On “Safer but more Paranoid Markets”; Butter is not Back!

From: aditya rana <aditya>


The irrepressible and maverick fund manager Hugh Hendry usually has interesting views and his occasional letters, steeped in relevant lessons from financial history, provide much food for thought. His latest newsletter follows in that tradition, advising clients not to panic in the face of market volatility. To summarise:

-The current financial environment reminds him of the scene from the 1964 Stanley Kubrick movie Dr. Strangelove, where a deranged US general orders a first strike on the Soviet Union as he is convinced that the Russians had been adding fluoride to the water supply in the US, thereby depriving Americans of their “precious bodily fluids”.

-Similarly, the bears today argue that QE policies by central banks QE have distorted the market pricing mechanism resulting in high asset prices with low growth and inflation. They fret about the inability of central banks to raise rates, with rates in the US having been kept unchanged for longer than during the Great Depression.

-The bears also argue that if only global policy makers had stuck to the 1930s approach of maintaining “hard-money”, the developed world would already have experienced a depression through the process of creative destruction, and a full recovery would be in place by now with inflation and rates rising. However, this approach was a policy of mutually assured destruction with a devastating impact on the real economy and the populace.

-A policy of not intervening to support the economy, or worse, a tightening monetary policy to foster the process of creative destruction is not the preferred method to produce a diverse and vibrant economy. Rather, the current policy of supporting the economy while allowing the explosion of free services from Google Search to Skype and Wikipedia, thereby forcing a reallocation of capital within the economy, would over time create a more diverse and durable economy.

-The current environment is dominated by predictions of a future much worse than today, much like Jack Schwager’s first book Market Wizards, published after the October 1987 crash. Then (as now) the best financial minds were convinced that the future was bleak, adding further credence to the view that capital markets harbour innately pessimistic views, providing an opportunity for risk takers.

-Anxiety is deep rooted in the human psyche (and the disease of the 21st century), driving the market panics in August (with VIX spiking above 50) and in September (causing a dramatic re-pricing of the year’s winners and losers). Being anxious can sometimes be useful (especially when one is anxious before the herd), but being anxious at the wrong time (like today) can be very painful.

-Markets do not crash when everyone is anxious, and investors are very concerned about today’s elevated prices and the potential lack of a policy response to ward of further weakness in the global economy. There is little appetite to take risk and panic abounds at the nearest sign of danger. Ironically, by withdrawing the “Greenspan put” and using QE policies to support elevated asset prices, policy makers have created a safer but more paranoid market.

-Crisis fears have driven markets this year , starting with Europe, then the US high yield credit market with worries about shale oil borrowers, then back to Greece, and finally the big one – a China hard landing, with its falling stock and property prices seemingly adversely impacting economic growth and raising prospects of a sizeable devaluation. However, no crises have transpired – with no observable bankruptcies in China, continued production of shale oil, and no bankruptcies in the EMs by issuers of US dollar debt despite the sizeable currency devaluations.

-Perhaps this is a premature view and the cards are about to fall, or alternatively there are no dead bodies in the system and the global economy is a lot more resilient to shocks. Being forewarned a few years ago of a 50% appreciation of the US dollar versus some EM currencies, and a 50% fall in the price of oil and iron ore, no one would have expected the current relative calm at both the corporate and sovereign level, with the turmoil having being contained to financial markets. “Perhaps it’s time to stop worrying and love the bomb.”

-Great piece which highlights the key feature which has governed markets since the 2008 financial crisis : “policy makers have created a safer but more paranoid market.” To operate in this volatile environment one has to make note of the fact that every time a potential crisis begins to unfold, global policy makers have blinked and intervened aggressively to ward of the crisis, and the strategy has worked in terms of restoring confidence each time. While at some point this feature will undergo change, there is no reason to expect it to change anytime in the near future.

-So what do investors do in this environment? As noted in previous newsletters, either stay put and ignore the market volatility or maintain a core long risk position while lightening up on rallies, thereby freeing up cash to reinvest on sharp downturns. The current strong global rally provides an opportunity to reduce risk (while maintaining a core long) as the uncertainty regarding the Fed’s rate rise in December resurfaces. Meanwhile, the China stock market is now officially again in bull territory (having risen by 20% in the last month or so) making it perhaps the only market in history to have experienced two bull and one bear markets all within the space of a year! As a noted China financial analyst has observed- “there is no bull market like a China stock bull market”. Ironically, Chinese stocks could provide a safe haven in volatile markets during the coming months.

Butter is not Back – Limiting saturated fat still best for heart health:

Media headlines advocating that eating butter is not bad after all have been popular recently– but is that really true? Apparently not, as a team from the Harvard School of Public Health, led by two of the world’s leading health experts (Professors William Willett and Frank Hu) have demonstrated in a recent study:

Harvard School of Public Health.

September 28, 2015

-People who replace saturated fat (mainly found in meats and dairy foods) in their diets with refined carbohydrates do not lower their risk of heart disease, according to a new study led by researchers at Harvard T.H. Chan School of Public Health. On the other hand, those who replace saturated fats with unsaturated fats (found in vegetable oils and nuts) or whole grains lower their heart disease risk.

-Many people fall back on carbs, especially refined carbs like white bread, when they reduce saturated fat in their diets, said senior author Frank Hu, professor of nutrition and epidemiology. This may in part explain findings from a controversial 2014 paper that called into question recommendations for limiting saturated fat for heart health, and led to headlines promoting the return of butter.

-“Our research does not exonerate saturated fat,” said Hu. “In terms of heart disease risk, saturated fat and refined carbohydrates appear to be similarly unhealthful.” The study appears online September 28, 2015 in the Journal of the American College of Cardiology. This is the first prospective analysis to directly compare saturated fat with other types of fats and different types of carbohydrates in relation to heart disease risk.

-Hu and colleagues looked at diet and health information from participants in two long-running observation studies, the Nurses’ Health Study (84,628 women) and the Health Professionals Follow-up Study (42,908 men), who were free of diabetes, cardiovascular disease, and cancer at baseline. Diet was assessed by food frequency questionnaires every four years. During follow-up, the researchers documented 7,667 cases of coronary heart disease (CHD).

-They estimated that replacing 5% of energy intake from saturated fats with equivalent energy intake from either polyunsaturated fats, monounsaturated fats, or carbohydrates from whole grains was associated with 25%, 15%, and 9% lower risk of CHD, respectively. On the other hand, swapping 5% of saturated fat calories for the same amount of refined carbohydrates and sugars did not change CHD risk.

-“In other words, refined carbs and sugars don’t lower CHD risk any more than saturated fats lower CHD risk (which they don’t),” said researchers in the Department of Nutrition. “People who choose refined carbs and sugars instead of saturated fat, thinking they’re making a healthier choice, are not doing themselves any favours in terms of heart health.”

-The study’s analyses took into account cardiovascular risk factors such as age, body mass index, smoking, and physical activity.

“Our findings suggest that the low-fat, high-carb trends of the 1980s and 1990s are not effective in reducing risk of CHD,” said Li. “Dietary recommendations to reduce saturated fats should specify their replacement with unsaturated fats or with healthy carbohydrates, such as whole grains.”

Here’s to replacing that extra helping of butter, cheese, eggs, fish or meat with healthy oils, nuts and whole grains.




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