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The Absolute Return Letter
Beggar thy Neighbour
“I am deeply ashamed to know that I won't be able to pay our staff. They have got
mortgages, children. What am I supposed to do?"
Jesus Manuel Ampero, Mayor of Cenicientos (Spain)
It has been an unpredictable summer. Investors have been wrong-footed by
surprisingly strong growth emanating from Europe (read Germany),
whereas the US economy – habitually the locomotive for the global
economy – has gone from one disappointment to another1. Not many
would have predicted that back in early summer.
The endless series of bad news has led many commentators to speculate on
whether the US is about to catch a bout of the Japanese disease. The most
comprehensive analysis on the subject that I have come across has been
conducted by the Global Economics and Strategy team at Bank of America
Merrill Lynch (they have to get that name sorted out)2. They make the
following observations in terms of what can be learned from the Japanese
1. Economic growth and bond yields will remain low until banks start
lending and house prices start rising.
2. No secular bull market can be expected in equities until bond yields
3. Until such time that the secular bull returns, expect plenty of volatility
4. In a low growth, low interest rate, environment, investors crave yield,
growth and quality.
5. Growth is likely to outperform value.
6. The secular bull doesn’t return until the central bank can hike again.
There are indeed many similarities between the situation experienced by
Japan and the challenges now facing the US, but there are also significant
differences. However, whether you agree or disagree with all these
observations, I believe it is worth paying careful attenti