Twisted or Sub-optimal normality

“We have it, the smoking gun; the evidence, the potential weapon of mass destruction we have been looking for as our pretext of invading Iraq. There’s just one problem – it’s in North Korea.” Jon Stewart, American Comedian

15. March 2013 Today is (or was) Kim Il sung’s birthday. Under his Grandson, as under his son, the birthday of the founder of North Korea, is traditionally an opportunity for celebrating with a show of military might. The fact that North Korea has a strictly limited military might is unknown to its populace, but the bellicose bluster, which has worked well in the past, serves only to unsettle the jittery investors in Japan and the western world, which could in itself be a desirable result.

There is much to be said against any actual decisive action from North Korea. Firstly, there are the several hundred million dollars the Kim family has deposited with Chinese banks in Shanghai which would be at risk and then there is the fact that Kim Jong un enjoys basketball and pizza just as his father enjoyed whisky and he would be unlikely to jeopardize his own existence, let alone his access to such luxuries. Kim Il sung’s birthday will therefore probably pass with a token military gesture from his grandson; enough to make his populace and his elderly generals, believe he has taken decisive action. As long as that is believed in Pyongyang, all will revert to twisted normality.

In China, economic growth figures released today showed a ‘disappointing’ 7.7% (expected 7.9%) in the 4th quarter of 2012 and the global equity markets turned softer. This is illogical as:-
1. any other country growing at 7.7% would be seen to be flourishing and
2. The Peoples bank of China has long held a growth target of 8% as ideal, but a leviathan such as China can lumber between 7.5% and 8.5% growth without diverging from this aim.

The decline in the Chinese and global equity markets must be seen as a buying opportunity.

In the United States the first quarterly results in the current reporting season have emerged. While good, the first results came from banks which are still recovering from past troubles. Their results disappointed the analysts and in the US equity markets, while results can be good, if they are not as good as analysts expected, they are held to be ‘sub-optimal’ (or bad).

Many large companies will present quarterly results in the next days and few weeks. Many will do well, others will disappoint. The point is that a fund manager with above average analytical competence will be able to select the companies with most promise and invest in them.
There are wildly differing opinions as to whether the fixed income markets should be a target for investors. Depending on their need for publicity, some pundits suggest that now is the time to invest in government bonds in large size – others warn of the dangers of inflation and negative yields. It is hard to build a balanced portfolio in unbalanced times and many fund managers have already pumped money into the bond markets, both corporate and state, of the emerging countries. These managers are all too often unaware of the risks that they run in being able to liquidate their investments when markets fall suddenly, as they can and will.

The wiser and more experienced fund managers are presently more likely to be sitting on large cash positions, waiting for adequate investment opportunities to emerge.