The friendly ones: into the discomfort zone

  • We explore the investment industry’s discomfort zone, which requires us to extend our horizon beyond 2014.
  • The investment environment is changing fundamentally due to three major discontinuities. They concern the price of real duration, the pressure upon the global growth theme owing to return-to-mean in the emerging world and the profit share in the major economies. The change leads us to call into question the cult of equity quality.
  • We consider that 2014 will be the last full year of the current equity bull market. The discomfort relates to the explanation of why this cycle will come to an end. Our conception of the bear market of 2015-2016 in Europe is of a leadership hiatus that marks the arrival of the era of low returns on all major categories of financial investment.

*In Greek mythology revenge and remorse were represented by female Furies called the Erinyes. They were the embodiment of the ancient law that blood must be paid for with blood in an unending cycle of retribution. In order to placate their terrible wrath the ancient Greeks changed their name to the Eumenides, which translates as the kindly ones or the friendly ones.

Our reference is to the cycle of investment boom and bust that has been encouraged by the monetary hyper-activism practised by the major Central Banks, and by the Federal Reserve in particular, since the Greenspan era. Since the great financial crash Central Banks have been more friendly to investors in risk assets than at any time in recent history, providing an exceptionally favourable environment at the cost of the expropriation of secure savings. The Federal Reserve promises to remain friendly to investors even though the time to reduce reliance upon monetary super-stimulus has arrived. Are we to trust the idea that a monetary return-to-more-normal can be achieved without giving rise to major disturbances? Are we really to think that the cycle of investment boom and bust has been broken?