Buttonwood’s notebook

Financial markets

  • Godzilla escapes

    Markets think trade war is good for "absolutely nothing"

    by Buttonwood

    IN THE original Godzilla movie, made in Japan back in 1954, the testing of American nuclear weapons leads to the creation of a giant dinosaur that threatens to destroy not just Japan, but the rest of the world. Now Asians face another American creation that seems to be laying waste to all around it.

    President Donald Trump has already pulled out of the TPP (the Trans-Pacific Partnership) and the Paris climate change agreement.

  • The mulligan rule of investment

    Beware of performance figures

    by Buttonwood

    GOLFERS are familiar with the concept of a “mulligan”—the chance to retake a shot. Give an averagely talented player enough mulligans and he or she will get one close to the hole. And a version of the mulligan exists in fund management too.

    Readers will be familiar from past blog posts with the idea that actively managed funds cannot be relied upon to beat the index. Many of these studies are conducted in the US market, which is probably the most efficient (and thus hardest to beat) in the world. But the same is true in Europe.

  • The soaring cost of old age

    The real problem with pensions

    by Buttonwood

    PAYING for pensions is like one of those never-ending historical wars; a confusing series of small battles and skirmishes that can obscure the long-term trend. The latest conflict is in Britain where university lecturers are indulging in strike action over changes to their future benefits.

    Let us start by making the long-term trends clear.

    1. People are living longer and retirement ages have not kept pace. This increases the cost of paying pensions 

    2 Interest rates and bond yields have fallen. This increases the cost of generating an income from a given pension pot

  • A message from the future

    A history of the Trump slump

    by Buttonwood

    LOOKING back from the vantage point of 2025*, economic historians are starting to write their analyses of the Trump slump. It seemed to appear from nowhere with the economy growing at around the trend rate (2.3% in 2017) and the stockmarket booming. The abrupt change came in March 2018 when President Donald Trump decided to impose tariffs on steel and aluminium imports. "Trade wars are good and easy to win" he said. Both China and the European Union (EU) retaliated in kind without trying to escalate the tensions. It might have ended there.

  • The Fed and the markets

    Jerome Powell's game of Kerplunk

    by Buttonwood

    THERE is an old children's game called Kerplunk. It is similar in concept to Jenga. Marbles are poured into a plastic tube through which sticks have been threaded. The players take it in turns to remove the sticks with the aim of avoiding the fall of marbles. The normal pattern is for a few marbles to drop until the unlucky player removes the strut that keeps up the rest. A noisy crash ensues.

    Jerome Powell (pictured), the new chairman of the Federal Reserve, may be that unlucky player. Janet Yellen, his respected predecessor, managed to pull out five sticks (ie, raised rates five times) before she departed, leaving both the economy and the markets in fine shape.

  • The billion-dollar tweet

    Snap, chatter and pop goes the share price

    by Buttonwood

    KYLIE JENNER, a model and reality TV star best known for being the, er, second most famous Kylie in the world, managed to cause a stir on Wall Street. With this idiosyncratic tweet

    sooo does anyone else not open Snapchat any more? Or is it just me...ugh this is so sad

    she knocked back the share price of Snap, the parent company of the video- and picture-sharing app. Ms Jenner’s influence in the target market is deemed to be huge; she has 24.5m Twitter followers, and her message has (at the time of writing) been retweeted 58,000 times and “liked” by 310,000. 

    Snap’s share price fell 6%, reducing the company’s market value by $1.3bn.

  • Long-term investing

    Why low returns are inevitable

    by Buttonwood

    WHEN the stockmarket is close to a record high, the chances are that recent returns will have been very strong. The terrible tendency among investors is to assume that those returns will continue. But the higher you go, the harder it is to keep rising at the same pace. 

    When I visited America for a story on pensions last autumn, I was struck by how few people failed to grasp this point. Public pensions have return targets of 7-8% for their portfolios. When challenged they tend to cite their 30-year record of achieving those numbers. But that record makes it less likely, not more that they will hit their targets. 

    The easiest way to think of this is via the bond market.

  • Saboteurs and sunlit uplands

    Those Brexit clichés explained

    by Buttonwood

    EVER since February 2016, when David Cameron, the British prime minister, called a referendum on the UK leaving the EU, the debate has been clouded by catchphrases, similes and confusing metaphors. If you haven’t followed the debate religiously, or you are unfamiliar with British idioms, these may be mysterious. So as the negotiations reach a critical stage, here is your cut-out-and-keep guide to some of the most notable.

    Project Fear

    This was how the Leave campaign dubbed the economic forecasts made by the Treasury and bodies like the OECD and IMF about the potential adverse impact of a Brexit vote.

  • Cycle of the times

    Financial markets abhor an equilibrium

    by Buttonwood

    THE recent volatility in the stockmarket has come as a shock in part because equities have been performing well for an extended period. Share prices have been on a broadly upward trend ever since the spring of 2009. That follows the long bull market of 1982 to 2000. As the chart shows (on a log scale), there has been a tendency for bull markets to be longer-lasting than they were in the 1960s or 1970s. 

    The same can be said for the economy. The average business cycle since the Second World War has lasted around six years. By that standard the current expansion is elderly, at eight-and-a-half years.

  • The bond mystery

    Why don’t foreign investors take fright more often?

    by Buttonwood

    BACK in the days of the gold standard, central bankers were very concerned about the views of international investors. They believed that maintaining the value of their currencies would reassure creditors. That is why they were so resistant to the idea of floating currencies. Georges Bonnet, a French finance minister, put it best

    Who would be prepared to lend with the fear of being paid in depreciated currencies always before his eyes?

    This fear still shows up from time to time. Under the old exchange rate mechanism, countries like Italy would undergo periodic devaluations to restore their competitiveness*.

  • Politics and the currency markets

    The buck drops here

    by Buttonwood

    THERE may have been a “Trump bump” in the stockmarket but the opposite has been true in currency markets. The dollar has steadily weakened and the administration does not seem too concerned about it. Steven Mnuchin, the Treasury secretary, said this week that

    Obviously a weaker dollar is good for us as it relates to trade and opportunities.

    He qualified his remarks by saying a strong dollar reflects a strong US economy. Leaving aside his clear confusion (so does the dollar’s weakness mean the US economy is weak?), it is rare for any Treasury secretary to welcome a fall in the greenback.

    Paul O’Neill, who held the position under George W. Bush, declared that

  • Tales from the crypto

    The rise and fall of bitcoin

    by Buttonwood

    THE great Sir Isaac Newton may have revolutionised our knowledge of the world but he still had his blind spots. He was sucked into the great mania of his day, the South Sea Bubble (pictured) and lost a lot of money. “I can calculate the motion of heavenly bodies but not the madness of people,” he ruefully reflected. In retrospect, he should have pondered the popular saying that was used to define his law of gravity: “What goes up, must come down.”

    Investors in bitcoin are learning this old truth.

  • Well-timed call or Gross exaggeration?

    Predicting doom for the bond market

    by Buttonwood

    INVESTORS are dragging their attention away from the stockmarket for a moment to figure out what is going on in the other main part of their portfolios: government bonds. Yields have been rising so far this year and Bill Gross, one of the sector's gurus, has said the long bull market (which dates back to the early 1980s) is finally over.

    This certainly seems to be the month for big calls; the noted equity bear Jeremy Grantham has already pointed to the potential for a "melt-up" in the stockmarket. Mr Gross, who runs money for Janus but made his name at Pimco, said that the 25-year trend lines had been broken  for both the five- and ten-year bonds. 

  • The dog that’s yet to bark

    Where did the inflation go?


    THE strength of the global economy is one reason why the stockmarket has started 2018 in a buoyant mood (with the Dow passing 25,000). At some point, in any expansion, businesses find it harder to recruit workers or get the materials they need; these bottlenecks cause wages and prices to rise. Central banks then start to tighten monetary policy, a process that can eventually turn the market (and the economy) down.

    After many years of ultra-low interest rates, the Federal Reserve has started to tighten monetary policy. There were three rate rises in 2017, and three are expected this year.

  • A wild ride in 2018

    Is the bubble only starting?

    by Buttonwood

    READY for a melt-up? Investors are generally upbeat about the prospects for equity markets this year but one intrepid fund manager thinks it is likely that American share prices could rise by 50% in the next six months to two years. Perhaps the biggest surprise is the identity of that pundit: Jeremy Grantham.

    Mr Grantham, one of the founders of the fund management group GMO, is best known for a cautious approach to valuations. He was one of the investors who got out of the dotcom boom well before the top.

About Buttonwood’s notebook

Analysis of the ever-changing financial markets (Wall Street trades used to take place under a Buttonwood tree)



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