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How To Survive And Thrive In A “Zlatan Ibrahimovic” Market

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Authored by Daniel Nevins via FFWiley.com,

 

REPORTER: “Who will win the World Cup playoff?”

 

ZLATAN: “Only God knows who will go through.”

 

REPORTER: “It’s hard to ask him.”

 

ZLATAN: “You’re talking to him.” 

 

REPORTER: “What did you get your wife for her birthday?”

 

ZLATAN: “Nothing. She already has Zlatan.” 

 

ZLATAN: “I can’t help but laugh at how perfect I am.”

In case you don’t pay attention to soccer, here are three things to know about Zlatan Ibrahimovic:

  1. He’s an excellent player.
  2. His ego, as you can see, is large.
  3. He doesn’t appear to have much in common with Yale University’s Robert Shiller.

I’ll start with the third point and the insightful Shiller, in particular. (I’ll get back to “Ibra” in just a moment.) Shiller wrote an article last week warning of the potential hazards of equity investment. As he often does, he shared a chart showing his cyclically-adjusted price-to-earnings (CAPE) ratio. He reminded us that the CAPE ratio is “somewhat effective at predicting real returns over a ten-year period.” But this particular article had little to do with ten-year forecasts. Here’s the conclusion (with my emphasis):

In short, the US stock market today looks a lot like it did at the peaks before most of the country’s 13 previous bear markets. This is not to say that a bear market is guaranteed: such episodes are difficult to anticipate, and the next one may still be a long way off…

 

But my analysis should serve as a warning against complacency. Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses.

He likens today’s market to 1929, 2000, 2007 and other scary market peaks of the past, while pointing to characteristics he considers typical of market peaks. A high CAPE ratio stands at the top of his list, although he also mentions strong earnings and low volatility. Effectively, he says those three indicators should cause us to worry that a bear market could be right around the corner. And he makes useful observations about the CAPE ratio typically being high, earnings growth also somewhat high, and volatility low (although only slightly below average) just before bear markets begin.

With all due respect, though, I think Shiller’s pivot from long-term returns to a short-term outlook was incomplete. Sure, strong earnings and low volatility aren’t necessarily bullish – I get that – but I find it hard to call them bearish, either. My bigger objection, though, is with the CAPE ratio being part of a market-timing argument. (I applaud the “no guarantee” disclaimer, but still.) As a researcher and asset manager, I’ve never found valuation ratios useful for short-term horizons, nor have I found other researchers having much success using them as short-term indicators. From that experience, I would have recommended one more disclaimer for Shiller’s article – that valuation ratios stink for market timing. And I think my disclaimer is more than just a nitpick, for three reasons that I’ll explain with increasing “Ibra-ness.”

“A World Cup without me is nothing to watch, so it is not worthwhile to wait for the World Cup.”

 

—Ibrahimovic after Sweden failed to qualify for the 2014 World Cup finals

First, certain other indicators actually have helped foretell major market turning points. Nearly all of the past 13 bear markets, for example, were explained partly by some combination of sharply rising inflation, high interest rates, poor credit conditions or economic depression. I state that with conviction, but you can judge it yourself by reading our article “Riding the ‘Slide’: Is This What the Next Bear Market Looks Like.” Our research suggests that the most common bear-market conditions are mostly absent today. It uses Shiller’s data, by the way, although it covers bear-market conditions he didn’t consider in his article. Without being as bombastic as Ibra but being self-serving nonetheless, I recommend reading our research alongside Shiller’s for a more complete picture than either article offers on its own. (And while you’re at it, I highly recommend Eric Parnell’s latest for a third perspective.)

“I didn’t injure you on purpose and you know that. If you accuse me again I’ll break both your legs, and that time it will be on purpose.”

 

—Ibrahimovic responding to an accusation from Rafael van der Vaart

Second, the market’s current valuation is like Ibra’s ego – both are inflated. But if you’re Rafael van der Vaart or Pep Guardiola or Lucas Moura and hoping for Ibra to change, you’ll probably be disappointed. He’s not likely to become modest tomorrow just because he’s egotistical today, as if one state triggers the other. And the market won’t become a bear tomorrow just because it’s an expensive bull today. When Ibra’s skills finally erode, though, that’ll be a different story. That’ll be a change in the conditions that feed his ego, just as market forecasters should be concerned with the conditions that feed bulls and bears. In other words, market conditions (such as those mentioned in the preceding paragraph) seem more likely to predict the next bear than indicators calculated from market prices (such as the CAPE ratio).

“First I went left, he did too. Then I went right and he did too. Then I went left again and he went to buy a hot dog.”

 

—Ibrahimovic on how he dribbled around Liverpool defender Stephane Henchoz

Third, the market can be just as tricky as Ibra is with a ball at his feet, which is why you should choose your defenses carefully. In the big picture, your team (portfolio) should have an appropriate balance between attacking and defending elements. When you’re in the moment, though, I would suggest reading short-term outlooks with a degree of skepticism. If you’re prone to biting on feints and head fakes (overtrading), relying on the CAPE ratio for market timing might make it easier for your opponent to dribble around you. And where would that leave you? Apparently, you’d be found somewhere near the hot dog stand.

Conclusions

Like Robert Shiller, we would advise equity investors to have modest expectations for long-term returns (as we advised here). We also advocate diversifying across major asset classes to reduce the damage that could occur in a bear market. But having realistic expectations and diversifying won’t protect against the greatest risk many investors face – the risk of overtrading. Investors tend to sell risky assets at lower prices than they later repurchase them, suggesting that it’s important to build safeguards against overtrading. At a minimum, bullish and bearish indicators should be weighed carefully. By studying which indicators are most likely to predict bulls and bears, investors can build defenses against rash decisions. And that should be especially helpful today, as investors confront an unusually inflated and tricky mark… no, make that a Zlatan Ibrahimovic market.

Author’s note: Shiller’s article caught my attention because he wrote about 13 bear markets shortly after we, too, published an article about 13 bear markets. To identify bear markets, we used Shiller’s data, which he graciously includes on his website. But our 13 bears aren’t exactly the same as his 13 bears, because we defined them differently. If anyone would like to know the differences, just ask and I’ll discuss them in the comments when I have some free time. Also, I took the Ibrahimovic quotes from various websites, such as here, here and here.


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Ex-Bosnian Serb commander Mladic faces verdict in genocide trial

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THE HAGUE (Reuters) – The U.N. tribunal on war crimes in former Yugoslavia hands down its final verdict on Wednesday in the genocide trial of Ratko Mladic, the ex-Bosnian Serb general accused of ordering the massacre of 8,000 Muslim men and boys at Srebrenica.

Fikret Alic, one of the survivors of concentration camps shows his photo on the cover of Time before the trial of former Bosnian Serb military commander Ratko Mladic before a court at the International Criminal Tribunal for the former Yugoslavia (ICTY) in the Hague, Netherlands, November 22, 2017. REUTERS/Michael Kooren

Prosecutors demanded a life sentence for Mladic, 74, who was the Serb army commander in Bosnia’s 1992-95 war and is also charged with crimes against humanity over the siege of Sarajevo in which 11,000 civilians died from shelling and sniper fire.

The Srebrenica slaughter was Europe’s worst atrocity since World War Two. Mladic faced 11 charges in total and pleaded not guilty to all of them. He is expected to appeal if convicted.

Srebrenica, near Bosnia’s eastern border with Serbia, had been designated a “safe area” by the United Nations and was defended by lightly armed U.N. peacekeepers. But they quickly surrendered when Mladic’s forces stormed it on July 11, 1995.

The Dutch peacekeepers looked on helplessly as Serb forces separated men and boys from women, then sent them out of sight on buses or marched them away to be shot.

A bronzed and burly Mladic was filmed visiting a refugee camp in Srebrenica on July 12. “He was giving away chocolate and sweets to the children while the cameras were rolling, telling us nothing will happen and that we have no reason to be afraid,” recalled Munira Subasic of the Mothers of Srebrenica group.

“After the cameras left he gave an order to kill whoever could be killed, rape whoever could be raped and finally he ordered us all to be banished and chased out of Srebrenica, so he could make an ‘ethnically clean’ city,” she told Reuters.

The remains of Subasic’s son Nermin and husband Hilmo were both found in mass graves by International Commission of Missing Persons (ICMP) workers. The ICMP have identified some 6,900 remains of Srebrenica victims through DNA analysis.

Mladic’s lawyers argued that his responsibility for murder and ethnic cleansing of civilians by Serb forces and allied paramilitaries was never established beyond reasonable doubt and he should get no more than 15 years if convicted.

The “Butcher of Bosnia” to his enemies, Mladic is still seen as a national hero by compatriots for presiding over the swift capture of 70 percent of Bosnia after its Serbs rose up against a Muslim-Croat declaration of independence from Yugoslavia.

“GREATER SERBIA”

Survivors of concentration camps pose with banners before the trial of former Bosnian Serb military commander Ratko Mladic before a court at the International Criminal Tribunal for the former Yugoslavia (ICTY) in the Hague, Netherlands, November 22, 2017. REUTERS/Michael Kooren

Prosecutors said the ultimate plan pursued by Mladic, Bosnian Serb political leader Radovan Karadzic and Serbian President Slobodan Milosevic was to purge Bosnia of non-Serbs – a strategy that became known as “ethnic cleansing” – and carve out a “Greater Serbia” in the ashes of old federal Yugoslavia.

In arguing for Mladic to be imprisoned for life, prosecutor Alan Tieger said anything else “would be an insult to victims and an affront to justice”.

Mladic was indicted along with Karadzic in 1995, shortly after the Srebrenica killings, but evaded capture until 2011.

File picture: Former Bosnian Serb army commander Ratko Mladic attends his trial at the International Criminal Tribunal for the former Yugoslavia (ICTY) at The Hague May 16, 2012.. REUTERS/Toussaint Kluiters/Pool

His trial in The Hague took more than four years in part because of delays due to his poor health and will be the last case – barring appeals – to be heard by the International Criminal Tribunal for the former Yugoslavia (ICTY).

“From the legal point of view we expect the court to release the general,” Mladic’s son Darko told Reuters. “During the trial we have not seen any evidence against him. What we are worried about now is his health.”

Mladic has suffered several strokes, though U.N. judges rejected a flurry of last-minute attempts by defense lawyers to put off the verdict on medical grounds.

But his lawyers faced an uphill battle, given a mountain of evidence of Serb atrocities produced in previous trials. Four of Mladic’s subordinates have received life sentences, while Karadzic was convicted in 2016 and sentenced to 40 years.

Milosevic, who defended himself, died in prison in 2006 before a verdict was reached in his case.

Mladic’s lawyers argued that Sarajevo was a legitimate military target as it was the main bastion of Muslim-led Bosnian government forces. They also asserted that Mladic left Srebrenica shortly before Serb fighters began executing Muslim detainees and was later shocked to find out they had occurred.

However, prosecutors argued that under war crimes law, even if Mladic did not directly order the killings, he should have known what his subordinates were doing, and would be liable for failing to punish those who committed atrocities.

The ICTY indicted 161 people in all from Bosnia, Croatia, Serbia, Montenegro and Kosovo. It has convicted 83, more than 60 of them ethnic Serbs. Tradebuddy.onlineL8N1NL7ZT]

Reporting by Toby Sterling, Stephanie van den Berg and Ivana Sekularac; editing by Mark Heinrich

Our Standards:The Thomson Reuters Trust Principles.

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Budget Preview: Chancellor Philip Hammond’s Impossible Task To “Square The UK’s Circle”

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At lunchtime today, Philip Hammond will give the weakened Conservative government’s first budget in the new parliament.

Against a likely backdrop of downgrades for the economy from the OBR, the Chancellor will be under immense pressure to provide a sound plan going forward on many issues. As Statista’s Martin Armstrong notes, the NHS has already had its call for an emergency boost of £4 billion rejected, but there will need to be at least some answers to the problems surrounding health and public services funding.

As a new survey by ComRes shows, this topic is one of particular importance to the public, with 67 percent saying that there should be more investment in these services, with a slight majority even saying they would personally be prepared to pay more taxes to enable it.

Clearly, this is a highly significant budget and we would be greatly surprised if it’s considered a success. As we noted yesterday, Reuters columnist and former European economics editor of The Economist, Paul Wallace, believes:

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22. The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

However, it’s worse than that, as the Chancellor is also under pressure from senior members of the Conservative party, never mind UK citizens, to increase spending amid widespread fatigue with austerity. Here is the Financial Times on the stiff challenge Hammond is facing.

UK Chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday. The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a “soft Brexit”. If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.

The FT notes that the Chancellor’s statement will “serve a cold dish of downgrades for the UK economy” from the independent “Office for Budget Responsibility” (OBR). This year’s growth forecast is expected to be cut from 2.0% to 1.6% and for 2018 from 1.6% to 1.4%. The medium-term forecasts depend on the OBR’s assumptions on productivity growth, which it has already flagged will be cut “significantly”. The FT expects that.

That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.

Paul Wallace highlighted productivity as Hammond’s biggest problem.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight…

 

Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

While public finances look slightly more robust in the near-term, the outlook is deteriorating 3-4 years out, as the  FT explains”

Tax revenues have been stronger than expected this year, alongside lower-than-expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances. But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.

However, he does have one thing up his sleeve…an off-balance sheet accounting gimmick.

The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.

Affordable housing is a major problem for Hammond and Prime Minister Theresa May. According to the FT:

Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.

He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.

In its budget preview, the left-leaning Guardian newspaper highlights the deteriorating outlook for public finances due to the productivity problem.

Lower expectations for the output per worker will have an impact on the gross domestic product, cutting the amount of economic output available for taxation. The Institute for Fiscal Studies reckons the downgrade will contribute to a £20bn black hole in the public finances, limiting Hammond’s spending power if he wants to stick to his pledge to remove the deficit by the mid-2020s. John McDonnell, the Labour shadow chancellor, seized on the October data to argue that seven years of spending cuts had “caused pain and misery for millions with little to show for it”.

As if “Fiscal Phil” Hammond didn’t have enough on his plate, he’s also been lambasted for his gaffe that “there are no unemployed people” in Britain, in a television interview at the weekend. Disliked by the pro-Brexit side of his party, Hammond’s budget speech is being viewed by some as the “make or break” moment of his career. We concur.

Meanwhile, Bloomberg has been doing some sleuthing on budget preparations by government departments and think tanks. It identifies six things to look out for when Philip Hammond stand up in parliament to deliver his speech.

The U.K. budget is usually a mixture of measures that have been heavily trailed in the run-up by various government ministers, with a liberal sprinkling of surprises. In the past six months there have been myriad consultations and papers on everything from the offshore oil to air pollution that hint at possible measures in the works. Bloomberg trawled through that documentation, as well as recent announcements, to identify six areas that are likely to get a mention when Chancellor of the Exchequer Philip Hammond lays out his economic blueprint.

1. Stamp Duty and the Housing Crisis
Prime Minister Theresa May last week pledged that it’s her personal mission to “build more homes, more quickly.” To that end, the budget is likely to include a number of measures to encourage construction and enable younger people to get on the housing ladder. Asked on the BBC on Sunday about whether the home-buying tax known as stamp duty would be cut for younger buyers, Hammond declined to discuss tax matters, but didn’t deny he was looking at the measure.

“We recognize the challenge for young first-time buyers, that in many parts of the country deposits are now very large,” Hammond said. “Nobody is saying we’ve done enough. We must do more. We recognize there’s a challenge there and on Wednesday I shall set out how we intend to address it.”

2. North Sea Oil and Gas
Whilst remaining committed to its climate-change goals, the U.K. is also trying to extract as much value from its waning oil and gas fields in the North Sea. The industry is crucial to the economy in Scotland, which would be grateful for any assistance to a financial lifeline even as it remains angry at the Conservatives for taking it out of the European Union.

At the last budget in March, the government published a “discussion paper” that examined allowing transfers of tax history between buyers and sellers of oil and gas assets — a measure designed to make it easier to buy and sell the fields, and keep them producing for longer. It would allow buyers to get a tax refund as a result of any costs incurred decommissioning the field at the end of its life.

Hammond told the Sunday Times he’s “looking at” a possible change in the tax rules, which is “the No. 1 ask of my Scottish colleagues.” Even so, he did issue a note of caution, adding that the Treasury needs to ensure the reform “is robust and that we don’t inadvertently create scope for gaming on a grand scale in the tax system.”

3. Boosting Research & Development
May on Monday said the government aims to increase public and private research and development spending to 2.4 percent of economic output by 2027, and beyond that to 3 percent. “This could mean about 80 billion pounds ($106 billion) of additional investment in the next decade,” she said.

As part of an announcement the same day linked to her government’s Industrial Strategy — due to be published next week — she said that would begin with a commitment for an extra 2.3 billion pounds of investment in the 2021-2022 tax year, taking total public investment to 12.5 billion pounds that year. The government also signaled plans for a 1.7 billion-pound fund focused on improving regional transport links.

4. Shale Wealth Fund
In another measure aimed at boosting the fossil-fuel industry — in this case by making it more palatable to local communities — the government promised at the last election to overhaul a pledged fund worth as much as 1 billion pounds to distribute some of the profits from hydraulic fracturing.

The aim is to ensure “a greater percentage of the tax revenues from shale gas directly benefit the communities that host extraction sites.” The government last week responded to a consultation on the issue pledging the fund will initially consist of as much as 10 percent of tax revenues from shale-gas extraction, with proceeds to be spent on projects ranging from play parks for children to improved transport links and restoring historical sites.

5. Air Pollution Tax
Diesel vehicles have become a political football of late. For years, governments ignored evidence that diesel is worse for air quality and encouraged its use because the fuel is less damaging to the climate than gasoline. With air pollution now under the microscope in London in particular, the government published an air-quality plan over the summer and is likely to include measures in the budget designed to help clean up the air in Britain’s cities by encouraging cleaner vehicles.

Possible measures include raising the sales tax on diesel cars, known as vehicle excise duty, or raising taxation on diesel fuel itself, which is currently taxed at the same level as gasoline, at about 58 pence per liter. The government has also said it will consider programs to encourage motorists to trade in their older, more polluting cars, for newer, cleaner ones. Ministers also stepping up efforts to encourage the use of more electric vehicles by supporting the development of batteries and the deployment of charging points.

6. Fund for Start-Ups
In August, the government proposed a new National Investment Fund that would help start-ups access the “patient capital” funding they need to develop into so-called “unicorns” — innovative companies valued at over $1 billion. A consultation on the proposal closed in September, and Hammond is likely to propose a confirmed plan of action in the budget.

The consultation suggested funding should come from the British Business Bank, replacing the backing currently received from the European Investment Fund. One of the reasons this could get a mention is that the the government is keen to demonstrate that London can attract Big Tech even when it’s no longer in the European Union.

Although the view is hardly unique to this government, a mere 22 percent said that they feel taxpayers’ money is currently being spent wisely.

Whether this percentage will go up or down after the Chancellor’s statement today, remains to be seen.

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