“Investing in Treasuries at their
currently artificially depressed yields is playing with fire. It is one of the
wonderful ironies of the English language that the word “taper” not only means
to “gradually withdraw” but is also a noun used to describe a long, thin candle
or a long, waxed wick used to light candles or fires. Perhaps the Princeton
economics professor was playing with the market in more ways than people
realize when he used that term to describe his future policy
E. Lewitt, in John Mauldin’s ‘Outside the Box’. Hat-tip to Espirito Santo’s
Marcus Ashworth. If this isn’t a team effort, I don’t know what is.
“These results have been achieved through the most perilous financial era of a
lifetime. Throughout this period we have followed our objective of protecting
your capital. The price has been, as I have referred to in previous statements
to you, modest underperformance as we refused to put all your capital at risk
when the economies of many areas, notably in Europe, have experienced moments
of near collapse, and when political events in the Middle East and beyond have
been so threatening..
“Sacrificing growth in value to ensure against danger has been an
uncomfortable process. But necessary. We have not abandoned the overall caution
which the world economy, in my view, still demands.. Defensive hedges cost us
money last year, as did our historically profitable gold positions..”
Rothschild, 6th March 2013, in the Chairman’s statement to shareholders of RIT
Capital Partners plc, Company report and accounts.
Two frustrations are paramount
as we watch the evolution of the financial markets today. One is the facile but
obsessive coverage of apparent “forward guidance” by central bank spokespeople.
This confirms the extent to which markets have become hostages to monetary
stimulus, and hopes – or fears – of more, or less, of the same. This also makes
sensible investing on the basis of what used to be called “fundamentals” more
or less impossible, at least in the short term. The second is the seemingly
widespread belief that the world economy is enjoying some form of recovery,
which would then validate the ongoing melt-up in the prices of risk assets, and
notably stocks. Note that these two influences are not unconnected; the
‘confidence’ generated by central bank policy pledges, with or without the
subsequent liquidity gifts, drives markets higher, allowing those who still
believe financial markets as discounting mechanisms are capable of pricing in
nascent future developments not yet fully visible, such as an economic
recovery, to see evidence of the recovery not otherwise apparent in real world
data. It is all a hopelessly confused and confusing mess.
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