- “Of all 1,059 5-year rolling cycles observed since 1932, there are only 3 periods with smaller value premiums. The current -6% belongs to the 1% of the weakest periods”
- Typically this type of underperformance has led to 14-19% outperformance in the subsequent 5 years.
Macroeconomics
Snippets on the big picture.
Equity Drawdowns by Country
- Chart from Bridgewater of the worst equity drawdowns (declines in equity markets) by country.
- The final column shows if one equal weighted geographically that one’s returns would be much better.
History of Asset Bubbles
- A history of asset bubbles from Bank of America.
Bernie gain = Trump gain
- Interesting chart that shows as Sanders gains so does Trump’s re-election probability.
Labour vs. Profits
- A great set of charts from Bridgewater Research.
- The left hand shows how US company profit margins have trended up largely thanks to productivity gains outpacing real wage growth.
- In other words profits rise because workers are getting paid a smaller share of the output they produce.
- Part of this is due to wages being driven down globally by the emergence of China (right hand chart).
- China has seen rising wages outpacing productivity growth and hence companies grabbing a smaller share.
Valuation and Returns
- This is an interesting chart that shows the performance of the S&P 500 index by different valuation levels.
- Based on data since 1935.
- The current valuation is 18x P/E.
Construction
- Interesting post from FT Alphaville about construction.
- It discusses a recent IMF note which shows that the construction sector is often a great canary in the coal mine of economic activity.
- “An additional percentage point of value-added or employment growth in the construction sector during a boom raises the probability of the boom being bad—followed by subpar economic performance or a systemic financial crisis—by 2 and 5 percentage points, respectively.“
- “Strikingly, in our sample, long-lasting booms that featured rapid construction growth never ended well.”
- Interesting point that because inflation doesn’t account for housing costs properly the central banks will always be behind the curve.
2019 Top Manufacturing Growth
- A ranking of all PMIs by country in 2019.
- Greece comes top. Explains the rally in Greek assets in 2019.
- Germany at the bottom.
Competition
- The two interesting charts from Bridgewater’s Research.
- They show a gradual relaxation of policies targeting competition among firms.
- This allows larger or dominant firms to form.
UK
- Fund flows look to have bottomed.
- Not everyone is positive.
- “The U.K. remains – the cork is still in the bottle. It didn’t go off last Friday [Election day]. Money is still sitting on the sidelines. I think it may start to come, but I don’t think we’d be calling that as like the last Friday doesn’t – is only the beginning, not the end. And there are other challenges in the U.K. market, so the U.K. is probably the area across the industry which is the most difficult at the moment.” JanusHenderson CFO
London House Prices
- Rightmove report out for February on UK and London house prices.
- “London’s recovery continues with new-year momentum pushing up prices and sales numbers, and finally encouraging more sellers to come to market … Better market encourages new sellers, with the 1.6% increase in the number of newly marketed properties being the first rise compared to the prior year for 16 months.”
US Gallup Survey
- Interesting chart from the latest Gallup Poll.
- Americans’ optimism about their personal finances has climbed to levels not seen in more than 16 years, with 69% now saying they expect to be financially better off “at this time next year.”
Bond ETF
- We have previously written about the risks building form the rising popularity of bond ETFs.
- This article argues the opposite – more ETFs = more trading in bonds = liquidity.
- We take issue with these arguments. An inspection of two bond etf prices shows you that they have mostly marched upwards (e.g. LQD, VCIT).
- As ETFs go up they create more units and are willing buyers in bond markets. This of course creates liquidity.
- The main issue will be on the downside – if something goes wrong, ETFs, en masse as they follow pre-set rules, will sell and there won’t be anyone on the other side.
PMIs Improving
- This chart shows that some 60% of economies are seeing improving manufacturing PMIs vs. December – a bullish sign.
Buybacks
- Buyback activity by US companies has fallen.
Outperformance is hard
- This chart from Soc Gen shows that over the past two years out of a total of 16,000 public companies world wide only 20% have outperformed the S&P 500.
- The peak was 70% a decade ago.
Germany
- This is a really good article on Germany. h/t The Browser.
- It really gets to the crux of the country’s success.
- In 1993 they ran a $20bn deficit and now that is a surplus of over $200bn (inflation adjusted).
- Worth a read for any economist and puts into perspective the trade-war going on right now.
- “The takeaway — from this whole 6,000 word essay — is that Germany has done insanely well for itself since the creation and adoption of the Euro and the European Single Market by pursuing a strategy of Export-driven Industrial production that is considered impossible in any other developed, high-GDP, high-population, high-wage-paying nation.“
UK Electricity Mix
- Amazing how quickly it changed.
Artificial Intelligence (cont)
- Even central banks are getting in on the game.
US Election
- Worth keeping an eye on betting markets.
- Sanders has recently overtaken Biden for the Democratic nomination.
