i-Cthru’s consolidated time-weighted return over Q2 2019 is USD 0.22%; EUR -0.98% (YTD USD 4.95%; EUR 5.92%). These results are unleveraged, net of all trading costs, fees, dividend tax withholding for non-US clients and cost of protection of individual portfolio holdings.
“Be fearful when others are greedy” so say the wise. But it’s complicated, right? Just last December we saw a rather negative outlook on the equity markets with interests rates set to rise significantly as communicated by the Fed. Squeezing liquidity by any means is always negative for asset values.
Look at us now, only six months later, the narrative has completely changed and normally we should be turning more bullish when Central Banks give clear indications to increase cash liquidity by lowering interest rates and/or by buying bonds against cash. More liquidity stimulates buying of goods, services and assets, increasing economic activity and ultimately increasing price and income levels resulting in higher inflation figures.
However, interest rates are already very low and even negative. There are currently $12 Trillion of negative yielding bonds in the market, mainly in Europe and Japan, pushing investors to chase assets with much higher risks for better returns. So we have to wonder what the real effect is of lower rates from here? We are also far into the economic expansive cycle, a moment where you would anticipate inflation to go up and consequently interest rates as well.
Does this make sense? Who is the “patsy” here, the equity owner or the bondholder? They cannot both keep winning; that is not how poker games work – it is unsustainable. But, history tells us unsustainable situations can last much longer than we anticipate because of persistent “narratives”. Narratives are much more powerful than statistics because stories take less effort for our brain to contextualize complex issues. We read and listen to narratives every day, often reinforcing a story of why and how and why it is different this time around.
Valuations, real interest rates, total debt, return on invested capital and cash flows have mattered since the establishment of our first enterprises many years ago and undoubtedly will do so in the future. A return to the mean for all these ratios in a time-related cycle is statistically unavoidable. Some investors will win, many will lose in spite of the popular narratives they believe in.
At i-Cthru we embrace risk by investing in great enterprises for the long term. We know this requires a lot of patience and prudence. We don’t get overly excited in good times and not overly pessimistic in bad times.
Thank you for your trust. As always, it means a lot to us.
Happy Fourth of July!