Contagion

Contagion

16 Oct 2018

  “The least thing upset him on the links. He missed short putts because of the uproar of the butterflies in the adjoining meadows. ” PG Wodehouse Financial contagion is a phrase employed by those who try to explain a fall in an asset price that they didn’t see coming.  If it means anything, which is not certain, it describes the fallout from the volatility that results when any market falls because people are forced sellers. This is prone to cause panic which in turn means that the attraction of holding cash rises. Given that no one likes to sell a falling asset (a psychologically taxing experience) people prefer to raise money by selling things that haven’t fallen in price but look potentially vulnerable (especially if viewed with a newly sceptical eye). As the quote from PG Wodehouse shows, when things go wrong we tend to cast around for something to blame. Bad things happen to relatively overpriced assets and the nature of the event that triggers their decline is really of no consequence. The need to explain what happened is driven by a reluctance to take responsibility for a poor investment decision. Hence we are allegedly the victim of the devaluation of a currency, the collapse of an obscure foreign bank, the failure of a harvest or the uproar of beating butterflies’ wings. In reality, contagion is not a hidden threat but a constant reality that we should never forget. All assets are in competition all the time, subject to perceived risk and liquidity. All asset values are relative to each other. The most crass mistake that financial analysts make (and I certainly write from experience) is to compare the price of an asset with its own history and to declare that this proves it to be cheap or expensive. Here are ten assets in which you, if your assets and liabilities are UK based, might conceivably invest, ranging from cash (the most liquid) to commercial property arguably the least liquid). Note that all savings are investments, even cash.   Gross yield Cost of ownership Net yield Capital gain/loss? Building society 2.0% 0.00% 2.0% No Government Gilt 1.7% 0.25% 1.5% No Cash 0.0%...

Four kinds of bias

Four kinds of bias

30 May 2016

1)      SELECTIVE USE OF FACTS It is not news to say that people will select facts and opinions that appear to favour their side of an argument. There was a good example last week from the pro-Remain CBI which wants to demonstrate that the possibility of Brexit is already hurting investment. “Overall, surveys of investment intentions have shown a deterioration in investment plans, particularly in the services sector. Some of this is likely to be related to uncertainty ahead of the EU referendum. Although our April investment intentions data for the manufacturing industry actually strengthened, anecdote from the sector suggests some specific factors at play – in particular, replacement spending in the food & drink sector (following flood-related damage earlier in the year) and buildings investment by chemicals manufacturers looking to expand production on the back of solid export demand.” CBI Economic Forecast 16th May 2016 Did you get that? The latest data suggest that their view is wrong so they have concluded that the data are wrong. The CBI is supposedly a highly respectable organisation (so respectable that the EC contributes money to fund some of its publications) and can get away with substituting anecdote for data, or so it seems.    The Leave side is mostly less respectable and, partly by virtue of the necessity that it is promoting something of a leap in the dark, rarely seems to attempt to employ hard facts. But you can be sure that it is highly selective in what it says. You would imagine that the UK is full of people who are deeply worried about immigration. According to a survey that goes back to 1962, the peak year for UK citizens thinking that there are too many immigrants was 1970 when the level reached 89%. In 2014 it was 54%. Enoch Powell’s infamous “rivers of blood” speech was made in 1968 and probably contributed to the high level of antipathy to immigration that the chart shows. During the speech, Powell quoted a white constituent (in Wolverhampton) as saying: “In this country in 15 or 20 years’ time the black man will have the whip hand over the white man.” As it happened, the period...