• Monmouth Capital

Q3 2021: The Terror


Everyone’s obsessed with inflation. It is “The Terror” of our times. I understand why. Higher-than-expected inflation = faster rate rises = lower valuations for the highest growth stocks which have powered equities, especially in the US stock market. The great fear is that stock markets and bond markets will fall at the same time.


Should you worry about it? And should you do anything about it?


Yes and yes, according to many in the financial press. Merryn Somerset Webb urged us to “Switch to value stocks to prepare for inflation” on the back page of FT Money last weekend:


“If you want to avoid the worst of the inflation effect it’s time to shift from growth to value.”


The trouble is this advice doesn’t provide any answers; on the contrary, it triggers a raft of questions:


· Does that mean sell all “growth” and replace entirely with “value”?

· If not, in what proportions should I make this shift?

· How will I know when to shift back again? (Do I have to keep reading the back page of FT Money…?)

· How will I know if it turns out to be the wrong call – and what do I do then?


I’m not sure I am any wiser having read the article.


What about advice from more “serious” parts of the FT? Well, a couple of weeks ago, the renowned Lex column ended a sharp analysis of the bond market with a crushingly tame conclusion: “Prepare for bumpier times ahead.”


Bond prices have already been historically “bumpy” in the past 2 years, with US yields careering from 1.9% pre-crisis to just over 0.5% mid-crisis to 1.7% as the recovery took hold earlier this year (and now partly back down again). What preparation are we to make? And how bumpy are “bumpier” times?


Both pieces of “advice” reminded me of meaningless pundit platitudes (along the lines of “the market may be volatile in the months ahead”) that we see all too often in finance.


I’ve picked on inflation and interest rates because these are just two of the fashionable “terrors” right now. At any given point, there will be other burning issues to chew over, to figure out and to predict. They come around with monotonous regularity – and we find the same analysis and empty exhortations to take action.


To demonstrate the point, here’s a thoughtful excerpt from a memo on forecasting by Howard Marks of Oaktree Capital – written not this year, but in 2013:


“People have been preoccupied with when interest rate increases would take place, and that’s the question I’ve been asked most often. My response has been consistent: How would I know, and why would you care?


Why do so many people care? Because they continue to treat markets and economies as systems that can be modelled and problems that can be “solved” – and they want to know that their particular analysis and prediction is “right” because that’s the game they are paid to play.


The Reality


What should you, an investor with a time horizon stretching over years or decades, worry about, then?


I would heed the approach of a grizzled retired admiral in the BBC show The Terror. Ahead of another attempt to find the Northwest Passage across the Arctic Circle, he challenges the mission’s commander:


ADMIRAL: What plans have you made, Sir John… in case the ships are ice-locked?

COMMANDER: [affronted] We are amply provisioned for three years and up to five with strict rationing –

ADMIRAL: [impatient] Your rescue plan! What is your rescue plan?


One gift of a long time horizon is that you can stop worrying about being “right” about inflation, interest rates or so much else that preoccupies our industry. I’m damned if I will let my ego get in the way of fiercely protecting your hard-earned wealth. Like the Admiral suggests, we spend a lot of time thinking about what might scupper the mission altogether and how to mitigate those risks.


As you may be bored of reading, your portfolios, at all risk levels, are structured so as not to be tied to one particular outcome or environment. Indeed, some of the assets you hold will probably be happy with a burst of inflation. There is little passive exposure to bonds, even in lower risk portfolios – and plenty of strategic bond managers skilled at negotiating periods of interest rate rises.


Trying to navigate the short-term twists and turns of financial markets and economies is, primarily, entertainment. Enjoy it, if you wish, and be assured we have our eyes fixed on your long-term interests to the exclusion of all else.


Faisal Sheikh

Managing Director, Monmouth Capital

10th October 2021