Will Warren Buffett be Rolling Over in his Grave, When the Market Bots Finally get Here?

Let’s face it, we live in a world that craves convenience and things that work simply. You flip the switch and the lights come on.  You press a button on the TV remote and the channels change. You put your key in the ignition, turn it and the car fires up. In today’s world, technology is an increasing part of our lives. Is it any wonder that the market players and big brains are looking for the same type of switch?   Flip the switch on when the market is good and make money, and flip it off when things are failing and attempt to protect capital. This is financial utopia at its finest. We have been believers of this approach at different points along the investment continuum, and can observe frankly at times this works well, yet sometimes, not so much.

Hence this discussion about bots.  For those not familiar with this jargon, a bot, also known as web robot, is a software application that runs automated tasks. Typically, these bots perform tasks that are both simple and structurally repetitive, at a much higher rate than would be possible for a human alone.  The largest use of bots is in an area called web spidering, in which an automated bot fetches, analyzes and files information from web servers at many times the speed of a human. Consider this Financial Bot for a moment:  it buys when markets start going up and sells when markets start going down – no questions asked.  This bot is doing a fine job and winning day in and day out, compounding this strategy month in and month out.  This bot is doing so well that another bot takes notice and learns or copies the algorithm and starts doing the same process, with similar success, albeit somewhat diluted.  Suddenly, all these bots notice what is going on and they all play the same game. What is happening?

We ask ourselves, is there any bot out there that can think and act differently than all the other bots?

We use algorithms like most others and understand their limitations, as they are designed by humans.  Consider earlier this year when oil was $26 a barrel. The trend was decidedly negative. Notable investment firm, Goldman Sachs, said it was going to $10 levels.  Most people you asked use the behavioural bias and suggested that because it was lower yesterday, it will be lower again tomorrow. Can a bot learn that rationally, oil prices cannot print a negative number? Unlike interest rates, that are going more negative…

Warren Buffett started buying the Phillips 66 during the oil decline. Phillips 66 is a diversified energy manufacturing and logistics company.  He suggested that he was not buying at the bottom but rather in the bigger context, was buying lower today than yesterday. Mr. Buffett is perhaps different, and smarter than most bots, as he looks through things to the other side. This is where his success in the past has mostly been driven from.  

Moral of the story – Bots have limitations, but the world seems to be liking them more. Warren Buffett would disagree.

Is there GOLD in the hill? YES

We have been doing some exhaustive investigation into a multi-factor platform for assessing gold.  Most of these catalysts came from a desire to understand what is happening with the new negative interest rate environment.  Given that in some countries, government bonds now have negative yields, meaning an investor is paying these governments to hold their cash safely.  It begs us to ask the question: what and where are the safest places to allocate capital?  Part of our investigation has led us to gold bullion. Further investigation has lead us to screen gold equities. In this data discovery process, we were often times left scratching our heads and feeling forced to go back to the drawing board with a clean slate and learn some more – so we did. The outcome is a clearer understanding of the catalyst that can, and should, affect gold prices.

Today is a great example of one of the catalysts in our multi-factor model that is developing.  Today Friday, June 3 2016, we reviewed a data print, from the US on Non-Farm Payrolls.  In simple terms, this is a data point of how many new jobs were created in the past month in the US.  The number the world was estimating prior to the release of the survey was 160,000. The actual data release this morning showed a dramatically lower number of 38,000. For those that follow this type of data, this is a huge miss.  It suggests that the growth engine of the US, has slowed down over the month.  It also “kicks the can down the road” with regard to the US Central bank, the FED, to have enough impetus to increasing interest rates sooner than later.  So what is really happening?   First, the US dollar sells off against most major currencies.  Historically, the US Dollar and Gold Bullion have had a rather inverse relationship or correlation. So the next move is that gold prices move higher.  We just checked and gold is up $28 since prior to the jobs survey release, but this is only one factor.

The second factor is inflation protected bonds. This is where things start to get really technical, rather mathy and we start to sound like the teacher in the Peanuts and Charlie Brown cartoons.  Woon woon woon wooan wooan….. (Anyone old enough to remember that?)   We are not going to even mention the third and fourth factors because we will have hit the blue box well before this.

So we won’t go down that road.  However, what we are finding is that gold/gold stocks are becoming more meaningful - as a diversifier to portfolios and to actually reduce a portfolio’s risk.  It does NOT mean we will be in gold forever, but for now, the evidence is stacking up to hold some of the shiny yellow metal and/or some equities in this sector.  The moves, looking forward, could be meaningful.

Anything That Can Happen Usually Will Happen

To round out our thoughts of the world today, it is clear that politically, things have changed. I guess if Arnold Schwarzenegger can be the Governor of California, Donald Trump can be the next President of the United States of America.  Maybe one day we will see flying pigs with genetic developments. Basically, breakfast bacon will fly right to your doorstep.  Sorry, we digress, but the story has some rolling in the isles, to the extent that immigration to Canada seems likely for some (many). The world around us is constantly changing, and getting accustomed to negative interest rates is just part of our learning curve. A decade ago, no one was building this into their economic models, yet today it is the new normal.

Negative Yields in Switzerland – In Pictures

We always like to add a picture because it tells a bit of the story, sometimes better than words do. Below is a simple chart of Swiss Government, 5 year bond yields.

Source: VIP Wealth Solutions & Bloomberg

Central banks desire negative yields, in order to spur economic growth.  We talked about one way to protect against this state of interest rate suppression in the event it spreads like contagion abroad.

Thank you for reading this week's newsletter.

 

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