John Dizard, writing in FTfm, predicts the start of an equity bull-run; a traditional end of cycle rally. The bubble hasn’t popped, it’s just beginning to inflate. Over the next 18 months, says Dizard, we should expect to see equity markets shoot the moon.
There are three pre-cursors to that:
- Central banks must set aside their “delusional” dynamic stochastic general equilibrium (DSGE) models and cut policy interest rates.
- The market in doom-and-gloom financial punditry will run out of steam, having accelerated the depressive part of the current credit cycle to its bottom.
- New money.
Enter the current darling, dark horse and desperado of the financial commentariat - the sovereign wealth fund. The readjustment of SWF investment strategy - out of treasuries and into more notionally risky securities; crucially, equities - will fuel the bubble. And they will be looking to model their investments in particular on US university endowments and the trailblazing “Singapore model for government investment structures” says Dizard. “That means buying a lot more equities.”
How rational is this? Let’s assume that the SWFs come in at the very end of a long equity cycle. Take an investor who bought his entire equity position in September 1929, at the needle peak of the equity boom. How would he have done compared to a “central banker” low-risk strategy? I went to Ibbotson Associates, the securities returns statisticians in Chicago, for a comparative data series.
By 1939, 10 years after the crash, an investor in the S&P 500 would have an inflation-adjusted total return of negative 24.5 per cent, compared to an inflation-adjusted return of positive 34.5 per cent in T-bills.
But by 20 years out, the inflation-adjusted S&P return would be nearly 6 per cent, while the comparable “risk-free” T-Bill return would be worse than negative 18 per cent. By 30 years out, a near horizon for real “inter-generational” investing, and comparable to many home mortgages, the T-bill inflation-adjusted total return would be a negative 21 per cent, while the S&P 500 would have clocked over 464 per cent. And that’s with the worst possible timing.
Think big picture, then. Welcome to Draaismaland.