Hedge Clippings | Friday 21 February, 2020

Hedge Clippings was interested to note (not sure if "miffed" or "pleased" is correct) that he was no longer (assuming he ever was) a member of the informed public according to the Edelman trust barometer released yesterday. Basically, that's because those the survey defines as the "informed public" are tertiary educated, have top quartile income, are 25-64 years old and are relatively high consumers of news. Sadly we fail on nearly all counts, the exception being the high consumer of news (and not the fake news either). Now many of you might have already guessed that we didn't qualify as "informed", but now it has been confirmed.

Apparently the informed public now increasingly share the negative sentiments of the mass public in Australia - or in other words, we presume, the UNinformed public. So be it. Hedge Clippings is always in line with the term "hedge", or at least generally conscious of the potential for the negative to occur, albeit that we would generally like to think of ourselves as positive. Anyway, enough about us!

This week we had the good fortune to host Chris Watling of Longview Economics who presented his overview and Latest Global Macro and Market Outlook. We have quoted Longview previously, and we would consider Chris to be one of the most well informed economists we have come across - and certainly one of the most interesting and entertaining. As testimony to this, last October Longview correctly predicted the outcome of the UK General Election - and not just the overall result, but the number of seats Bojo would win by. At that time the result was anything but certain, but their prediction of a 70-90 seat majority was smack on the money - except sadly we didn't put a cent on the trade.

We digress (again). One of Watling's slides reminded us that it was Warren Buffett who quoted Aesop who in 600 BC said, "A bird in the hand is worth two in the bush".  In other words, don't take excessive risks with your capital. Meanwhile, Watling's many charts went on to prove that while there are widespread concerns about earnings ("in the LONG term, it is all about earnings") in fact since 1930 there's been a strong correlation between the US S&P500 and EPS:

Equally, he showed that over the past 39 years there's been no correlation between Earnings and Returns on a one-year outlook, and that over the VERY long term, earnings mean revert:

While over the very short term (1, 3, 5 years) there's no correlation between Valuation and Returns.
 

Most interesting was his points on listening to those he terms the "Armageddonists" such as Jim Rogers who has repeatedly forecast the end of the boom each year between 2011 and 2017. For instance, in 2011 Rogers predicted a "100% chance of crisis, worse than 2008" and so on through to 2017 when it was "the worst crash in our lifetime". For the record, the S&P500 fell 7.7% in 2011 (at least he got the direction right) and in 2015 it was down 3.3%, but for every other year it rose. We note he stopped, or wasn't quoted, predicting after 2017.

That's the history. For Longview's opinion on the future you can contact them here.

Hedge Clippings | Friday 14 February, 2020

Being the old-time romantic type, Hedge Clippings duly (and thankfully) remembered that today marks St Valentine's day, but we'd guess there's not too much kissing aboard the Coronavirus stricken Diamond Princess in Yokahama. Before we're accused of being insensitive (have you ever heard of an insensitive romantic type?) the point we're getting to is whether isolating 4,000 passengers on a ship with known cases of a highly contagious and dangerous disease was the correct strategy.

We have to admit that we wouldn't have a clue WHAT the best strategy would have been, and hindsight is a wonderful view to have, but is there a chance that by keeping all the passengers on board it is just a matter of time before more and more become infected in a somewhat gruesome version of the domino theory?

Meanwhile as our government tries to limit further cases in Australia by extending travel bans from China for non-citizens, and as noted in last week's Hedge Clippings the economic ripple is continuing. The issue is not only affecting direct imports and exports to and from China, with reports that Korean vehicle manufacturers Kia and Hyundai have had to halt car production due to the shortage of some components manufactured in China.

Maybe we're being alarmist, but it would seem that the risks associated with a longer than expected duration of the crisis are considerable - and unknown.

Also in the media this week has been the court case involving the Goldsky Ponzi fund, the founders of which managed to misappropriate large sums of money from unwitting investors. Once again hindsight can be a wonderful thing, but in this case, just like most other Ponzi schemes before (Astarra in Australia, or Bernie Madoff for example), there are some tell-tale signs, and some simple rules to follow.

One is to beware of the marketing spin, but to be fair, smart marketing to gullible or even greedy investors is just what Ponzi operators survive and thrive on. There's an old saying that if "something sounds too good to be true, then maybe it is". Famous sportspeople and other household name "brand ambassadors" should not be relied on for so-called financial advice.

So as a rule of thumb, do some basic research and due diligence. Who is the scheme's administrator, custodian or trustee? Even this can be difficult, particularly for the unsuspecting, or unsophisticated investor chasing exceptional returns. In the case of Goldsky, they falsely claimed to use Citco, a well known global fund administrator for independent pricing of assets, and reporting of returns.

The implied endorsements of industry awards aren't foolproof. Awards are frequently there for the manager's marketing purposes - and have been known to be less than reliable as an indicator of future returns.

Even relying on financial advice or paid for research isn't foolproof, as shown in the case of Shawn Richard's Astarra, which way back pre 2010 cost investors over $100 million in spite of a positive research report written by a party who also consulted to Astarra (for a fee of course), shared office space, and sat on the investment committee of the advisory group (AIOFP) which just happened to be the main distribution channel for the fund.

For the whole sorry tale click here. Suffice to say Astarra was paying advisors high commissions, and lending money to the associated dealer groups. For the record (excuse the pun), Richards was sentenced to 3 years in the slammer.

While on the subject of advisors (and no connection with the above) an excellent and interesting piece of research from Mark Hoven's Adviser Ratings summarising the changes to the advisor landscape in 2019 entitled "Musical Chairs", the key findings of which showed adviser numbers fell 4,378 (-15.6%), three out of every five advisers are now privately licenced, 21% of the industry is now made up of "Micro-licensees" of 10 advisers or less, and that 30% of the entire industry has been on the move (ceased or switched) in some form or another in 2019.

(And finally, for the pedantic types who noticed the varied spelling of the word advisor/adviser, the dictionary allows both.)