Absolute Return Letter - December 2020
Zombies are firms that are neither dead or alive. They are in so much debt that virtually all their free cash is used to service their debt, and that is very damaging to GDP growth. This month, we explain why there are more and more zombies all over the world, and why they do immense damage to the global economy.
A Constitutional Crisis in the Making?
We are earlier than usual this month because of the upcoming presidential election. See why a US constitutional crisis could unfold in the days and weeks to come if Trump delivers on his earlier ‘promise’ not to accept the outcome, should he lose on the 3rd November.
Modern Monetary Theory Explored
Modern Monetary Theory (MMT) is a rather unconventional economic concept – at least if you are a classically trained economist as I am. That said, over the years, I have learned that, every now and then, it pays to think out of the box, so I am willing to take a closer look.
The Sad Case of TINA
Tina is an old friend of mine, but she is also a sad case of hubris, over-confidence and misguided pride. I first met Tina about 38 years ago but, more recently, I have been reminded of her presence every single day. Sometimes valuations get so much out of whack that I get goose bumps all over, and this is one of those situations.
The Road to Equality
As if the Coronavirus outbreak wasn’t enough of a problem for society to deal with, shortly afterwards, two American police officers ended the lives of two American civilians. Why that will affect financial markets for a long time to come you can read here.
Five Lessons from History (5/5)
Wounds heal but scars last. That’s an old lesson from history and will also be the case as far as COVID-19 is concerned. We already know from empirical evidence in China that consumers are in no rush to come back on the streets of the big cities, and why would it be any different elsewhere?
Five Lessons from History (4/5)
Why is it that a fire on the other side of the planet attracts far more attention than a new innovation about to be rolled out, and how can investors take advantage of that? This is a question more relevant than ever, given the impact of the current Covid-19 outbreak.
The Economic Cost of Social Distancing
The economic costs associated with the coronavirus case outbreak are nothing short of staggering. Expect Q2 to collapse which is not good for equities and not good for bonds either.
Five Lessons from History (2/5)
Lesson #2: Reversion to the mean occurs because people persuasive enough to make something grow don’t have the kind of personalities that allow them to stop before pushing too far.
Five Lessons from History
Financial hardship often drive people to adopt views that were previously unthinkable. It is a very powerful behavioural pattern and has significant implications for financial markets. In this month’s Absolute Return Letter, we take a closer look at what it really means.
The Known Unknowns of 2020
Trump's decision to take out the Islamic Republic's most celebrated military leader, Qassem Soleimani, was a timely reminder that we face many problems. An armed conflict between the US and Iran is clearly one of them but far from the only one. Here is a list of the ones we worry mostly about, going into 2020.
A Future Embedded in the Present
We have reached a stage in the cycle where you need to think out of the box in order to deliver respectable returns. Investing like most of us have done in the great bull market will not deliver returns anywhere near the levels we have enjoyed over the past 35-40 years. This month’s Absolute Return Letter offers a solution.
How to Invest in a Low Growth World (Part 2 of 2)
The evidence is overwhelming that automation has positively impacted total factor productivity (TFP) for years, i.e. GDP growth continues to benefit from the digital revolution despite the fact GDP growth is rather pedestrian these years.
How to Invest in a Low Growth World (Part 1 of 2)
A classic approach to economic theory suggests low GDP growth in the years to come. Why and what to do about it is what this month’s Absolute Return Letter is about. Next month, we’ll look at the impact of advanced robotics – why a rapidly ageing workforce might not be the problem it is often portrayed as. Could robots simply replace humans in the work process?
Is Ageing Inflationary? Really?
For years, economists have disagreed whether ageing is inflationary or dis-inflationary. Ever since IMF published a controversial paper in 2015, the debate has raged, but I have finally concluded that ageing is most definitely dis-inflationary (and perhaps even outright deflationary), and here is why.
Investors are not always told the full story before they invest. In this case, we are constantly told that electric vehicles offer the way forward, but evidence is mounting that they are actually polluting more than petrol or diesel cars. The penny just needs to drop as far as our political leadership is concerned.
The Cost of Rising Populism
25% of Europeans vote for a populist now, and rising populism has a devastating impact on GDP growth, as more and more capital is misallocated which is an economic term for capital being deployed unproductively. Rising populism is obviously not the only reason why more and more capital is misallocated, but it is nevertheless an important reason.
The New ARP+ Service
New rules do not allow us to provide research free of charge any longer. Consequently, our business model is changing.
Addicted to Oil?
Apart from the 2014-15 supply shock, oil prices have proven to be extremely elastic more recently with only modest changes to either supply or demand having an outsized impact on oil prices. We look into the implications of that and find that oil prices could possibly rise a fair bit further this year even if they are already up 40% year-to-date.
Is Life Expectancy Falling? Really?
Life expectancy has started to decline in some of the world's most prosperous countries, and there seems to be a powerful link between that and falling real wages. Come to think of it, there is even a link between austerity and falling life expectancy as the Greeks learned in 2010-2012.
More on the Productivity Conundrum
With the workforce starting to decline in many countries, we need brisk productivity growth for the economy to prosper, but exactly the opposite is happening. Why is that? In this month's Absolute Return Letter, we take a closer look at a number of negative productivity agents that hold back GDP growth.
Another Zimbabwe In the Offing?
What will central banks do with all the bonds they have acquired through QE? Could it ultimately lead to (much) higher inflation? These and other questions to do with QE will be addressed in this month’s letter.
Potential Pitholes of 2019
The January Absolute Return Letter is always about the pitholes one could fall into in the year to come and, lo and behold, financial markets are behaving as if we have already fallen into one. December was a most difficult month, and January hasn't exactly started with all guns blazing either.
The Art of Defaulting
A debt crisis is looming, but how will it manifest itself? Through inflation, defaults or ...? There are many possible outcomes. Even more interestingly, it could also mark the end of the current debt super-cycle, which has been in full swing since 1945. When debt super-cycles end, something dramatic always happens.
Will Lithium Sink OPEC?
Electrification of all transportation and heating is already a trend in motion, and it is going to change everything. The arrival of fusion energy will only make those changes even more dramatic. Commercial banks may cease to exist, fossil fuel prices will fall dramatically - some may even go to zero - and OPEC may be replaced by OLEC - the Organisation of Lithium Exporting Countries.
The Productivity Conundrum
One of the great conundrums in today’s world is why computers in general and the digital revolution in particular have had exactly the opposite effect on productivity than everybody expected. Why on earth is productivity growth slowing when we all expected it to rise and what can we do about it? That’s what this month’s Absolute Return Letter is about. Enjoy the read.
Private Credit Demystified
60% allocated to equities and 40% to bonds has been an extraordinarily successful investment strategy for most of the past 40 years, but I believe the show is now largely over. In this month's Absolute Return Letter, I focus on the 40%, and I argue that, although I don't expect 10-year government bonds to deliver more than 0-2% annual inflation-adjusted returns in the years to come, there are indeed things you can do to earn higher returns.
The Italian Job
Italy suffers from a series of major structural problems that, even with the best of intentions, cannot be corrected anytime soon, and the new Italian government is about to find out that it has landed in the deep end of the pool.
Investor Attention Deficit Disorder - aka the Goldfish Syndrome
There are three key drivers of financial markets - behavioural patterns, cyclical trends and structural trends. Because human attention spans are getting shorter and shorter, behavioural patterns affect financial markets more and more. That is a problem but also an opportunity set for the astute investor who is prepared to think outside-the-box.
The Death of Fossil Fuels? Really?
Oil prices have been remarkably strong more recently, defying our (very) long-term prediction that fossil fuel prices will go to $0. In this month's Absolute Return Letter, we take a look at the reasons behind the recent strength and where oil prices are likely to go next.
The Inflationary Impact of Ageing
BIS surprised many, when they back in 2015 concluded that ageing is actually inflationary. New research from Oxford Economics have come to precisely the opposite conclusion, which is why I have decided to do a deeper dive on the topic this month. Conclusion? BIS may have been correct in the past but, more recently, my vote would definitely go to the dis-inflationary camp.
An Inflationary Bust Or?
Events of recent weeks suggest that we have now entered the final stage of the long-running bull market in equities, but what will happen next? An inflationary or a deflationary bust? We argue that, as we see things, the more likely end-game is an inflationary bust, but we do admit that the arguments in favour of a deflationary bust are quite pervasive. Regardless, a bust is next, and a bust is still a bust.
The Most Hated Bull Market of All Time?
At the end of the day, equity returns are driven by ROE, and we argue in this month's Absolute Return Letter that ROE is likely to drop as 2018 unfolds, partly due to rising inflationary pressures – particularly wage inflation – and partly due to rising borrowing costs. Perhaps more surprisingly, the new US tax reform could also negatively affect ROE. Continue to read if you want to understand why.
My Not So Outrageous Predictions
Equity markets have enjoyed an exceptionally long spell of rising prices but, as we all know, it won't go on forever. Here are five reasons why the party may soon be over. Many would probably expect recession to be one of those five, but it isn't. The economic outlook is simply too good for me to add that to my list of main risks for 2018, but that doesn't mean equities cannot fall. Enjoy the read.
Live and Let Die
Are you ready to die younger than your parents? It may not be what you want, but for society it is not at all that bad. In the years to come, we will literally drown in healthcare costs, but declining longevity, which is an emerging trend, could just about to solve that problem.
The Lost Decade
When real wages decline and the retirement pot takes a hit, the man in the street starts to bleed. He doesn't always understand the underlying dynamics, but that rarely matters. Something must change, he says to himself. That is what has happened to many Brits in recent years and explains why Corbyn has suddenly got plenty of momentum.
Running Out of Freshwater
The world is running out of freshwater, and much needs to be done unless we want a crisis to turn into a catastrophe. Desalination will fix the problem, they say, but desalination is not an option open to all countries. A dramatic change in consumer habits and attitudes must also take place, and that takes time.
Two Sides of the Same Coin
Rarely have equity bulls and bears disagreed more than they do at present. We look at both the bull case and the bear case, and then we introduce a longer-term structural angle, which is largely ignored by both bulls and bears. This third side of the coin is based on the fact that inflation is structurally low, and that central banks may be committing a serious policy error by targeting 2% inflation, when it is almost impossible to drive inflation to those levels. Enjoy the read!
Are Robots Disruptive? … or Could They Be the Saving Grace for Ageing Societies?
As regular readers of the Absolute Return Letter will know, we run a list of structural mega-trends which will form the world as we know it for many years to come – and that list drives our investment strategy.
Oil Price Target: $0 (by 2050)
Low-cost, high-grade coal, oil and natural gas - the backbone of the Industrial Revolution - will be a distant memory by 2050.
When investing, investment rules ensure long term success. I would even go as far as to suggest that those who don't follow certain rules, i.e. they invest more opportunistically, are bound to run into trouble sooner or later, but much more about that, and what my rules and principles are, in this month's Absolute Return Letter.
The Truth About Brexit
UK politicians are not telling the full truth about Brexit. Why? Most likely because it is not in their interest to do so. UK exports to the EU are far more important to the UK economy than vice versa, and a substantial number of UK jobs could be at risk should the free trade agreement go up in smoke.That is only one of several issues our political leaders are concealing.
A Note on Inflation: Is It Here or Isn't It?
Is inflation finally back? There are certainly signs that it is – at least in some countries – and it appears that both central bankers and investors have already picked up the early signs. We argue why investors should worry more about the US and UK and less about the Eurozone, where higher inflation more recently is all non-core.
Who Really Knows?
This month's Absolute Return Letter is a follow-up to last month's letter. In January I argued why investors could be facing a much more hostile Fed this year than generally perceived, and this month we look at the implications of that; why beta risk should be de-emphasized in 2017, and where we spot better opportunities.
Hiccup of the year?
As we always do in January, this month we focus on the investment minefield laid out in front of us and we argue that with upcoming elections in the Netherlands, France and Germany, and economic uncertainties globally, this year could turn into a rather tricky one for investors. There are reasons to be optimistic, however, and we hope that 2017 will be a prosperous year for you all.
A Lesson in Microeconomics - How to Get the Economy Going Again
There is macroeconomics, and there is microeconomics. Macroeconomics have failed miserably in recent years, and it is time to approach things differently. If you can find ways to stimulate demand more than supplies, you will almost certainly see a re-acceleration in economic growth.