June 2021

“All the alleged evils of free banking count little when compared with the disastrous effects of the tremendous inflations which the privileged and government-controlled banks have brought about.”
Ludwig von Mises

Attention was once again firmly centred on the Federal Reserve in June, with the mid-month meeting upending markets while giving the commentariat a bad case of the vapours.  The cause?  News that the Fed’s “dot plot” forecast showed rate hikes by late 2022 and that policy makers have acknowledged that they might soon discuss when to begin tapering bond purchases.  For readers unfamiliar, the “dot plot” is a innovation introduced in 2012 by the Bernanke Fed, and aims to boost transparency by presenting the views of FOMC members on future levels of interest rates.  Never mind that the prognostications of 18 individuals have been no more reliable than having a blindfolded Jocky Wilson throw darts against a yield chart, this unfortunately is the current state of affairs.  Since the 2008 financial crisis Forward Guidance has been official central bank orthodoxy across the G7, based on the belief that more information would create a safer market environment.  However, this has resulted in an overabundance of official commentary as central bankers feel obliged to opine on every bit of data or economic development, which often leads to conflicting perspectives as data rarely moves in a consistent pattern.  And when an overt political agenda creeps into policy it further complicates the forecasts.  Perhaps it would be better if we went back to a time when central bankers said less, and we didn’t treat every bon mot as dogma.  Or perhaps Milton Friedman was right when he suggested that we replace the Fed with a computer that simply raised the money supply every year by a fixed amount.  And news of tapering on the horizon brought back memories of 2013 when the Fed first mooted scaling back bond purchases and markets reacted badly.  At that time the Fed’s balance sheet was less than half of what it is today and was already considered unsustainably large.  The market’s reaction to this news?  After a brief one-day selloff Treasury bonds rallied to levels not seen for months, which is quite something considering recent data and the absolute level of real rates.  Perhaps the shorts realize the Fed’s bazooka might keep reality at bay for longer than expected?

Elsewhere the broader markets shrugged off the Fed and news that the G7 had reached a deal on a global minimum corporate tax with the SPX ending 2% higher despite a midmonth wobble, driven by technology.  Markets in Europe followed with STOXX 600 up just over 1%, while financials sagged 4% off the back of lower yields and expectations of muted results from Q2 global markets activity.   In other sector news the merger of Unicaja and Liberbank cleared regulatory hurdles, while Credit Suisse was once again in the spotlight as a potential merger partner for UBS.  CS was also in the news for being forced to pay retention bonuses to retain key bankers after losses sustained earlier in the year, while noises emanating from HQ indicated another strategic review of the investment bank is in the offing.  At this stage the bank is stumbling around like a punch-drunk pugilist and needs a very firm hand to guide it to a sustainable equilibrium, which should not include reinvesting in the IB.  And other Europeans with global aspirations should do the same.

Against that backdrop the fund’s A share rose +0.1% for the month and +6.8% for the year as credit markets largely treaded water while equities were buffeted by the drop in yields. The moves were reflected in the performance where credit contributed +73bps gross, largely offset by a -58bps contribution from equities. News emanating from the ECB that the dividend ban is likely to be lifted has started to filter into the market and is likely to be a catalyst in the coming month. We remain focused on this theme as well as the consolidation story as potential drivers of value in equities while we are using the favourable rate environment to continue to lighten our credit exposure. July will also be the start of the 2Q results season, where we expect to see benign developments on asset quality, cost of risk and weak revenue for IBs after the very low volatility of the quarter. Our objective is to be positioned with maximum flexibility as we enter the late part of the year, which we believe could be eventful for markets.

This month marks our last in the bucolic environs of Maidenhead, and from July 1st we will be located in our new offices on Curzon Street in Mayfair.