It’s the time of the year, or to be truly accurate shortly after, that we shine the crystal ball, shake the tea leaves and make predictions for the coming year. Instead of sticking my neck out some more I am going to have a glance over my shoulder and look back. I am going to start by going right back to the days when I was a floor broker on Liffe. I remember a client coming on and asking me what the price of the Sterling Red June/ Red September spread ( A QUADRATIC EQUATION) was and I started answering by saying “ I think it is…” only to be stopped in my tracks by the retort “ Listen dog’s breath I don’t pay you to think, what’s the fucking market?”. A fair point, somewhat harshly made, but a fair point. A broker survives on his knowledge not his guesswork. Those words and more importantly that sentiment have echoed in my brain quite a lot recently especially now the 2018 predictions for the markets have been published.
Look back a little over the last couple of years and see what the pundits were predicting. Let us start with Brexit. Well what can we say about the forecasts on that? Christine Lagarde, Managing Director of The International Monetary Fund warned of market turmoil, plunging house prices and streets full of giant Lizards. She actually stopped short of the Lizards, but only just. Ahead of the poll, Ms Lagarde said the outcome of a decision to leave the EU ranged from “pretty bad to very, very bad”. I suppose the clue to her negativity is in her surname. Meanwhile the leavers promised pretty much everything with the infamous red coach emblazoned with a weekly £350m into the NHS being the most outrageous claim. The leavers defend their claim by saying that this sum “could” go into the NHS. Ah yes, another favourite, the conditional tense. Allow me to rant a little. In Latin based languages the conditional tense takes a subjunctive and whilst not being either equipped or pedantic enough to explain the vagaries of language I will just say that the subjunctive draws attention to the weakness of the tense. If I had only one wish for this year it would be for editors to cut any headline containing “could”.
HOW WRONG CAN YOU BE AND KEEP YOUR JOB?
Last year we were presented with doom and gloom from the get go. At the very least Donald Trump and Brexit would be a disaster for the world and French elections would endorse the right wing Marine LePen. For an accurate example look at the redoubtable Goldman Sachs for some market predictions. Goldman’s predicted that Sterling would fall from $1.25 to $1.14 err it’s trading more like $1.35.They also saw 10 year Gilt yields rising from 1.28% to 1.65% when in fact they fell to 1.19%. HSBC were not much better forecasting that the pound would hit parity with the Euro whilst Morgan Stanley were a bit more optimistic when they called the Pound at €1.02 at least pro Brexit Roger Bootle called it better when he predicted €1.12 ( current market €1.13). Interesting though that Goldman’s predictions reflect the political views of their CEO, Lloyd Blankfein. Or are they just genuinely poor at calling the market and as such be ignored?
In the last year that markets have been driven by politics as much as anything else but who, a year ago, saw Macron winning? Did one pundit see May calling a disastrous election or Merkel not being able to form a government? I think not. Trump was and still is seen as a disaster for the US, by the media, and the record breaking run in the US stock markets was not even dreamt of. Crypto currencies? A fad that no one will take seriously Bitcoin was trading under $1000 on 1st January 2017 and we all know what happened there. Britain would collapse and its economy would implode. Hmm well I guess it is easier looking back than forward.
But look forward we must into 2018 when we will see Jay Powell taking Janet Yellen’s place, a banker replacing an economist, as chairman of the Fed. The challenge that many are seeing is the money from the Trump Tax cuts and what impact this will have. Naturally not the benefits but the negatives. The estimates of the overseas wealth being repatriated vary but a figure of around two trillion Dollars seems to be the ball park figure. Is this money already in Dollars or sitting in local currency? Is it in Bonds and do those need to be sold in Europe and US ones bought? Will the sudden impact of the money hitting the economy be inflationary and if so will short term rates rise whilst long term rates drop and we see the yield curve go negative? Just some of the challenges we can foresee facing Jay Powell no doubt there will be more and hopefully his years at Goldman’s will help him be pragmatic. In Europe we will see other challenges on the political front from Merkel to May and from Calais to Catalonia and in the markets what impact will the ECB’s slowing of asset purchases have?
I am not going to make any more predictions for the year; instead I am going to make a wish. I mentioned earlier the use of the conditional tense and how I hoped that the word “could” normally followed by utter nonsense was seen less in headlines. I am going to expand that wish a little bit to include that we stop having to digest what “an expert” says and concentrate more on expertise. Remember the markets, an expert will tell you what the price could be but someone with expertise will tell you what it actually is so please editors remember this when publishing and traders just look at the numbers , they never lie.
This column is dedicated to Gary Bone who gave up his trading rights over the Christmas period. Gary and I were like brothers for quite a number of years. We worked hard, played hard and drank hard together in the late 1970s and early 1980s at R.P. Martin. He was without doubt one of the greatest brokers I ever worked with and he has died much too young. I thought of Gary whilst I wrote this column and his great escape phrase that he used when asked a price that he couldn’t quote. He would stall and buy time by saying “I will just pop into the orchard and pick a price for you“ leaving the dealer, who had asked the price, stuttering.
His other phrase that he would utter as we staggered drunk to bed in the early hours before work was “ See you on the beach , pet “. Well Gary, get a cold one in for me and I will see you there one day. God Bless you, old mate