Bedrock’s Newsletter for Friday 14th of September, 2018
14 September 2018


 Friday, 14th of September 2018

We remembered 9/11 seventeen years ago this week, as we shuddered at the tenth anniversary of Lehmans’ collapse, marking the start of the ‘Great Recession’… Before Lehman Brothers collapsed, before AIG buckled, before the financial system fully broke down and was bailed out, stocks were already in a bear market. By Sept. 12, 2008 — the Friday before the effort to rescue Lehman came up short in a big way and unleashed a new level of panic and pain — the S&P 500 had been falling for nearly a year. It had dropped 22% from its October 2007 peak by mid-July. Bank stocks had haemorrhaged more than half their value over the prior year and a half, and the U.S. was nearly a year into a bruising recession. The front page of The Wall Street Journal that Friday blared, “Lehman Races to Find a Buyer,” while Washington Mutual “said it had enough liquidity and capital to ride out the banking crisis.”


So, what if you’d bought the market at that point, thinking stocks were already down quite a bit, and a lot of the bad news was both splashed across the headlines and reflected in their prices? If Lehman was rescued that weekend, wouldn’t it plausibly spark a decisive recovery in stocks? For the next six months, buying right before the crisis crescendo would feel disastrous. A year later, it still felt premature. Even after three years, loading up on stocks in September 2008 seemed more headache than home run. But from the advantaged vantage point of today, buying on Lehman eve has been redeemed and rewarded by the passage of time, the resilience of corporate America and the durability of the bull market that’s followed. The S&P 500 closed at 1,251 the Friday before the Lehman bankruptcy, down from the October 2007 high of 1,565. In the 10 years since then, the S&P 500 is up 130%, an annual average gain of 8.7% and yearly total return (including dividends) of 11%. Those numbers are right around the very long-term average annual equity performance. This is a fairly encouraging one-decade result, given that less than six months after this hypothetical purchase of stocks, the market reeled under the most violent global asset liquidation since the Great Depression. By March 2009, the S&P 500 was down another 40% and had gotten there in exhausting fashion: Brutal declines, interrupted by four ripping rallies of at least 8% that gave fleeting hope to bulls.


Here are the total returns for the S&P 500, and for a 60/40 stock/bond portfolio (gauged by the Vanguard Balanced Index Fund) at several intervals starting at Sept. 12, 2008. Periods beyond a year are average annual returns:



Here’s how the Los Angeles Times summed up the situation in August 2011: “RIP, bull market? Unless stocks reverse quickly, Wall Street statisticians will mark April 29 of this year as the end date of the bull market that was born in March 2009, in the depths of the last recession.” Indeed, take your financial readings of the future with a big pinch of salt…


Back to our present… Long-awaited wage growth posted its biggest increase of the economic recovery in August while payroll gains beat expectations and the unemployment rate held near a generational low of 3.9 percent, according to a Bureau of Labour Statistics report last Friday. Average hourly earnings rose 2.9% for the month on an annualized basis, while nonfarm payrolls grew by 201,000. Economists surveyed by Reuters had been expecting earnings to rise 2.7%, payrolls to increase by 191,000 and the jobless level to decline one-tenth of a point to 3.8%. The wage growth was the highest since April 2009. We read this data to confirm our long standing bullishness on equities. The economy is building steam… stay through the intraday and weekly bounces…


In Turkey, the Lira jumped after the Turkish central bank hiked rates in a bid to save the tumbling currency. The Central Bank of Turkey increased its benchmark interest rate on Thursday to 24%, a hike of 625 basis points from the previous rate of 17.75%. The Turkish lira jumped more than 2% on the news, firming to around 6.1 against the dollar. The rate hike came alongside a pledge by the bank to enact strong monetary tightening in order to support price stability amid recent economic turbulence. “The lira will remain under pressure in the coming months owing to tightening global liquidity conditions and tensions between Turkey and the U.S.,” said Agathe Demarais, Turkey analyst at the Economist Intelligence Unit.


At the same time, The European Central Bank (ECB) left benchmark interest rates unchanged on Thursday, with policymakers likely to argue the regional economy is robust enough to absorb spare capacity and generate inflation. In a subtle change to the bank’s guidance, the ECB announced plans to end bond purchases at the end of year and keep interest rates at record low levels at least through next summer. The bank also confirmed it will halve bond purchases to 15 billion euros ($17.4 billion) per month from October. So steady winds ahead on this front too…


A sad and scary picture is evolving across the Atlantic- Hurricane hitting the East Coast in the States and the Argentine economy is crumbling- Consumer prices in Argentina rose at their fastest pace in August since the nation’s statistics agency regained credibility in 2016, another sign that South America’s second-largest economy is heading for a recession this year. Inflation reached 3.9% in August from July. The Peso closed at a record-low of 39.55 per dollar, which is likely to further fuel inflation. Inflation, economic growth and the Peso’s performance are expected to worsen more. Economists see inflation reaching 40% by the end of this year, and the economy contracting nearly 2%, according to the most recent central bank survey. Well, the Argentine central bank is holding interest rates at 60%, a world record! Not a very happy picture, and then there is Venezuela, for which we can’t find words. A humanitarian disaster emanating from the economics of political folly. We must not forget the other humanitarian disasters elsewhere, Yemen, Syria, Iraq… With all this going on, plus the Trump trade wars and the formation of the new axis of China with Russia, Iran and Turkey with Russia too, we might be facing global power re-alignment with absolutely unpredictable consequences. But there is a technical calmness in the markets- The VIX, the so-called fear factor is at a stable and moderate level at 12, Gold steady at $1’200 or so, Bitcoin has already lost more than half its value this year, amid a continued regulatory crackdown and the growing sense that a broader adoption of digital assets will take longer than some had anticipated. Ten year US Treasuries’ yields edging up ever so slightly to 2.98% (flat or so, ytd) and the classic insurance being the US$ unable to find its North- The DXY Dollar index languishing at 94.50 showing no signs of life in reaction to all of this. Perhaps the world has tired of the American leadership? Will the Yuan find its place in the hard currency world? We must keep the Pound Sterling in our sights as well… Brexit isn’t lowing gently into its British designed future… Volatility on the GBP is spiking…


“One cannot and must not try to erase the past merely because it does not fit the present”. Golda Meir




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