Research & Insights

Posts published in July 2011

Midweek Market Comment: Safe Haven Economics 3.0

July 27, 2011

By Katrina Lamb, CFA

  • Comment

As these words come to page we are six days away from August 2, the supposed drop-dead date for the US government’s running out of money and, for the first time since 1790, being unable to meet all its financial obligations. Right now it is hard to see the entrenched pig-headedness of vested interests giving way to compromise for the common good – but stranger things have happened I suppose. Perhaps there will be an eleventh-hour-and-fifty-ninth-minute solution. Another distinct possibility is that August 2 comes and goes, no deal is on the table but markets and the economy keep hobbling along anyway. If nothing else, we have become remarkably skilled at kicking the can down the road, putting Band-Aids on the ailing patient and foregoing tough choices. I would still be more willing to bet on some patchwork fix that holds the wolves at bay rather than immediate financial Armageddon.

Regardless of how the next six days turn out, however, one thing seems to be fairly evident – we are at the dawn of a new age of Safe Haven Economics. The concept of a “safe haven” investment is probably as old as finance itself – a place to park your hard-earned capital and sleep a bit easier when the storms rage. So why have we chosen to call this version 3.0? We could go back further, but for the purposes of this post it is sufficient to think of the age of the gold standard and the pound sterling – from the late 18th to the early 20th century – as version 1.0. That era hung on life support for a brief time after the First World War and then fell apart as the clouds of the Great Depression gathered. After the dust had settled from the  turbulent ‘30s and the Second World War the United States held the undisputed mantle to version 2.0. The US dollar and Treasury bonds would be the dominant safe haven investments for the next sixty years. Even the financial crisis of 2008 – a meltdown largely caused by US financial institutions – failed to dislodge the dollar and the T-bond from their caché as the go-to port in a raging storm.

This time around things are different. I think the writing was on the wall in 2008 that dollar-denominated hegemony was in its waning days, but investors as much as any human genus are creatures of habit, slow to change. Make no mistake – the transition from version 2.0 to 3.0 looks different from the last go-around. There is nothing on the financial stage today to compare to the clear leadership role the US dollar played when the world went off the gold standard. Rather, what we are seeing is the emergence of something like a safe haven basket – a collection of assets that can play the role of “risk off” trades when capital goes a-scurrying. The Swiss franc, the Japanese yen and gold (some things never change) clearly appear to be part of that basket. Arguably certain other currencies such as the Aussie dollar may be included as well. How about other AAA-rated debt? One of the many possible curiosities of the fallout from a downgrade of US government debt is that the safest domestic corporate bonds remain AAA-rated. Why not? After all, the companies that issue those bonds are citizens of the world much more than they are distinctly American.

In finance we have long been used to thinking in terms of the “risk-free asset”. Perhaps it is time to start recasting this as the “risk-free basket”, the defining characteristic of Safe Haven Economics, v3.0.

Tags

  • No tags were found.

Murdoch, Markets and Mistrust

July 20, 2011

By Katrina Lamb, CFA

  • Comment

Over the past several days we have been treated to the spectacle of an unsavory phone hacking scandal that has metastasized into a full-blown politico-media scandal shaking the upper-crust branches of the British governing class, forcing a reluctant humility on the pashas of an arrogant media empire and making threatening growls from the recesses of that empire’s US stomping grounds as well. Now, what Rupert Murdoch, News Corp, UK Prime Minister David Cameron or any other personage or organization are or are not guilty of is not the point of this post. And as far as I can tell there is no obvious connection between this scandal and the other spectacle of the week – the playground theatrics of the US Congress whose members taunt each other with a rhetorical “Are Too! Am Not!” level of sophistication.

But these two stories are simply different faces – each ugly in its own distinctive way – of a larger and seemingly unshakeable presence in our lives today. That is a chronic, all-pervasive mistrust of institutions on the part of just about everybody who is paying even a modicum of attention. Mistrust begets uncertainty, and uncertainty is what investment markets hate more than anything else in the world. In this light it is not surprising that the dominant paradigm in the markets today is a bipolar, trigger-finger “risk on / risk off” pattern of behavior. One day the world is about to fall apart and everybody wants to do nothing other than hoard gold behind fortified ramparts. The next day investors look at the same news, see the glass as half-full or at whatever level is necessary for hope to spring eternal, and rush out to buy primary shares in some technology 2.0 IPO with a dicey revenue model. And so it goes, back and forth, day in and day out.

This is not rational behavior, in the sense that it is far removed from the “Rational Man” theorems that have filled economics and finance textbooks for decades. But in a way it is an understandable response to the world of mistrust that permeates the modern mind-set. We begin to just assume that massive conflicts of interest exist at every nexus of money and power everywhere in the world. We assume that the ones who actually get caught with their hands in the cookie jar are a small percentage of all the double-dealing and clever scams being hatched and executed – and we further assume that in most cases no one will actually pay the price even if they are caught. We hear the accused and their lawyers dissemble about what they did, what they didn’t do, how they managed to thread the needle through the conflicts of interest and the attendant multiple temptations without coming up on the wrong side of the law. We start to believe that words don’t really matter anymore.

Our better angels say no – that is not how people invested with the public trust behave, and they must know that in a capitalist economy public trust is our single most important currency. But our daily experience nags at these better angels, and with every new empirical data point we think, no, this is not the exception, it is the rule. Am I feeling lucky today? Hello, Wingandprayer.com IPO. Had enough? Time to haul those gold bars over the moat and into my cellar. Maybe tomorrow will be different.

Tags

  • No tags were found.