I don’t see why they’re surprised

Financial markets may have rules of their own, but even there it has to be that the value of financial products can only rise if the real value of the assets beneath them are also rising. In an economy in which the actual quantum of productive assets has deteriorated, nothing can make the real value of financial assets increase. Why is this a puzzle to anyone?

The idea behind asset allocation is simple: when one market struggles, it’s OK because an investor can jump into another that is thriving. Not so in 2015.

In fact, if you judge the past year by which U.S. investment class generated the largest return, a case can be made it was the worst for asset-allocating bulls in almost 80 years, according to data compiled by Bianco Research LLC and Bloomberg. With three days left, the Standard & Poor’s 500 Index has gained 2.2 percent with dividends, cash is up less, while bonds and commodities are showing losses.

If green energy is your idea of economic growth, to take just one example, the world of finance is going to be a very disappointing experience. It fits in perfectly with this: Debt distress level at highest since recession.

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13 Responses to I don’t see why they’re surprised

  1. Zyconoclast

    “Green, for lack of a better word, is good. Green is right. Green works. Green clarifies and cuts through to the essence of the evolutionary spirit.”
    (Apologies to Gordon Gekko)

  2. Stackja

    BO delivers worst return in almost 80 years.

  3. Bruce of Newcastle

    Financial markets may have rules of their own

    One rule of financial markets is faster is better, which has led to an interesting arms race:

    Meanwhile, Over At The “New York” Stock Exchange: Even More Lasers

    All this to shave off about a tenth of a microsecond in data transfer rates, so that algorithmic traders can trade even faster. Electrons only move in copper wires at about 0.1 c. If anyone is going to invent faster-than-light communications it’ll be share traders.

  4. Faust

    Right now financial markets have been so far tugged in every direction by central banks that it is difficult to really understand the underlying value of many of these assets. Coupled with bank regulation meaning that many corporate securities are relatively illiquid with wide price jumps means that for the foreseeable future financial markets prices are going to be skewed.

    I am not in the habit of giving investment advice, but if we are to assume that asset prices are coming down off a cyclical peak, then having your investments primarily in cash or in liquid floating rate notes makes sense for opportunistic buying. You might be able to hedge if you have genuine income-producing real assets but the returns have to be sufficient to offset the illiquidity factor notwithstanding the question around the point we are at in the cycle.

  5. Steve, it’s worse than you are suggesting. They’ve reduced the relative rewards for effort based production compared to economic rents. Basically the “new” money bids up the price of existing assets (bonds, houses, shares, art etc). Holders of these assets make a return, unrelated to the production value of those assets or any entrepreneurial function on their part. This decreases the relative rewards for labour or entrepreneurial activity. Indeed, by bidding up the price of factors of production needed by entrepreneurs (say the price of land for the office/factory) they make it harder to create a new business. New businesses traditionally tend to drive productivity gains and employment.

    Then there is the disincentive to invest in new productive capacity, which can take time to come on stream, cover its cost and make a return in a manifestly absurd macro-economic environment. An environment that has to change, and when it does may wipe out the capacity for the investment to be profitable.
    A glance at the chart of asset correlations linked below shows just how weird things are, and arguably foreshadows that when things do crash it will broad ranging, with all prices collapsing together. There will be no “safe” assets.

    Also I think you are talking about the “long term” not transitory movements (which can go on for years) when you state: “the value of financial products can only rise if the real value of the assets beneath them are also rising”

    “This linked chart from the IMF October Global Financial Stability Report shows that global asset correlations levels transitioned to a new, much higher regime over the last five years…. The cross heatmap above shows the increase in comovement is a remarkably broad-based phenomenon – it hasn’t been driven by just one or two asset classes.”

  6. Hydra

    Was watching my mother do the annual news.com.au survey the other day. She is a country lady and volunteers 5 days a week at the local primary school. Her 2 largest concerns were the cost of living (mainly for her 3 young adult sons) and terrorism. It asked her to pick 4 and she couldnt pick 4 because the other things were the wants of a selfish needy community hellbent on coercing free things from Government and she hates such things.

  7. It asked her to pick 4 and she couldnt pick 4 because the other things were the wants of a selfish needy community hellbent on coercing free things from Government and she hates such things.

    We need to clone Hydra’s Mum.

  8. H B Bear

    Looks like the latest central bank asset inflation through cheap money policy that stretches right back to “Inflate ’em” Al Greenspan has run out of puff.

    What will the pass-the-parcel asset shufflers do now? Hard to justify those 7 figure salaries when the only game in town is over.

  9. Simon

    I just assumed it was the same as the horse racing industry, there is more money in the speculating side of the business than in the business of producing good thoroughbreds, so the investment gradually gravitates from one side to the other.

  10. Yohan

    Steve, it’s worse than you are suggesting. They’ve reduced the relative rewards for effort based production compared to economic rents. Basically the “new” money bids up the price of existing assets (bonds, houses, shares, art etc). Holders of these assets make a return, unrelated to the production value of those assets or any entrepreneurial function on their part. This decreases the relative rewards for labour or entrepreneurial activity. Indeed, by bidding up the price of factors of production needed by entrepreneurs (say the price of land for the office/factory) they make it harder to create a new business. New businesses traditionally tend to drive productivity gains and employment.

    This is exactly right and everyone should take note. When you combine a monetary system of fiat money along with regulatory barriers to entry, we end up with an economy that rewards economic rent seeking rather than real production activity.

    Rob, we need you on a PM advisory board somewhere….

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