A Few Things....

August 28, 2019

I don’t usually like discussing macro because I don’t think it should be part of long-term investors’ process (except to be aware of cycles as we’ve learned from Howard Marks).

That said, interest rates to some degree dictate the rate of return you should expect from riskier assets, so they are the one macro data point worth having some opinion on.

So, what about these negative rates?

One paper I was reading recently by Professor Ole Peters on wealth redistribution under capitalism for the last century. Specifically, he can model what happened starting around 1980 using historical data. He posits that the 35-year decline in rates (driving the 35-year bull market for bonds) has been necessary so that lower-income households can effectively continue to mortgage their futures to fund the shift in wealth to high-income households.

This isn’t a political statement, it’s simply the math of Brownian motion behind many natural phenomena and complex systems, using historical data as input. It’s an intriguing and explanatory theory, and it would suggest, absent significant government welfare intervention, we should expect rates to keep going more and more negative. This again supports the view that it might be much more effective for the central banks of the developed world to write checks to households instead of cutting rates further. Both strategies print money, but the former solves inequality, which would boost interest rates and growth. I expect to be hearing much more about Modern Monetary Theory (MMT) no matter who wins the next election.

Two more macro indulgences on interest rates for this week: If we hypothesize that deflation is going to accelerate as a result of technology (productivity, AI, alternative energy, low-capital-intensity/high ROIC businesses of the Information Age, etc.), then we can also explain lower and lower negative rates. Why? If I think I only need 90 cents five years from now to buy stuff that would cost $1 today, then I’m happy to invest my money in negative-rate debt and I still come out ahead if I only get back 95c on those bonds.

Lastly, demographics. The world is aging and population growth rates are slowing. With little population growth, there is limited demand growth and so it’s hard for companies to have pricing power. This keeps inflation contained and hence rates can again stay low.

Those are three factors potentially driving increasingly negative rates. And, it’s possible that deflation, demographics and rising inequality are having a joint effect on interest rates that could be stabilized with government-led welfare or spending.

Technological innovation will likely continue to garner a large share of the value created in the global economy. If wealth redistribution is stabilized or reversed, you should expect higher rates, but deflation from technological forces will likely still be at play. As a result, you have to assume that if rates go back up, it probably won’t be by much, which leaves the expected return hurdle rate for investments quite low.

But some people are taking lower rates to be another recession warning, and as recession indicators pile up and rate fears continue, it’s worth noting that investors, and humans, tend to become greedy slowly over time, but they become fearful very quickly. There’s good evolutionary explanation for this (the caveman who panicked slowly died, and the one who panicked quickly survived !).

But in the end, it’s important to remember Buffett’s saying: "be greedy when others are fearful". Odds strongly favor that things will be better 10 years from now; and 10 years after that they will be even better, so ignore the noise and keep thinking long term and compounding daily: I wrote a little article on that here.

Thanks to Brad Slingerlend @ NZS for inspiring some of these ideas.


Clayton Christensen is known for his work on Disruptive Innovation, which at its core is about competitive responses to innovation. It explains and predicts the behavior of companies in danger of being disrupted and helps them understand which new entrants pose the greatest threats.

One of the key ideas in understanding innovation and disruption is the concept of Knowing Your Customers’ “Jobs to be Done. The idea being that when customers buys a product or a service, they are ‘hiring’ you to do a specific job.

It is this deeper understanding of what the customer (defined broadly to include your partner, boss, children) really wants you to do (something they may not have expressed or even know explicitly) that leads to real innovation and breakthrough.

If you are looking to understand your customer better, definitely check out this HBR Disruptive Voice Master Class.


A few things worth checking out:

1. I first came across the idea of business fly wheels in the writing of Jim Collins. Most successful business have a flywheel that once it starts turning accelerates the business and allows it to scale faster and faster. This post looks at a few fly wheels, including Amazon, Google and Microsoft and then discusses how to apply it to your life and business.

2. Paul Graham’s post on Life is Short, is one I go back to once a year to remind myself to:

“Relentlessly prune bullshit, don't wait to do things that matter, and savor the time you have. That's what you do when life is short.

3. A book I enjoyed reading this weekend was Carlo Rovelli’s: 7 Brief Lessons on Physics. It’s a great 60-pager packed with the great lessons and questions of Physics today. You can save time and watch this 15 min video.

One of the questions he ends the book with is: What is Time ?


Quotes I’ve been thinking about:

“Innovation is where the crazy people have stature”

- Trillion Dollar Coach by Eric Schmidt