What Is The Oracle (Rothschild) Doing?
They say if you want to play a game well then identify the Grandmaster players and study their moves.
So what is Rothschild ‘The Oracle’ doing?
Let’s zero-in on the crème de la crème money managers, the Rothschilds have banking and investment in their DNA, they have been a power in the world of finance since 1700.
The last time we visited the Rothschild’s RIT Capital Partners fund was back in December 2016 when the fund issued its financial results.
Just to recap the Rothschild Investment Trust Chairman himself, Lord Jacob Rothschild, was somewhat gloomy back then in his Chairman’s statement.
The central bankers are continuing “what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low-interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale,” said Rothschild.
Six months on and the Oracle is just as gloomy. Put another way, Rothchild has no appetite for risk assets. In RIT Capital Partners June 30, 2017, half yearly financial report (page 4) this is what Rothschild had to say.
Half-Yearly Financial Report 30 June 2017 27 St. James’s Place London SW1A 1NR Warning to Shareholders From time to time investment companies and their shareholders …
“We do not believe this is an appropriate time to add to the risk,” said Rothschild.
In a few words, the market is way over valued – it is in a bubble.
In Rothschild’s words, “Share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured. The S&P is selling at 25 times trailing 12 months’ earnings, compared to a long-term average of 15, while the adjusted Shiller price earnings ratio, which averages profits over 10 years, is approximately 30 times.”
So with the global economy perhaps entering a lengthy paralysis and stocks hovering around historic highs in relations to earnings, the Oracle is steering away from risk assets.
But the bulls will argue that economic fundamentals have been irrelevant ever since the major central banks pumped the system with trillions of dollars of monetary stimulus.
Indeed, the central bank’s bond purchasing program, better known as quantitative easing (QE) has enabled the monetary authorities to surgically disconnect financial markets from the fundamentals. The stock market has become the central bank’s trillion dollars perpetual motion machine. When central banks want stocks to keep moving upwards more QE is injected into the system. So stock price trajectory probably has more to do with how much liquidity is sloshing around in the system and less to do with fundamentals.
So if the central banks keep accomodating with monetary easing (low-interest rates and even more QE), will stocks and other risk assets keep rising?
What follows next is Rothschild’s takeaway statement,
“The period of monetary accommodation may well be coming to an end,” said Rothschild.
With no more QE to the rescue, bad news may indeed be bearish for stocks and the rather warped logic where bearish (bad) news is bullish for stocks because it equates to more QE may no longer hold water.
Whats more, there is no shortage of bad news. “Geopolitical problems remain widespread and are proving increasingly difficult to resolve. We, therefore, retain a moderate exposure to equity markets,” said Rothschild.
In fact, change in the diversification of the RIT Capital Partners shows a slight fall in allocation to equities from 56% on 31 December 2016 to 55% in June 2017.
Typically, in troubling times investors tend to rotate out of equities and into bonds but that is not the case with RIT Capital which has registered no change in government bond holdings over the same period.
There has also been a slight increase of 1% in currency allocation.
Moreover, there was a registered fall in the Net asset value in USD from 62% on December 31 to just 37% June 2017.
The net asset value of the fund in Sterling increase to 38% from 24% during the same period. Euro net asset value of the fund also increase to 16% from 4% during the same period.
So where has RIT Capital increased its allocation?
The fund has “diversified our asset allocation towards equity
investments where value creation is driven by some identifiable catalyst or which are exposed to longer-term positive structural trends.”
Rothschild is referring to value investing where the value of an asset is driven by positive fundamental. That could mean many things. For example, in view of the spate of terrorist attacks across Europe could we see a boom in sales of companies offering personal protection devices?
A quote from the National Rifle Association, ‘Only Thing That Stops A Bad Guy With A Gun Is A Good Guy With A Gun’ and in the US that good guy might even be a good woman.
Women are the fastest-growing demographic among gun buyers, but in an industry that’s traditionally catered to men, feminine firearm accessories can be hard to find …
Europe has one of the strictest gun controls in the world, with the exception of Switzerland. Practically every good natured Swiss adult male is a gun owner. Don’t you think it is curious that Switzerland in the heart of Europe is exempt from radical Islamic attacks?
Would the EU consider liberalising gun ownership or even allow a debate in the corporate control media? Probably unlikely, but it is an interesting question to ponder over.
So what are the long-term structural trends Rothschild is referring to?
“We have a particular interest in investments which will benefit from the impact of new technologies, and Far Eastern markets, influenced by the growing demand from Asian consumers.
As the ‘Fourth Industrial Revolution’ develops, it becomes increasingly important for your Company to be able to assess investment opportunities in the innovation-driven changes which are affecting almost every business sector. With this in mind, we have entered into a partnership with Social Capital, one of Silicon Valley’s leading technology investment firms, led by Chamath Palihapitiya. We will invest in a range of their funds to benefit from Social Capital’s data-driven approach and expertise in this area, as well as looking at specific opportunities.”
A casual perusal of Social Capital’s website and their mission sounds warm and cuddly “our mission is to advance humanity by solving the world’s hardest problems. By harnessing technology to address core human needs, we aim to drive a bottom-up redistribution of power, capital and opportunity.”
Vision – Social Capital
Social Capital is a partnership of philanthropists, technologists and capitalists utilizing venture capital as a force to create value and change on a global scale.
But cutting through the PR spin don’t they really mean the development of automated vehicles, drones, robots, second generation artificial intelligence. That might raise productivity but investing in the Fourth Industrial Revolution could also displace humans from the production process.
What is social about that?