Andy Haldane was the only member of the Bank of England Monetary Policy Committee to vote against expansion of quantitative easing in June.  His reasoning was that the glass was half full, in the sense that the economy was on track to recover about half of the lost output.
He had been gathering real time data on economic activity, such as credit card use, footfall and internet search terms, which led him to conclude that people were increasingly Google-searching for restaurants and spending more on credit cards. Also the Purchasing Managers indices were improving. And so we need to wait and see if the economy bounce back significantly before rushing into more money creation.
He gave his thoughts on the economic recovery in a speech at the end of June. The press reported that he spoke about the “V-shaped bounceback”, which gave the impression to many that we’re nearly back to normal “on track for a quick recovery”.
His actual comments are more nuanced that newspaper headlines.
Saying that the economy had grown by 1% in some weeks is not the same as saying we’ve experienced a V-shaped recovery.
Economic output fell by around 25% in March and April.  Growth meant that by July only half of the fall in activity had been clawed back. So, we have data on the down part of the V.  And we have data on the start of the upward part of the V, but half of the upward part of the V was still missing in July. Now, in September, we are probably a little further along.  But it is the final part of the V that will be the most difficult to achieve (perhaps 10% of our economy – think airlines, Rolls-Royce, travel firms, pubs, hotels, and the despondent, depressed, running-out-of-cash-and-hope and the bust in many other business sectors).
In August, Haldane says, unemployment had probably already hit 6% (the numbers are not compiled yet). And he has a fear that unemployment could move to its highest level since the 1980s as the long-term effects of Covid-19 set in.
He expects unemployment to go to 9%, but then fall back quickly, But that assumes only a small risk of workers not being re-hired after furlough. That is considered optimistic by many other economists.
The Speech
In his 30 June speech Haldane say that “it is early days, but my reading of the evidence is so far, so V.”
But he cautions those who would extrapolate from that by referring to the unknowns:

• the virus’ on-going impact
• government and BoE policy responses
• the behaviour of households and businesses
• economic growth in other countries

The recovery Andy Haldane has seen leads him to think that by the end of September spending is likely to be only around 10% below that at the start of the year.
The two paths from here
Haldane says that he does not know which of the following two feedbacks will be the most potent:

1. A negative feedback loop from higher unemployment to lower spending. If large numbers of furloughed staff are made redundant then household savings – precautionary savings to protect the family in hard times – will rise. This will lower demand. Company revenues fall, which creates yet more unemployment. A vicious cycle. “These dynamics might be particularly potent at present because households face double jeopardy – risks to their lives and their livelihoods.”
2. A positive feedback loop from higher spending to lower unemployment. If companies have reasonably positive expectations regarding future demand for their goods and services they will re-absorb furloughed workers. This raises household incomes, confidence and spending. which encourages firms to produce and take on workers. A virtu………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

It’s important at this time of enormous economic threat to listen to people who possess, through decades of intellectual effort, an informed long-term perspective on markets. I’ve been reading recent work by James Montier, Andy Haldane and Warren Buffett.
In today’s newsletter I’ll try to summarise James Montier’s views on the American market. James has written insightful articles for decades based on meticulous research. He worked as a Global Strategist at Société Générale before joining the thought-powerhouse and leading investment manager GMO. Apart from his articles, he has written important books such as Behavioural Investing and Value Investing. His knowledge base stretches from academic research on market out-performance through the psychology of investors to stock market history and the usefulness of valuation metrics (I recommend his books and his articles to you, many of which are available free on GMO’s website).
Montier thinks the US equity market has moved into “absurd” territory. It is close to its highest price ever relative to fundamentals such as earnings at exactly the time that it is facing one of the worst economic downturns. It is just not allowing for the possibility of there being a downside – everything is rosy – the market is priced for a perfect business future. The odds of perfection being attained are not good.
My next newsletter considers Andy Haldane’s ideas on where the UK economy has got to.  Haldane is the Bank of England’s Chief Economist and was recently in the headlines for saying that the V-shaped recovery was underway.  What he actually said was rather more subtle than what the newspaper writers described.
Many scribblers took him to mean that the V was pretty well complete; we’re all going to get back to normal soon. Sadly, for businesses, the unemployed and the soon to be unemployed that just is not where we are.  The V is far from complete on the right-hand side. It may not be for a long time yet.
Finally, Warren Buffett has made a lot of large share stake sales in the last six months.  For example, all Berkshire’s holdings of Goldman Sachs and JP Morgan have been sold, along with all its airline stocks. Billions have been raised from selling down Wells Fargo, US Bancorp and Bank of NY Mellon. During the same period Berkshire’s cash balance has grown to $143bn (yes, that is billion, not million) and Japanese trading house and Barrick Gold shares have been bought. What is Warren, through his actions, telling us about the future?
James Montier  - a Panglossian US equity market
James Montier (in Reasons (NOT) To Be Cheerful, available at GMO’s website) is not focused on predicting the near- or medium-term future of the US equity market. He is more refined than that.
He is using the data we have to point out that current prices are not allowing sufficiently for the potential of bad outcomes “It is as if Mr. Market is taking a tail risk (albeit a good one) and pricing it with certainty.”
What James is saying is that there is a range of alternative futures, as there is at any point in history.  We simply do not know which course will be taken.
If the possibilities are potted on a graph with, on the x-axis showing increasingly bad results on the left of the centre, and increasingly good results on the right, and the probability of those outcomes occurring on the y-axis, the “shape” of the distribution could be “bell-shaped”.


That is, the outcomes near the middle have the highest chance of occurring, while the extremes – the tails - have low probabilities. The extremes might contain scenarios such as a depression worse that of the 1930s on the left and, on the right, economic growth of 2%, or 3%, or 4% per year for the next few years.
What James is saying is that the extreme good economic outcomes are the ones Mr Market is placing all his money onto. Investors have bid up share prices so much that they are at record or near record levels relative to rational measures of value.
“Never before have I seen a market so highly valued in the face of overwhelming uncertainty. Yet today the U.S. stock market stands at nosebleed-inducing levels of multiple, whilst the fundamentals seem more uncertain than ever before. It appears as though the U.S. stock market has drunk from Dr. Pangloss’ Kool-Aid – where everything is for the best in the best of all possible worlds.”
James says he doesn’t know what the outcome will be, whether there will be a second Covid-19 wave, or we’ll get the unemployed back to work quickly, etc., but he knows downside risks exist and therefore we should be demanding a margin of safety when we pay for a share - “wriggle room for bad outcomes if you like.” Mr. Market is not allowing for that margin of safety.
What is Mr Market thinking?
A major preoccupation for the generality of US investors/punters is the support to businesses and the economy provided by the Federal Reserve in supplying oceans of liquidity – basically pumping in money.
But Montier points out, much of this involves banks swapping holdings of say long-term Treasury bonds for short term deposits at the central bank and is therefore not directly stimulating the equity markets, even if the thought of the Fed helping out is encouraging investors to buy.
Besides, quantitative easing has also been strong in Europe and elsewhere but equity markets there are not “sporting extreme valuations”.
“So, I think that Fed-based explanations are at best ex post justifications for the performance of the stock market; at worst they are part of a dangerously incorrect narrative driving sentiment (and prices higher)…The U.S. stock market looks increasingly like the hapless Wile E. Coyote, running off the edge of a cliff in pursuit of the pesky Roadrunner but not yet realizing the ground beneath his feet had run out some time ago.”
James quotes Voltaire, “ ‘Doubt is not a pleasant condition, but certainty is absurd.’ The U.S. stock market appears to be absurd.”
Overconfidence and overoptimism
Overconfidence and overoptimism are………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

Billionaire investor Jeremy Grantham was brought up in my part of the world; a Doncaster lad who studied economics at Sheffield University (he also picked up an MBA from Harvard - wherever that is).
He is co-founder and chief investment strategist of the $118bn GMO asset manager.  His particular interest is bubbles, and last week he gave his views on the position of financial markets currently in the context of the history of bubbles.
He is not positive on the equity markets. I’ll outline his current views in the next newsletter. In this one I’ll set out what his thoughts were in 1999 and in 2007.
Throughout his career he has put much emphasis on the idea of "reversion to the mean." Assets and markets when at highs and lows will move back to – or overshoot – their historical levels.
His focus is on a long-term horizon - seven years into the future (it used to be ten). GMO may take extreme investment positions when there is a significant deviation from historical means.
Before the Dot-com bubble burst
In 1998 and 1999 Grantham refused to invest his client’s money in over-priced equities, i.e. most of the available equities.  As a result, he lost 60% of assets under management as frustrated investors took their money away from him, disappointed with the performance of his funds relative to the 1998-99 market.
He reflected on this period during a 2009 Forbes interview: “We just assume that at the end, in those days, of 10 years, profit margins will be normal and price-earnings ratios will be normal. And that will create a normal, fair price. And more recently, we’ve moved to seven years, because we’ve found in our research that financial series tend to mean revert a little bit faster than 10 years
…And that's how we do it. And it just happened from October '98 to October of '08, the 10-year forecast was right… And on my birthday, October the 6th, the U.S. market, 10 years and four trading days later, hit exactly our 10-year forecast of October '98, which is worth talking about if only to enjoy spectacular luck. The P/E was a little bit lower than average and the profit margins were a little bit higher, so they beautifully offset. And given our methodology, that would mean that on October the 6th, the market should have been fairly priced on our current approach. And indeed it was.
… the magnitude of the overrun in 2000 was legendary. As historians, you know we’ve massaged the past until it begs for mercy. And we saw that it was 21 times earnings in 1929, 21 times earnings in 1965 and 35 times current earnings in 2000. And 35 is bigger than 21 by enough that you’d expect everyone would see it. Indeed, it looks like a Himalayan peak coming out of the plain.
And it begs the question, “Why didn’t everybody see it?” And I think the answer to that is, “Everybody did see it.” But agency risk or career risk is so profound, that even if you think the market is gloriously overpriced, you still have to get up and dance. Because if you sit down too quickly…
…you’re likely to get yourself fired for being too conservative. And that’s precisely what we did in ’98 and ’99. We didn’t dance long enough and got out of the growth stocks completely, and underperformed. We produced pretty good numbers, but they’re way behind the benchmark. And we were fired in droves.
I  think our asset allocation, which is the division I’m now involved in, we lost 60% of our asset base in two-and-a-half years for making the right bets for the right reasons and winning them. But we still lost more money than any other person in that field that we came across, which is a fitting reminder that career risk runs the business.”
Many clients went back to GMO once they had been proved correct.
The chart below shows the movement back to a long run
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Warren Buffett, speaking a few days ago, advised us to have a far horizon in mind when holding shares and to make sure we had the psychological resilience to be an investor.
Buy for the long term
“You shouldn’t buy stocks unless you expect to hold them for a very extended period and you were prepared, financially and psychologically, to hold them the same way you would hold a farm and never look at a quote.”
If the company is good, with a sound business, sound strategic position and excellent managerial team then why worry if Mr Market lowers the share price?
“You’ve got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it as long as you are comfortable with the holding.
There have been three times in Berkshire’s history when the price of Berkshire stock went down 50%. If you held it on borrowed money you could have been cleaned out. There wasn’t anything wrong with Berkshire when those three times occurred, but if you’re gonna look at the price of the stock and think that you have to act because you think that its going to do this or that…[well] you’ve got to be in the right psychological position."
You need the right emotional base
“Frankly, some people are more subject to fear than others. It’s like the virus. It
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Howard Marks is a billionaire American investor with a reputation for insightful analysis of markets and economies. He is the co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities worldwide. He wrote the well-received investment book, The Most Important Thing, Uncommon Sense for the Thoughtful Investor. For this newsletter I have collected some of his recent writings.
Investors tend to the extremes
“In the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot.’ But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless’.  What I can say is that a month ago [February], most people thought the macro outlook was uniformly favourable, and they had trouble thinking of a possible negative catalyst with a serious likelihood of materializing. And now the unimaginable catalyst is here and terrifying.
(There are a few important lessons here. First, the catalyst for a recession or correction isn’t always foreseeable. Second, it can seemingly appear out of thin air, as this virus seems to have done. And third, the negative effect of an unforeseeable catalyst is likely greater when it collides with a market that reflects so much optimism that it is 'priced for perfection'.)”
Bad news does not move share prices unless the bad news changes psychology
“Most investors seem to think in terms of a very simple relationship: bad news → price declines. And certainly we’ve seen some of that over the last week or so. But I’ve argued in the past that there’s more to the story. The real process is: bad news + decline in psychology → price declines.”
Price and value
“Intelligent investing has to be based – as always – on the relationship between price and value. In other words, not “will the collapse go further?” But rather ‘has the collapse to date caused securities to be priced right; or are they overpriced given the fundamentals; or have they become cheap?’
I have no doubt that assessing price relative to value remains the most reliable way to invest for the long term. I want to acknowledge up front that ascertaining intrinsic value is never a simple, cut-and-dried thing. Now – given the possibility that the virus will cause the world of the future to be very different from the world we knew – is value too unascertainable to be relied upon? In short, I don’t think so.”
Policy makers are not all powerful
“Market participants seem to think that (a) rate cuts and other stimulus are always a good thing and (b) they’ll work. Yet, given that the economic impact of the disease is unknowable, how ca………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

As far as I’m concerned the stock market does not exist. It is there only as a reference to see if anyone is doing anything foolish
Warren Buffett
It is optimism that is the enemy of the rational buyer.
Warren Buffett  (B.H. 1990)
If we can buy small pieces with satisfactory underlying economics at a fraction of the per-sh......To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

Benjamin Graham ran a fund with assets under management of £2.5m in 1929. The crash wiped out most of that.  In the Depression he pondered the meaning of "investing" as opposed to "speculation" and wrote the very influential Security Analysis book. Warren Buffett became his student in 1950. After regaining his investors' money, between 1936 and 1956 Graham achieved average annual returns of 20%.
A sound investment operation means you (a) conduct thorough analysis of the company (b) aim only for a satisfactory rate of return (c) always build in a margin of safety. If any of those factors are missing you are not investing but speculating (e.g. buying on tips or inside information ignoring analysis, trying to guess short term market moves).
He realised he had been speculating prior to the Crash. The searing experience of the Crash led to the foundational value investing philosophy he developed in the 1930s.
Peter Lynch ran The Megallan Fund at Fidelity 1977-1990 achieving average annual returns of 29.2%, but experiencing some sharp reversals from time to time.
Aphorisms
[Price fluctuations] provide [the investor] with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.  At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation result of his companies
Benjamin Graham
The investor’s chief problem - and even his worst enemy - is likely to be himself....We have seen much more money made and kept by ‘ordinary people’ who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had extensive knowledge of finance, accounting and stock market lore
Benjamin Graham
Yearly figures [of portfolio performance], it should be noted​………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

While value investors wait for the dust to settle we might want to ponder the thoughts of some experienced investors on market ups and downs. By dust to settle I mean understanding the new economic/business environment we are in.  There are new rules on government help, disturbed demand patterns, interrupted supply chains, psychological trauma.
No one knows where all this is going to end up, but in the new world there will be a new set of strong players and weak players in markets, there will be companies with intrinsic value significantly higher than market price, and there will be companies with dangerously weak market positions and balance sheets.  But until the macroeconomic and government counteraction fog has cleared we'll have great difficulty knowing which companies are bargains.
We have usually made our best purchases when apprehensions about some macro event were at a peak.  Fear is the foe of the faddist, but the friend of the fundamentalist.
                                                 Warren Buffett (B.H. 1994)
One of the ablest investment men I have ever known told me many years ago that in the stock market a good nervous system is even more important than a good head
Philip
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​Great investors have seen many bad markets. And they learned from them:
In certain years you’ll make your 30 percent, but there will be other years when you’ll only make 2 percent, or perhaps you’ll lose 20  That’s part of the scheme of things, and you have to accept it….If you expect to make 30 percent year after year, you’re more likely to get frustrated at stocks for defying you, and your impatience may cause you to abandon your investments at precisely the wrong moment.  Or worse, you may take unnecessary risks in the pursuit of illusory payoffs.  It’s only by sticking to a strategy through good and bad years that you’ll maximize your long-term gains
Peter Lynch
There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d all be millionaires by now....As some perceptive person once said, if all the economists of the world were laid end to end, it wouldn’t be a bad thing
Peter Lynch
Any individual stock does not rise or fall at any particular moment in time because of what is actually happening or will happen to that company.  It rises or falls according to the current consensus of the financial community as to what is happening and will happen regardless of how far off this consensus may be from what is really occurring or will occur.
Philip Fisher
There’s no way you can live an adequate life
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