Freedom Calls – “Doh!” – June 27th, 2022

From the desk of CIO Simon Fentham-Fletcher

 

I have been back in the UK for a few days now and so far, there have been three days of train strikes and at least one tube strike.  “Pay & conditions”.  Let’s be completely open here; I am not a trade unionist and think that striking is the worst method to get your way.  I have two children and know that beating them with the stick that is “abstaining” from things they want, is never a winning strategy.  But it seems the “workers” of the world know better, and are withholding labour so that they can protect their conditions?

 

The word “Luddites” springs to mind… the train drivers should know that if flying taxis and autopilot cars are not far away, then driverless trains cannot be far behind.  Still, until these strikes hasten that moment, they have decided to inflict work from home on everyone again.  Ahh the memories of CoVid lockdown, the best way to ingratiate yourselves to the rest of the workforce.

 

Unionised labour is soooo early 20th century.

 

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Still talking of mad decisions, the US supreme court did their utmost to put a match to the fireworks that will be the mid-terms elections with their “Roe vs Wade” decision.  Mr P in Russia will be disappointed as this may cause Democrats to come out and vote and he was hoping for a Republican win to temper the sanctions.  Still no threat of that, as the WMD (western liberal democracies) just added Russian gold to the ever-growing sanction list.

 

Talking Russia, a friend recently pulled out a map from early 19th century to show that Russia was larger geographically than now.

 

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Well, if we are going to go there, then above is a map from about the same time showing the British Empire, can we have that reinstated also?  No, I did not think so either… and just so we are all on the same page, I am not asking or hinting we should.

 

Performance spoiler

 

A baby step forward with +2.25% on the week.  I will keep quiet; I want lots of these steps before I become vocal.

 

EU madness – Part infinity +1

 

“Elbows” McGuiness the EU stateswoman/man/person was lost for words this week when it was pointed out that the EU gives China more “equivalence” status than the UK when it comes to financial regulation.  Smiles… you cannot make this stuff up.  Fair play though, if it is their ball then they can make their own rules up, just do not pretend that the decision is not political or has no spite involved.  Then again, sincerity is not a particularly notable EU trait.

 

Macro

 

I am often asked why this year is so bad and have thought long and hard about how to explain this simply.

 

One image to explain this situation is to imagine a bear stock market as a neutron, the cause of which is usually one large “event” flying round the core like a proton would.  This year I would argue that there is not one large proton orbiting the core but several smaller protons, which have acted as a magnifier on each other enlarge their individual effect, so of … 2+2=5. 

 

We have had the Ukraine War, extended inflation, China Covid, Fed hikes, Crypto crash, Fed tightening and other miscellaneous problems.  Each, on their own, I would argue without the strength to cause a market such as we have experienced to date in 2022.  This magnification will be erased as one or more of them fade.  I would argue that inflation is peaking and that though the headline number is still high the rate of change/growth is flattening. This will take much of the steam from the protons power and with it fear will fade.

 

I often talk about how confidence takes a long time to develop and evaporates far too quickly, but the fear factor is about done.  I have never experienced anything as long in duration as this current period of declines, sharper declines yes, but not for as an extended period as this.  Previously, I have always said 3 months of down and we recover and rebound within three months.  But this time we are 6 months in and so the recovery back is probably as long.  The one fact that I am sure of is that despite the doom and gloom, recovery will happen.  Please bear with me while I fight this good fight for us

 

Let me look at a taste of the bad, inside Germany the heartbeat of Europe…

 

Over the last six months, the volume of Germany’s construction orders has turned wildly volatile. It happened again in April’s report, which found orders volumes down -16% on the month, with building down -20% and civil engineering orders down -12%. Tracking what is really happening to the construction sector matters more in Germany than in most economies, since Germany’s growth and profits model is heavily weighted towards investment, and gross fixed capital formation accounts for c22% of GDP, and at the latest count, net investment spending accounted a majority of “country” profits.

 

Now, construction directly accounts for about 6% of GDP, but the correlation between quarterly changes construction value added and gross fixed capital formation runs at 97%.  Following the construction numbers, therefore, is a way to get a handle on what is likely to be happening to investment spending in Germany, and thus to profits and ultimately DAX valuations.  We are underweight and continue to be underweight Europe.  We have not done a Dalio and gone short (as we do not short inside the portfolios), but our underweight feels right.

 

Any good news…?

 

Asia continues to surprise on the upside, and if the trading hub that is Singapore is anything to go by, is starting to power forward.  Singapore May industrial production rose +14% in the last year, with a monthly move that is above seasonal trends.  Electronics rose +34% on the year, which is staggering given that the perception of global growth is that it is non-existent.

 

I will say that this perception is wrong; the OECD (who are always underestimating things) still think that worlds GDP will grow c2% this year and though we may get some “technical recessions” globally, that any recession will be very shallow and short.  I agree, though do want to see US inflation post a pause in rising before I say this with anywhere near conviction.  Like so many other market participants, I have been caught out this year and so want to remain more cautious in how I see things developing over the next 3-6 months.  I am still hopeful for a strong recovery I just need to see those protons slow down.

 

Positioning

 

We have not done any trading this week and after the quarterly investment committees were held, I can let you know that all the ICOM members were in agreement with our do not sell down now and makes the unrealised losses real.

 

Global Macro in one chart

 

 

Performance

 

With a few days to go until month end, I will leave the detail until next week.  Despite last week’s gains we are still red for the month… the Carnage of the Fed rate hike was a big hole that we are having to climb out of.  We are – but slowly.

 

All quiet with Aston Villa

 

Hopefully, I have turned you all into avid Villa fans you will no doubt be as excited as me to hear what news will soon be flowing from this venerable footballing institution.  After all, it is 2 weeks since we had any notable transfer news and Monday is the day that players return from their short summer sojourn for pre-season training.

 

I am as ever thankful for your trust and support.



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