Equity market strategists finally begin to know that they don’t know

One of the many things that the investment world is bad at is admitting what it doesn’t know. Take the Great Depression. What caused it? Société Générale’s Dylan Grice has a list of possibilities. It might have been the stock market crash of 1929. Or perhaps it was something to do with there not being enough liquidity in the economy (5,000 banks failed in the US in 1932).

Or maybe it wasn’t about the fall in liquidity after the crash. Maybe it was about the fact that there was too much liquidity before the crash: there was a huge run up in lending in the late part of the 1920s, so there had to be a round of deleveraging at some point.

Or if it wasn’t that, maybe it was the collapse in world trade, the total value of which utterly collapsed between 1929 and 1933 (from $5.3bn to $1.8bn).

This isn’t, I’m afraid, a rhetorical question. The answer isn’t set in stone and you could, if you could be bothered, find a room full of economists to argue any one of the four.
The truth, as Grice says, remains something of a mystery: we might know what happened but we don’t know the causal relationships between all the factors. The same goes for the decline of Rome. Was it something to do with religion (Christianity brought too much patience and not enough passion)?
Was it internal strife – too many generals fighting to be emperor? Was it the fiscal crisis? Or was it some crazy mixture of the lot? Here’s a link (thanks again to Grice) that pretty much sums up every possibility. The same is also true of most other tricky global crises. No one really knows how things (and economic things in particular) happen. They just do.


Sadly looking into the future is even harder than looking into the past. With this we get to know all the factors and try and figure out which ones are important and which are not. Then we have to figure out what that important one will make happen. Most forecasters – and equity market forecasters in particular – have usually made a good stab of pretending they can do this.
But these days, I’m sensing a little humility creeping into the market. Why? Everyone is copping out and suggesting we flee to the same safe havens: shares in companies with strong balance sheets and generous and growing dividends. We’ve been suggesting these in MoneyWeek for ages and I wrote about the momentum behind them here last year (calling them the New Nifty Fifty or NNF) and last week.
But as John Authers points out in the FT, the consensus is now getting weird. The strategists at Soc Gen and the strategists at Goldman’s are usually at loggerheads, the former being deeply bearish and the latter often appearing to live in some kind of crazy happy land where big banks make sense and equities always go up.

But this year they’re both suggesting deep-value high-yielders. The strategy might well have some legs still in it, and at least holding these kinds of stock limits your downside in a bad year. But, like all things on which everyone agrees, it can make a contrarian feel really very nervous. Perhaps it is time to start buying financials?

  • marketobserver

    MSW….your use of the term deep value high yielders is a moot point…..the likes of JNJ, MO, BATS etc etc are rarely referred to as deep value names. Deep value equates to bombed out, troubled names. I am sure you know this but in the rush to get the article out these ‘important’ nuances are ignored. ….what worked in 2011 for many investors who favour yield would not be categorised as deep value …. aside this, dividend stocks have ‘worked’ for decades, not just in 2011…..just maybe not in Japan (your original market I believe!…..)

  • Maxx

    Financials? I’ve had enough of all asset classes so I’m just going to buy, things: Perhaps I’ll start with a Ferrari; I’ve never seen the point in them before, there’s no where in the UK where you could enjoy one (There’s over 6000 speed cameras on our roads) but when the banks go bust again and the government realises it can’t afford to bail them out this time, then at least I’ll have something nice and shiny to look at on the drive; I won’t be able to afford petrol for it, but I’m not worried about that, they’re probably not the most comfortable machine to be in in a traffic jam anyway.

  • Anna Schwartz

    Actually there not a lot of disagreement about the main cause of the great depression – bank failures leading to a collapse in the money supply. Plenty of disgreement at the margin but it’s hard to conclude that this wasnt central

  • Colin Selig-Smith

    It was caused by the introduction of the Federal Reserve System in 1913. The interest rates at which credit was available were too low, causing the roaring twenties, the subsequent attempts to correct for inflation, the inevitable following crash and world war are the results.

    i.e. It was caused by central planning. AKA the overinflated egos of our dear leaders.

    Maxx. Germany is just a ferry ride away, where the speed limit is the point at which the throttle won’t open any further.

  • Colin Selig-Smith

    Sovereign bonds are the big, civilisation ending bubble. Where will the money from the bond market go? What is the safe haven from US Treasuries?

  • John Clark

    People may argue over the technicalities, but the underlying cause is clear. Financial life goes in cycles – things ebb and flow. A period of excess borrowing leads to excessive debt, which eventually has to be repaid or defaulted, leading to a period of depressed activity.

    Booms and busts reflect human nature.

  • Kerome

    I would suggest that there may not be such a thing as a causal relationship: what you are looking at is not a single problem, but a network of interrelated problems. Some of these problems will almost certainly be part of feedback loops, and others will generate influences which counter eachother. A good comparison is climate change – a similar cluster of related issues.

    And as with all such graphs of problems, the best solution is likely to contain multiple action points taken in sequence, each of which has an effect on the system overall.

    The hardest part is working out the relationships between the factors, and capturing the initial state. Without that a solution is still basically guesswork…