencing once again a very healthy level of increasing business activity around the world. We point out in the last article this week, that this may well have to do with a slowly changing level of financial liquidity available in markets as central banks begin to tighten monetary liquidity conditions and businesses find more productive uses for their idle cash piles than general capital market investments. This would be good news for further growth prospects in the real economy, while capital market investors will have to get used to the thought that further returns may require a bit more investigative analysis of presented investment opportunities, rather than being able to simply rely on the general surplus of financial liquidity to lift all ‘boats’ more or less equally.