DIARY OF A FUND MANAGER - Future Shock 14.09.20

In this week’s Diary, paying for the present and also the future we so desire, Brexit, together with updates from the US and India. Also, comments from a reader about the importance of intelligence when it comes to earning a return.
In recent days markets moved in opposite directions. US equities fell back, whilst the dollar strengthened. Europe had a better week with the UK in the lead helped by a weak pound. Bonds moved higher on both sides of the Atlantic. Other news laid siege to the headlines, side-lining business and economics.
Paying for the present is expensive and the future even more so. Filling the hole in the global economy created by the Covid lockdown has been the main preoccupation of central banks and governments as they print and spend. Debt levels have been rising exponentially. The future also has a cost if words are turned into action. Removing China from global supply chains to reshoring jobs in the US will be expensive both in terms of money and resources. The same applies to re-engineering the world to make it more sustainable. Back in the days when we were able to get together in crowded auditoriums to exchange ideas I listened to a debate between environment activist Naomi Klein and former Labour party leader, almost Prime Minister, Ed Miliband about what would need to be done to make the world a greener place. When it was acknowledged that a lot of concrete would have to be poured and carbon dioxide emitted to move us from now to a better future, the audience reaction was one of discomfort.
An expensive present and future paid for by debt rather than economic growth seems to have been accepted by all, at least for now. Higher taxes would scarcely scratch the surface suggesting that the cynics have a point when they say that the solution favoured by governments to excessive debt is inflation or default. Argentina has been doing this for decades, so why not others.
These are problems for the longer term rather than now and not forgetting that other more palatable solutions may emerge. Change never goes out of fashion. Twenty years ago who would have thought that Kodak, which at the time employed 170,000 people and supplied 85% of photographic paper used worldwide would evaporate. Now the car industry is set for disruption. Energy source, vehicle control and social change are all in the mix. Many other companies including fossil fuel providers, insurance, leisure and property will have to adjust their business models. As a Diary reader pointed out, we aren’t a long way from a Star Trek-type tricorder linked to our phones. Health apps are getting better at diagnosis all the time. Pessimists superimpose the present onto the future. Optimists do it the other way around.
In last week’s Diary question and answer session we covered a lot of ground with Brexit a focus of attention. Deal, no deal, bluff, counter-bluff. The politicians and their negotiators are playing a game that is too sophisticated for us mere mortals to understand. For those looking for guidance about the eventual outcome, currency markets will be quick to express a view. In the approach to previous deadlines sterling weakened when a hard exit seemed likely and strengthened when a deal miraculously emerged.
During the Suez crisis in 1956, Britain found itself alone and had to retreat. Could we be in for a re-run over Brexit? Unsurprisingly the threat by the British government to break international law provoked an instant reaction from many in Europe and the UK but more interestingly also in the US. Richard Neal, Chair of the House Ways and Means Committee which overseas US trade deals and Nancy Pelosi, Speaker of the House of Representatives were quick to warn about adverse consequences for the UK, once again illustrating quite how sensitive US politicians are about Ireland. None of the possible outcomes look particularly attractive for the UK in this virus affected world.
In other news opinion polls in the swing states; Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin show Joe Biden ahead, but the margins are too close for certainty, whilst India, which I have written about several times in recent months, has become the latest infection rate hotspot. Government mistakes have been jumped on by those minded to be critical, but foreign capital continues to flow in at a rapid rate. Indian shares may be expensive in historic terms but this is hardly unique when one looks around the world and despite all the negative news, the stock market is down only 9% this year compared to -23% for the UK.
Last week I also sent out an update about the use of artificial intelligence by investment managers. Feedback is always welcome whether positive or negative for which many thanks, but I particularly liked the comment from one reader who enthusiastically dismissed my carefully crafted summary of the current state of play between humans and machines, with the observation that he has never thought that there was any correlation between intelligence and making money so why should intelligent machines be any better than the human variety?

Written by

David Miller
Investment Director

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