Land of Confusion

Eran Peleg, CIO June 14, 2017

I must've dreamed a thousand dreams Been haunted by a million screams But I can hear the marching feet They're moving into the street.

Now did you read the news today? They say the danger's gone away But I can see the fire's still alight There burning into the night.

There's too many men

Too many people Making too many problems And not much love to go round Can't you see

This is a land of confusion….

From “Land of Confusion” - Genesis

Price volatility in global financial markets has been very low in recent months. The extreme example, perhaps, is US equities, where volatility has been hovering around multi-year lows. Volatility is often a reflection of the level of certainty (or uncertainty) that investors assign to the outlook. Is low volatility therefore a sign that all is good?

One can argue that the economic outlook has improved. Economic activity has picked-up in many regions and corporate earnings are growing again. Interest rates remain very low.

However, as far as the political/geo-political backdrop is concerned, things have been getting worse. And interestingly, gold is telling a different story than equities. Gold is often seen as the ultimate safe-haven. People are attracted to it in times of significant uncertainty, political as well as financial. The price of gold has risen by 10% this year, following an 8% increase in 2016.

Political processes have become extremely unpredictable. Look at what is happening in the US since the November elections (I am talking about events since Trump was elected, in addition to the surprise election outcome). And now, the UK again: a year ago, the British electorate took a nationalistic (right wing) stance and voted for leaving the European Union (‘Brexit’). Now, 12 months later, in a snap-election called by the ruling Conservative party (who believed they would improve their parliamentary majority), an election focused very much on economic policy, they chose to strengthen the Labour Party headed by Jeremy Corbyn, a fairly radical left-wing socialist leader. The electorate is pulling in two different directions. When it comes to their relations with other nations, they are increasingly right-wing, nationalistic, however as the economy is concerned, they seem to have been moving to the left. This general phenomenon can now be observed in several developed countries, not just in the UK.

What does this unpredictability mean for political governance going forward and how should financial markets deal with this phenomenon?

Confused? For now, I will leave you with the words of the poet. They seem as relevant as ever.