Last week I said that investors have plenty to worry about, but also that many of the traditional reasons to abandon ship—chiefly extended valuations and political paralysis and risk—perhaps weren't as valid as many think they are. The most convincing argument for not panicking despite extended valuations is that ample global liquidity and low interest rates remain as support for equities and credit markets. I imagine that his idea has been put down on page one of most investors' playbook since the financial crisis. The argument is pretty simple. As long as central banks are on the bid, their purchases of bonds—and other assets—will drive private investors into riskier markets. Known as the portfolio balancing effect, this is recognised to operate via both the stock and flow of central banks' balance sheets. Finally, front-end interest rates that are locked at the zero bound—or slow to rise even as the economy recovers—also translates into higher equity prices and tighter spreads. Low rates mean an increase in the future discounted value of cash flows and also encourages investors to pay a higher multiple for the same level of earnings. It also forces investors to seek out yield in private debt markets to reach their return targets, despite the higher risk profile of corporate bonds.
Read MoreIt has been three weeks since I last updated these pages, and as I leaf through my charts, I am tempted to conclude that nothing substantial has changed. In the global economy, headline leading indicators signal stable and relatively robust growth. The first chart below shows that my diffusion index of macroeconomic leading indicators is rising gently, indicating that the pace of industrial production growth in the major advanced economies will rise to slightly above 4% year-over-year in the next few months. The two following charts show individual leading indicators in the large economies. They are all rising year-over-year, and momentum has accelerated, with the notable exception of the U.K's leading index still stuck below zero. Finally, I throw in charts of real M1 growth—arguably the best single macroeconomic leading indicator—and these data also are constructive. We have to watch the slowdown in China, but M1 growth rose in July, which does not suggest a liquidity crunch, at least not in Q3.
Read MoreLast week I tumbled down the rabbit hole of quantitative finance, so this week I thought that I would take stock on some of the main themes. In addition, I am going on holiday soon, which means that you will have to survive without my mishaps for a couple of weeks. The continued woes of the greenback are probably the main story for markets at the moment. It is driven by a number of factors as far as I can see. Firstly, economic data in the U.S—in particular core inflation—have remained underwhelming, which have forced markets to roll back on their expectations for Fed rate hikes. September, which was a done deal only a few months ago, has now become a long shot. Secondly, just as the Fed's hiking cycle potentially has hit a snag, other central banks have stirred.
Read MoreOne of the main tenets at this space has been to cut away the extremes in your [equity] investing strategy. There are those who see market tops and imminent crashes everywhere, and then there are those who believe debt-financed share buybacks and dividend payments can continue to propel the market higher forever. They are both wrong, but the persistence of these two narratives and their interaction has been a key story in this cycle. It is my firm belief that the oscillations between these two positions have created a huge middle ground, which allows investors to make money. In the peanut gallery we talk about "sector rotation," but it's more than that. It's also about different themes which cut across traditional equity sectors and allow for price movements of key industries—even country indices— in opposite directions. I suspect most market geeks would be able to agree on this over a pint in the pub. But can we quantify it?
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