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Diary of a Fund Manager - Lost in Transition

In this week’s Diary, snippets of information that describe the present and may illuminate the way forward. From global politics to the pandemic and the drivers of economic growth, much is in transition. Certainty is in short supply.

Incremental gains continued last week with equities, bonds and useful commodities all ending higher. Gold was unchanged and the US dollar down. Those who commentate on financial markets spent their time trying to predict what the Chair of the Federal Reserve would say at the virtual Jackson Hole gathering of central bankers and other important people, only to be disappointed by a well-balanced speech that said little new. Elsewhere, interest rates have been on a rising trend for some time with Korea the latest to take action, blaming a combination of rising property prices and excessive debt. Free money for long enough does have consequences.

After the lockdown recession of last year, reversed in a matter of months by money printing, support packages and vaccines, there is a distinct sense that things are now in transition. Rather like the Thames at London Bridge when the power of the downstream flow is exactly matched by the incoming tide, the surface of the global economy and much else is choppy and the direction unclear. At times like this it is best to look around for small clues, accepting the paradox that greater knowledge brings with it less certainty. It is better to be roughly right than precisely wrong.

What is in transition? Well, just about everything. From shock to solution, COVID has been the centre of attention for approaching 18 months. Now we are trying to work out not only whether this pandemic will be temporary or permanent, but also what will go back to normal and what has changed for good.

Global politics is also in transition and not just because of Afghanistan. The old-world order established after the Second World War is being replaced by something more Machiavellian where self-interest is more important than fairness. The chasm between western rhetoric and reality continues to widen. If you have some spare time, do read The Prince which is only 100 pages long and continues to cause a stir 500 years after unemployed Niccolò Machiavelli put pen to paper.

Business is struggling with supply chain problems which have taken over from COVID and central bank policies as the main concern for financial markets. When you stop the global economy it is perhaps unsurprising that there will be many consequences. Like the human body, it is unimaginably complex with many interdependent parts. Bringing it back to life is far harder that closing it down. And that’s before progress is taken into account. Amongst many priorities it is estimated that to increase silicon chip production to meet expected demand will cost $3 trillion over the next decade.

It is better to be roughly right than precisely wrong.

During a general discussion with fund managers based in Asia, the Middle East, Europe and North America just one small example of the speed and materiality of change. In 2019 tourists, mainly from China, visiting Interlaken in Switzerland as part of a European grand tour, spent $1 billion on luxury goods. This year the amount will be closer to zero. The thirst for transportable wealth is unquenched but has moved elsewhere. Transitions are not always incremental.

Money is also in transition from cash to card and conventional to digital, with crypto currencies also in the mix. Quite why printing trillions of dollars, euros, pounds, yen and the rest over the last couple of years has had so little effect on the value of money is a debate that will run and run.

Companies are usually a good source of information. Published numbers need to be interpreted, but generally obey the rules, whilst management teams do their best to keep us informed about what is working and what isn’t. Over the years I have met many companies. Most are competently managed, usually by optimists. Only on rare occasions have I felt deliberately misled, although being economical with the truth is more common. Only twice have I met a criminal masquerading as a Chief Executive.

Our natural tendency is to believe what we are told. Permanent cynics do not make good fund managers as trust is a part of risk taking. Just now, however, I am finding it harder than usual to believe what companies are telling us. With so much in transition the judgements that management teams have to make about the future are particularly hard and mistakes will be made. After all they are only human and ultimately it is people not institutions that make decisions. Nevertheless, aggregating what they do say in good faith remains very useful, creating a pointillist painting of the future where the image will sharpen with time and distance.

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