Buttonwood’s notebook

Financial markets

  • 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?

    by BUTTONWOOD

    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.

  • The China syndrome

    What 2018 has in store for the markets

    by Buttonwood

    WHAT is in store for economies and markets in 2018? Around this time of year, a large number of analysts and fund managers are giving their views. Among the most interesting and thoughtful approaches can be found at Absolute Strategy Research (ASR), an independent group founded by David Bowers and Ian Harnett.

    ASR adds extra depth to its analysis by contrasting its own views with those of the consensus. To do so, the group polled 229 asset allocators, managing around $6trn of assets, for their views on the outlook for economies and markets. They found a groundswell of optimism; the probability of equities being higher by the end of 2018 was 61%, and that shares will beat bonds is 70%.

  • False promises

    When politicians and executives get caught out

    by Buttonwood

    POLITICIANS and executives are held to different standards. That is pretty clear when it comes to issues such as sexual harassment, notwithstanding the resignation of Al Franken or the rejection by voters of Roy Moore. As others have pointed out, the tweets and remarks of Donald Trump would have seen him forced out of the leadership of an S&P 500 company long ago.

    There are also big differences when it comes to the consequences of their regular actions. Politics is about making choices. Should public money be spent on defence or welfare benefits? Should taxes be cut for one type of voter and raised for another?

  • Crypto through the tulips

    Putting a price on bitcoin

    by Buttonwood

    SCENE: A pet shop with a bored looking proprietor. A customer approaches

    CUSTOMER: I’d like to buy a parrot.

    OWNER: Certainly, sir. How about this one? It’s a Norwegian Blue. Beautiful plumage.

    CUSTOMER: It’s not moving much

    OWNER: It is tired and shagged out after a long squawk

    CUSTOMER: Fair enough. How much is it?

    OWNER: $20,000

    CUSTOMER: I’ll pay with this bitcoin

    OWNER: Sorry, sir. On WavesDEX, the bitcoin is only worth $13,500

    CUSTOMER: But on Localbitcoins, it is over $21,500! Look at the news headlines. 

    OWNER: Sorry, sir, but I can’t afford the risk. My rent, heat and light are all payable in dollars.

  • Markets

    How to spot the next crisis

    by Buttonwood

    WHILE the world of geopolitics looks as risky as ever, the markets seem to go on their sweet way, recording new highs for equity indices. In large part, of course, this is down to signs of an improving global economy and a sense that politics doesn’t really matter, despite the tweets of President Donald Trump (defending Vladimir Putin and attacking Theresa May is a first for American diplomacy).

    Where might trouble first emerge? The most likely venue is the corporate bond market. This has changed a lot over the past ten years.

  • Politics and economics

    Britain’s 1970s retread

    by Buttonwood

    THE strange 1970s revival in Britain has another twist. The main focus has been on the Labour party which, under Jeremy Corbyn, wants to return to the era marked by nationalisation and higher taxes. But in a sense the Brexiteers want to take Britain back to the 1970s too; to the “golden era” before 1973 when the country was outside the EU. 

    In fact, the early 1970s were marked by strikes, power cuts and rapid inflation. They were presided over by Edward Heath (pictured left), the prime minister whose main achievement was to take Britain into what was then the European Economic Community.

  • Economics and democracy

    Where economic power goes, political power will follow

    by Buttonwood

    BACK in 1992, in his book "The End Of History and the Last Man", Francis Fukuyama argued that liberal democracy had triumphed. The return of authoritarianism in Russia, and the growing power of absolutist China, has undermined the argument at the geopolitical level. And events in recent years have caused questions on the ability of liberal democracy to flourish in some countries where it seemed established. The new nationalists that have emerged in Turkey, Poland and Hungary tend to regard disagreement with their policies as unpatriotic and are quick to brand opponents as being in the pay of foreign powers. 

  • Greater fool theory

    The bitcoin bubble

    by Buttonwood

    PUT the word Bitcoin into Google and you get (in Britain, at least) four adverts at the top of the list: "Trade Bitcoin with no fees", "Fastest Way to Buy Bitcoin", "Where to Buy Bitcoins" and "Looking to Invest in Bitcoins". Travelling to work on the tube this week, your blogger saw an ad offering readers the chance to "Trade Cryptos with Confidence". A lunchtime BBC news report visited a conference where the excitement about Bitcoins (and blockchain) was palpable.

    All this indicates that Bitcoin has reached a new phase. The stockmarket has been trading at high valuations, based on the long-term average of profits, for some time.

  • The wealth effect

    The financial markets are not the whole economy

    by Buttonwood

    DONALD TRUMP is fond of pointing out that the stockmarket has reached many record highs under his presidency. It is a capricious measure to boast about, and one that may not fully reflect the concerns of those who voted for him and probably care more about real wage growth. A look at the ratio of stockmarket capitalisation relative to GDP shows that this measure is close to a record high. That led me to reflect on a sentence I wrote a few years ago: we are better at creating new claims on wealth than at creating wealth itself.

  • British political risk

    When the revolution eats itself

    by Buttonwood

    WHEN a revolution happens, the consequences are not obvious straight away. The British referendum on EU membership in June 2016 was seen as a revolt of ordinary people against a globalised elite. The politicians who led the Leave campaign did not seem to expect to win. As wags remarked, they were like “the dog that caught the car”.

    This helps to explain the general chaos that has enveloped British policy since the result. The Leave campaign had contained two contradictions.

  • Goldilocks is back

    Economic optimism drives stockmarket highs

    by Buttonwood

    BARELY a day goes by at the moment without Wall Street hitting a new record high. The market has kept marching upwards despite all the headlines about the North Korean nuclear threat, a potential break-up of NAFTA, and natural disasters like hurricanes.

    If you want to know why the market keeps rising, just look at the latest poll of global fund managers by Bank of America Merrill Lynch. Almost half of all the managers now expect above-trend growth and below-trend inflation, what is dubbed the Goldilocks economy (she wanted porridge that was not too hot, or too cold, but just right). That is the highest proportion recorded in the history of the survey.

  • Tackling inequality

    Taxing the rich

    by Buttonwood

    FOR once, the Daily Mail and the Guardian, British newspapers of the right and left, agree. In the former, Alex Brummer says “IMF's new line of thinking of tax should please Corbyn & co” while the latter says that the IMF “analysis supports tax strategy of Labour in UK”. Both are responding to the IMF's fiscal monitor which does indeed say that

     there would appear to be scope for increasing the progressivity of income taxation without significantly hurting growth for countries wishing to enhance income redistribution.

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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