Note Précis January 8,2019: Checks and Balances Overdue – Well beyond politics, checks and balances seem overdue. They include the behavior and pricing of capital markets. In politics, checks and balances are still to gel in trade, in the Middle East cauldron with a new focal point of Syria, around Europe, in east Asia and not least between the United States and its allies as well as in its domestic post-election stresses. In current capital markets, checks and balances appear as being dismissed as secondary to central bank policy or as being difficult to incorporate and hence only an afterthought. Nothing could be further from reality. In nature and for that matter for well-trained engineers, redundancy exists precisely because sources of uncertainty cannot be pinpointed with accuracy in advance.
Ignored when hubris occurs as investment cycles mature, there is reason in capital markets for similar redundancy via risk or uncertainty premiums. Only a decade after the last debacle, a feature of this investment cycle has been collective market memories appearing to be purged of such considerations, apparently assuaged by prolonged low administered rates.
A new stream of corporate reporting has started and more will gush forth. Due to their being residuals from revenues accrued after expenses have been paid out, corporate earnings are an especially volatile series not just in recessions and appear far from certain even in growth. It remains so despite the global impact of massaging of company results and the U.S. corporate tax cuts of last year. Instead, the quality of recurring earnings is a key to valuation. Instructively, prolonged zero interest rates have hardly helped many industries in Japan maintain leadership. Fast leadership change resounds about smartphone manufacture. It has long been vicious in going from the U.S. to Canada to Finland and back to the U.S. then to South Korea and now seemingly China. It is also instructive across industries worldwide that ignoring the investment need for risk premiums can be costly. We reiterate the need for focus on quality in operations and financial structure strength as well as, cash reserves in asset mix as well as on Financial Services for market leadership.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.