The trade of half a decade: long gold, short Athens | FT Alphaville

The trade of half a decade: long gold, short Athens

If you had invested exactly five years ago, and done a bit of the ol’ buy-and-hold, here are the returns you would have reaped (according to Deutsche’s Jim Reid and Colin Tan — click to enlarge):

The chart is from Tuesday’s five-year anniversary edition the daily Early Morning Reid, and it’s colour-coded according to asset class.

Gold reaps the largest return. As Warren Buffet recently pointed out, the main feature of the commodity is not that it can be used for anything productive, but rather that it feeds off of fear and people’s belief that there will always be scaredy cats. Bit depressing really. And you must go read the Sage’s take on it in full if you haven’t already.

To the pile of gold, add some silver, and then oil which benefited from various supply disruptions. In addition to that, the commodities received a boost from the liquidity that evacuated risky assets over the course of the crisis.

Thereafter we have a cluster of assets, formerly known as “safe”, in the form of various government bonds — even Spain (21 per cent) and Italy (18 per cent) have managed decent returns (but we think it’s best if no one tells Jon).

And there’s a surprise appearance:

Even US and EU Financial Seniors have returned 30% and 24% respectively, impressive given the turmoil in the sector. It probably shows how crucial these bonds are to the financial system that they’ve been allowed to see such returns regardless of the large balance sheet problems.

Moving to the negative side means moving away from fixed income and commods, and into equities, an asset class about which The Economist recently asked in its series on financial innovation:

Imagine a financial instrument that exposes retail investors to first loss in the event of a problem, swings around wildly from day to day and delivers virtually no returns to Western buyers for a decade. Would equities have got through the regulators?

A particularly pertinent question when the stocks in question aren’t diversified globally and aren’t listed in a country which controls its own monetary policy. As Reid and colleague Colin Tan point out, when it comes to the UK and the US:

Of the main developed equity markets the FTSE scores best (+18%) which likely reflects a high proportion of internationally focused companies in a period where sterling has dropped around 20% vs the Dollar and the Euro. Devaluation/depreciation often gets a deservedly bad press but one can’t help thinking that the UK has so far dodged an enormous bullet by having currency flexibility and a central bank who is being very aggressive in money printing.

The US has also dodged a few bullets to date and constant fiscal and monetary interventions to bail out a severely over-levered system has so far allowed the S&P to just about move into positive total return territory (+8%)…

That doesn’t extend to banks of course, with the financial indices of the S&P 500 and Stoxx Limited 600 coming in at -54 per cent and -64 per cent respectively.

Lastly, concerning those sovereigns who have none of the control that the US and UK do:

The Spanish, Portuguese, Japanese, Italian, Irish and Greek indices are -24%, -40%, -41%, -51%,-62%, and -81% respectively. For the European countries here, these returns reflect a situation where being unable to control your response to a major financial crisis ends up severely impeding your economy and assets. The underlying problems here are not much greater than say the UK but the response has been completely different.

Obvious enough (now), but it’s interesting to see some of the numbers to go alongside it. And we hear from Joe Weisenthal at Business Insider that the Greek short continues to perform after Monday’s downgrade by S&P:

Related links:
Dash for trash, Hellenic edition – FT Alphaville
“Bond market returns are about as attractive as following a plague of locusts across a field of corn” - FT Alphaville
That Portugal enigma, demystified – FT Alphaville