Well, there’s another LME Dinner out of the way. The
(quasi-)competitive ‘it’s my 30th’, ‘my 35th’, ‘my 29th’and
so on amongst my generation is beginning to wear a bit thin. Let’s just agree
we've all done it a very large number of times and leave it at that. I thought
the atmosphere this year was actually quite positive, although one sector seems
to be having a tougher time. I’ll come to that, but the consensus view I seemed
to be picking up was that the future looks brighter than the present.
A couple of analysts revisited some of those wonderful,
pre-crash phrases, telling us, variously, that the super-cycle was not over in
industrial commodities and (a particular favourite of mine) that it’s not
really a super-cycle, it’s a new paradigm. That’s a phrase I thought had been
consigned to the dustbin of history, but here it is, rearing its head again.
Now, there are some reasons to be optimistic, mostly reflecting the undeniable
fact that growth in the major economies is – slowly, slowly – beginning again. It’s
fair to say that the Euro no longer looks quite as much as though it is on the
verge of extinction. I had a long conversation with a friend who is a pure
technical analyst and he is frankly quite bullish for the moment; the logic he
was using is that market players have been happy to build up LME shorts in the
absence of significant upside pressure and that those shorts represent the
potential for a sharp rally. His time-frame is early next year. This is classic
chart analysis – the market will go to find the point of maximum pain, and at
the moment, that looks to be up not down.
But Under the Surface....
So, three stars seem to be aligning – demand, coming out of
returning growth, improving macro stability (the Euro) and technical signs.
Does that create a constellation to light us all to better times? Well, it’s
not too difficult to counter most of the arguments. Growth is returning, but it
can very easily be choked again. The US has frankly made no genuine
progress on resolving the issues between President and Legislature over the
debt in the economy. Latest thinking seems to be that they are yet again
cobbling together a compromise which will result in the whole issue being
rolled forward and coming back to haunt us yet again. Now the problem with
that, and as an aside, a reflection on the intellectual dishonesty of
politicians, is that each time the problem is botched it means that the size of
it gets bigger. It reminds me of the old restructuring of option-based hedge
trades – “Of course we can get you out of this hole and move the strike price
down (or up), but you will have to accept a much bigger position.” Intellectual
dishonesty of the politicians because they don’t really care about finding a
real solution – as long as the problem can be rolled forward beyond the next
time they have to face their electorate, they are happy. And that US problem
threatens the stability of the entire world; so there’s a question mark over
the true sustainability of the growth. Macro stability? Well, in a similar
vein, the problems of the Euro are not so much being solved as being avoided.
Avoiding problems is obviously a valid strategy, but requires a consistent
nimbleness that I’m afraid I don’t see in the Eurocrats, so that one’s got a
question mark over it, as well. The last of our three stars, the technical
analysis one, is, strangely enough, the one in which I currently have most
faith. I think the market has been prepared to run short and that those shorts
are still in place. So I would agree that there is at least a strong
possibility of a rally to take out those shorts; if the other two issues don’t
genuinely improve, though, I can see a spike in the prices rather than a
genuine upward trend.
Tough for Hedge Funds
At the beginning of this I said that there was one sector
which seems less sanguine. I was chatting to a friend who runs a mid-sized
hedge fund, and he commented that the past year had been tough; there had been
no easily discernible trends to catch during the year and even with the low
hurdle set by current interest rates, it had been difficult to get too
involved. Now obviously different fund managers have different strategies, but
I guess the relative calm of the last year has probably made life a little
tougher. It also means mistakes would probably have been less costly, but
investors don’t choose hedge funds to secure a steady low growth; to satisfy
their clients, the hedge funds need the big plays, to give them a chance to
demonstrate their worth, and those big plays have largely been absent in 2013.
Solid Rock, or Shifting Sands?
On the surface, then, the market seems to be setting a
base; whether it’s rock or sand, though, is a much more nuanced question.
Why, oh Why?
and one last point. Am I the only one who questions why we have to have
speeches at the beginning of the dinner, rather than the end, as it always was?
This way, you've barely been able to introduce yourself to your neighbours when
suddenly a speech starts. I don’t think this is a change for the better,
particularly since there seems no obvious reason for it.