Explaining the Federal Reserve’s actions
August 18, 2020 Leave a comment
As extracted from Seth Klarman’s 2nd quarter 2020 investor letter;
“Fed policy has been magnificently successful in achieving its objectives not only of lifting securities prices but also of altering investor behaviour. The Fed wanted to influence buyers of securities to be bolder in their pursuit of return. The head of a major pension fund recently authored a piece describing how the fund had responded to lofty markets and low yields on safe debt instruments. Their reaction was not to lower the fund’s currently aggressive 7% risk-adjusted return objective to a more realistic threshold, but instead to direct more assets into “lower volatility” private investments while leveraging the portfolio. Private investments, of course, have the same underlying risk and inherent volatility as public investments – though because they are not publicly traded, their intermittent and privately determined appraisals may make them appear to be less volatile. And as for the choice to leverage up, we can only note that leverage is a double-edged sword that enhances returns in good times while sinking them in down markets. If markets falter, this fund will have not solved its problems but rather have multiplied them.
Central banks, led by the Fed, continue to be the predominant driver of financial markets. By holding down interest rates, they influence investors to bid up the prices of securities, irrespective of the economic backdrop. By maintaining these seemingly never-ending policies and wilfully ignoring developing bubbles, the Fed has engineered a strong market recovery even as the unemployment rate tests Great Depression levels. The Fed balance sheet grows larger and larger, and the annual U.S. budget deficit approaches a level triple its previous ignominious record high. Investors are being infantilised by the relentless Federal Reserve activity. It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene. When the market has a tantrum, the benevolent Fed has a soothing yet enabling response. As with the 30-year-olds still living in their parents’ basements, we can only wonder whether the markets will ever be expected to make it on their own.”
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It doesn’t matter if you receive a 5% dividend and the stock loses 50% of its capital.
Australian retail equity investors still pine for dividends at any cost AND the cost happens to result in losing capital.
More on the concept of “total return” in an upcoming post.
Following today’s earnings result, Telstra’s stock plummeted 8.2%.
This is 2 years worth of dividends, gone, in a single day of trading.
As a respected peer once told me, “Telstra is a stock that will keep paying a dividend, until it can’t anymore”.
August 13, 2020
by Rob Zdravevski
rob@karriasset.com.au