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Fear & Greed in 2016

27 October 2016

Charlie Parnell - Partner, Investment Manager

Fear (noun) – a distressing emotion aroused by impending danger, whether the threat is real or imagined

Greed (noun) – excessive or rapacious desire, especially for wealth and possessions

Fear and greed: the long-time twin imposters of financial markets, near-perfect distillation of the human condition, a potentially nerve-shredding tightrope we walk across daily. As 2016 nears its end, it is hard to recall a time when both were in such sharp focus. Most fresh in the memory are two striking examples where greed has apparently been left totally unchecked by fear. First, we learned of the alleged excesses of executives at HBOS in the bank’s impaired assets division in the lead up to the financial crisis.

The second, much more scandalous for England football fans, was the professional demise of newly-appointed manager Sam Allardyce, who was caught in a newspaper sting where he was in essence exposed agreeing to facilitate questionable practices in the player transfer market for a few extra quid, augmenting his £3 million a year FA salary.

In both instances, the people under the microscope appear to have been so driven by personal gratification (financial or otherwise) that the fear of getting caught out was completely bypassed. Arrogance, complacency, the innate belief that nothing could go wrong – whatever the reason, careers and lives are in tatters. Greed with a total absence of fear would appear to be a road to potential ruin.

As a nation we endured the interminable Brexit debate, during which neither side of the argument, it could be said, covered themselves in glory. Certainly as I recall it, there was a huge amount of scare-mongering by the combatants in chief and not a lot of appealing to people’s base need to believe in some sort of upside (to whichever outcome). Worse, both sides seemingly assumed that the UK would be “remain” to the extent that neither appears to have formed a plan in the event of a ‘leave’ outcome. Today, the only thing we can say with any certainty is that Remainers continue to be disappointed with the result, and Leavers may well be disappointed too. “Hard” or “soft”, Brexit in reality could engender little change given we live in an age of globalised co-dependency.

As we head into November, America is now centre-stage for surreal politics. In the red corner, Establishment pocket-heavyweight Hillary Clinton, who I think is daring much of confidence-shorn middle America to be “greedy”, promoting personal ambition and upward social-mobility. In the blue corner meanwhile, Donald Trump has surprised all experts and defied logic to become the Republican candidate. His modus operandi, much less subtle, appears to be preying on the fears and insecurity of an increasingly divided nation, while at the same time basking in the glory of his own greed.

And what of financial markets? For several months now, investors have been wrestling with the conundrum thrown up by the bond and equity markets which have seemingly engaged in some sort of real life Schrodinger’s Cat scenario. Based on generally accepted wisdom, the former are telling us that the world is on the precipice of existential economic meltdown, with government bond yields bobbing along at unfeasibly low levels, while the latter conversely are indicating that all is well and we are very much heading back to the races. They cannot both, surely, be right. Worse, could they both be wrong? Either way, it has been a bizarre twist of the last four decades that, in theory, investors have been paid handsomely to be afraid, while those greedy equity market punters have been punished time and again in the 21st century, turning the whole scenario on its head.

In 1933, at the height of the Great Depression, Franklin Roosevelt came to power and told the American people that “the only thing we have to fear is fear itself”. In the context of capital markets today it resonates powerfully. In 2008, Western society stared into the abyss and ultimately was bailed out by the largest, most coordinated, programme of “socialist” state intervention in history. Markets simply were not allowed to play their role in any conventional way and arguably haven’t been able to since bearing in mind the sustained, aggressive action, taken by central banks. Much has been made of institutions deemed to be “too big to fail”, but the blunt reality is that it is the (Western) world itself that was and is too big to fail. It is an uncomfortable truth that we face a daily dilemma of what we should be doing with our money if we are worried that equity markets are too high and at the same time the traditional alternative, bonds, are also expensive. The answer, I suppose, is the same as it has always been – don’t look down.