Goldman Sachs: Sterling isn’t even cheap yet

No one really knows for sure where sterling ought to be or where it’s going to go

 

One reason to be cautious about buying sterling is that strongly trending markets often overshoot to the downside, resulting in cheap assets becoming cheaper. Here’s a second reason: according to Goldman Sachs, sterling isn’t even cheap yet.

Goldman admits sterling looks cheap.  Goldman’s proprietary exchange rate model indicates that compared to the dollar, sterling is “slightly more than one standard deviation cheap at this point”. Unfortunately, these valuation models are, well, a bit useless at times; by not adjusting to a Brexit-style “structural break”, they miss “the ructions that Brexit may cause for the UK economy and – potentially – a drop in fair value”. A new, adjusted approach suggests a 20 to 40 per cent fall from pre-Brexit levels; the declines since June “have only brought us to the lower bound of this range”.

Let’s be frank – this is speculative stuff involving all kinds of assumptions. A reasonable case can also be made that the worst of the sterling decline is over, given that the decline of some 30 per cent since summer 2014 mirrors its worst bear markets of the past. 

Still, no one really knows for sure where sterling ought to be or where it’s going to go. Irrespective of the perceived fundamentals, bottom-fishing traders should be cautious about going against the herd; as George Soros once quipped, you are liable to be trampled on.

Market quiet ‘truly historic’

“What has happened the past four months is truly historic,” said LPL Research strategist Ryan Detrick last week, “in that nothing has happened”.

Since the Wednesday after Brexit, Detrick notes, the S&P 500 has closed within 3 per cent of its all-time high every single day, a streak unseen since 1995’s famously dull bull market. In fact, the current market is ever more boring than the 1995 one. Then, stocks hit 34 new highs over an 82-day period, compared to just 10 over the last 82 trading sessions.

The index has gone more than 50 trading sessions without hitting new highs, despite hovering just below them. Such a streak has never occurred before, making this a “historic holding pattern”.

Other asset classes are similarly sleepy. Merrill Lynch’s Market Risk Index, which tracks volatility expectations for stocks, bonds, currencies and commodities, is at two-year lows.

Why? Central bank policies have obviously suppressed volatility. The ongoing earnings season has neither lifted nor dampened the market mood. Rates are expected to be hiked in December but that prospect is not disturbing the market calm.

Nor is next week’s presidential election likely to be a game-changer. For now, it’s anyone’s guess as to when the current sleepy spell will end. 

Any sign of election nerves?

One of the more bizarre rationalisations for the current calm is that investors don’t want to commit to any course of action until the US presidential election is over.

“Uneasy Calm Grips Markets Suddenly Silent Before US Vote” read one Bloomberg headline last week. The theory, advanced by no shortage of commentators lately, is that investors may be too nervous about the future to make any decisive bets.  

Ironically, the opposite thesis had been advanced throughout 2016. Last month, the Financial Times said the unusual calm “is set to shatter, as investors brace for greater bursts of volatility expected in the next few weeks ahead of the US presidential election”. 

Volatility does tend to rise in the run-up to elections. Overall, however, election years tend to be little different to non-election years.

Much of what passes for market analysis is nothing more than storytelling. If stocks are experiencing wild gyrations, it’s because investors are nervous about the election. And if stocks are doing nothing at all, it’s because investors are nervous about the election.

StockTake agrees with exasperated financial blogger Michael Batnick: “Please, give me a break.”

Easy coin-flip game confounds bettors

You’re given $25 (€23) and allowed to place bets for 30 minutes on a coin that will come up heads 60 per cent of the time. Easy money, right?

Not necessarily, according to a new paper co-authored by Elm Partners founder Victor Haghani and Pimco’s Richard Dewey. They invited 61 quantitatively-trained people to play the game, people who should have been able to multiply their money tenfold by following simple strategies to take advantage of the excellent odds. Most “managed their betting very sub-optimally”, displaying “as many behavioural and cognitive biases as you can shake a stick at”. About 30 per cent actually lost their full $25 stake.

It’s no surprise people pay for “patently useless advice”, the authors caution. “If these quantitatively trained players, playing the simplest game we can think of involving uncertainty and favourable odds, didn’t play well, what hope is there for the rest of us when it comes to playing the biggest and most important game of all: investing our savings?”

To play the game, go to coinflipbet.herokuapp.com.

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