A Few Things: Napier on Financial Repression, FP on Biden and China, Eating To Death, New World Order, Yergin on Ukraine & Russia, Deep Survival, Charts That Make You Go......
October 18 2022
I am sharing this weekly email with you because I count you in the group of people I learn from and enjoy being around.
This week’s edition is action-packed.
You can check out last week’s edition here: Raising Great Children, Your Life as a Network, Chip War, Eating Ourselves to Death, Tudor Jones on Markets, What Happened to Gilts?, Getting More Awe In Our Lives......
“Criticism may not be agreeable, but it is necessary. It fulfills the same function as pain in the human body. It calls attention to an unhealthy state of things.”
- Winston Churchill
“If you cry because the sun has gone out of your life, your tears will prevent you from seeing the stars.”
- Rabindranath Tagore
“We are what we pretend to be, so we must be careful about what we pretend to be.”
- Kurt Vonnegut
“The art of being wise is the art of knowing what to overlook.”
- William James
A. A Few Things Worth Checking Out:
1. This new Russell Napier interview is a thoughtful discussion on what the future might look like, and I highly recommend reading it. Thank you Jihan and Wouter for sharing.
Historically Napier has been a deflationist, about two years ago the tide turned and Napier warned of a vicious return of inflation. According to Napier, financial repression will be the leitmotif for the next 15 to 20 years. But this environment will also bring opportunities for investors. We will see a boom in capital investment and a re-industrialisation of Western economies, says Napier. Many people will like it at first, before years of badly misallocated capital will lead to stagflation.
In summer of 2020, you predicted that inflation was coming back and that we were looking at a prolonged period of financial repression. We currently experience 8+% inflation in Europe and the US. What’s your assessment today?
My forecast is unchanged: This is structural in nature, not cyclical. We are experiencing a fundamental shift in the inner workings of most Western economies. In the past four decades, we have become used to the idea that our economies are guided by free markets. But we are in the process of moving to a system where a large part of the allocation of resources is not left to markets anymore. Mind you, I’m not talking about a command economy or about Marxism, but about an economy where the government plays a significant role in the allocation of capital. The French would call this system «dirigiste». This is nothing new, as it was the system that prevailed from 1939 to 1979. We have just forgotten how it works, because most economists are trained in free market economics, not in history.
What has triggered this process now?
My structural argument is that the power to control the creation of money has moved from central banks to governments. By issuing state guarantees on bank credit during the Covid crisis, governments have effectively taken over the levers to control the creation of money. Of course, the pushback to my prediction was that this was only a temporary emergency measure to combat the effects of the pandemic. But now we have another emergency, with the war in Ukraine and the energy crisis that comes with it.
So the endgame will be a 1970s style stagflation, but we’re not there yet?
No, not by a long shot. First comes the seemingly benign part, which is driven by a boom in capital investment and high growth in nominal GDP. Many people will like that. Only much later, when we get high inflation and high unemployment, when the scale of misallocated capital manifests itself in a high misery index, will people vote to change the system again. In 1979 and 1980 they voted for Thatcher and Reagan, and they accepted the hard monetary policy of Paul Volcker. But there is a journey to be travelled to get to that point. And don’t forget, by the time Thatcher and Reagan came in, debt to GDP had already come down to new lows. That enabled them to introduce their free market policies, which would probably not have been possible if debt to GDP were much higher. So that’s why we’re in for a long social and political journey. What you have learned in market economics in the past forty years will be useless in the new world. For the next twenty years, you need to get familiar with the concepts of political economy.
What would have to happen for you to conclude that we'll avoid this path?
If governments went out of interfering with the banking system, reinstated private sector credit risk and handed back control over the growth of money to central bankers. Also, if we had a huge productivity revolution that would make real GDP grow at 4%. This would allow us to keep inflation at 2% in order to get nominal growth of 6%. We can’t forecast productivity, and I never want to underestimate human ingenuity, so we’ll see about that. A third possibility would be voters telling their governments to stop these policies by voting them out of office. But this is not likely because, as mentioned, most people will like this environment at first.
What will this new world mean for investors?
First of all: avoid government bonds. Investors in government debt are the ones who will be robbed slowly. Within equities, there are sectors that will do very well. The great problems we have – energy, climate change, defence, inequality, our dependence on production from China – will all be solved by massive investment. This capex boom could last for a long time. Companies that are geared to this renaissance of capital spending will do well. Gold will do well once people realise that inflation won’t come down to pre-2020 levels but will settle between 4 and 6%. The disappointing performance of gold this year is somewhat clouded by the strong dollar. In yen, euro or sterling, gold has done pretty well already.
2. US sanctions escalated versus China, specifically around the use of semiconductors.
Foreign Policy Magazine had a good article titled: Biden Is Now All-In on Taking Out China.
Key bits, emphasis mine:
Last Friday, however, a dense regulatory filing from a little-known federal agency gave the strongest hint yet of U.S. intentions. The Bureau of Industry and Security (BIS) announced new extraterritorial limits on the export to China of advanced semiconductors, chip-making equipment, and supercomputer components. The controls, more so than any earlier U.S. action, reveal a single-minded focus on thwarting Chinese capabilities at a broad and fundamental level. Although framed as a national security measure, the primary damage to China will be economic, on a scale well out of proportion to Washington’s cited military and intelligence concerns. The U.S. government imposed the new rules after limited consultation with partner countries and companies, proving that its quest to hobble China ranks well above concerns about the diplomatic or economic repercussions.
In short, America’s restrictionists—zero-sum thinkers who urgently want to accelerate technological decoupling—have won the strategy debate inside the Biden administration. More cautious voices—technocrats and centrists who advocate incremental curbs on select aspects of China’s tech ties—have lost. This shift portends even harsher U.S. measures to come, not only in advanced computing but also in other sectors (like biotech, manufacturing, and finance) deemed strategic. The pace and details are uncertain, but the strategic objective and political commitment are now clearer than ever. China’s technological rise will be slowed at any price.
Many U.S. policymakers and analysts will cheer a further decoupling. They rightly argue that Beijing’s decades-long strategy of intellectual property theft, hidden subsidies, and stealthy regulatory discrimination has played a large part in Chinese technological advancement. They correctly note that China has used its growing prowess to crush dissenters and minorities, threaten neighbors, prop up foreign autocrats, carry out espionage and influence operations, entrench market dominance, and lay the groundwork for future digital sabotage or coercion. And they can fairly claim that most previous U.S. restrictions—though hardly all—were sensible and successful.
Yet the latest U.S. move may erode some of the very conditions that have enabled earlier successes. Up until now, allies and partners were more or less willing to follow America’s lead, China proved unable to respond forcefully, the private sector adapted well enough, and U.S. technocrats had room to shape key policy details. The next phase of decoupling, however, could be more unpredictable and riskier. The increasing boldness of U.S. unilateral actions, and Washington’s open embrace of a quasi-containment strategy, will draw reactions from many actors. This may finally set in motion forces beyond the control of U.S. national security leaders.
U.S.-led technological decoupling from China has had enormous consequences in just a few short years. It has rewired international relationships, unsettled the global economic order, and transformed technology policymaking and politics in many countries. In this high-stakes game, Washington has been both card player and card dealer, making its own moves while constraining the choices of others. Now the United States has gone all-in—wagering like never before and placing its cards on the table for all to see. The decisive American gamble: to openly block China’s path to become an advanced economic peer, even at significant risk to U.S. and allied interests. Bigger U.S. moves are probably coming in the future. But for now, Washington must wait to see how others play their hands.
Two other good things to check out on the sanctions:
This twitter post:
3. Honestly with Bari Weiss is one of those rare podcasts that discusses important issues without biases. In this conversation, she spoke with Dr. Casey Means, a Stanford trained physician who left the traditional medical system behind to solve the one problem that she says is going to ruin us all: bad food.
74% of Americans today are either obese or overweight. And yet, we’re no longer talking about it. The national conversation around health and weight has turned away from things like good nutrition, weight loss and the importance of physical fitness, and instead adopted phrases like “fat acceptance” and “healthy at any size.” In some circles, there’s even blanket denial that there is anything unhealthy at all about being obese.
Her simple health recommendations:
Eat more unprocessed, real foods. Nothing in a package. Whole vegetables, fruits.
Move regularly throughout the day, rather than sitting all day, and one 45 min workout
Improve your sleep
Support your microbiome
I had shared this last week, but given it’s importance I have shared it again.
4. Thoughtful article by Mike O’Sullivan and Christos Cabolis titled: As we enter a new era of instability, we need new institutions. What should they look like?
Key bits, emphasis mine:
The Queen’s death reminds us that an era of stability has come decisively to an end. We are currently facing a number of global shocks—a sharp breakout in inflation and a corresponding rise in interest rates, a bloody war in Europe and rising tensions between China and the US, the two largest economies in the world. Longer-term issues such as climate change, declining productivity, rising indebtedness and extreme income and wealth inequalities in the wake of the financial crisis leave us in no doubt that the world has changed.
We now must focus attention on the institutional infrastructure required to marshal the world order of the 21st century. Many of the institutions that were established to mediate the post-World War Two order are now defunct. Even those that fulfilled the roles that were intended for them may now have nothing more to offer.
These institutions are now largely obsolete, and any debate that seeks to resurrect them is a waste of time. More effort should be spent on identifying the policy challenges of the 21st century and mapping out the institutions that can address them.
The new, multipolar world will be one dominated by at least three large regions—the US, the EU, China (the India-Dubai region is a potential fourth pole)—who do things increasingly distinctively, from their socio-economic models to internet regulation.
The needs and aims of these groups and nations, together with the ways in which they respond to new threats to security, will determine what the next set of institutions will look like and where they will be based. The new challenges of the future—climate change, potential energy shortages, and economic volatility, coupled with new technologies—will necessitate collaboration between them and other stakeholders, such as corporations. This will in turn demand global governance, new standards and regulation, and coordination through new institutional bodies. New world institutions or collaborative arrangements will need to be hammered out. What should they focus on and what might they look like?
5. Louis-Vincent Gave is the Founding Partner and CEO of GaveKal. He was on Ted Seides Capital Allocators discussing his perspective on the bear market and its transition of leadership from developed to emerging markets. They dove into the U.S. dollar, age of weaponization, deglobalization, China, and where to invest to weather the storm.
6. The Bridgewater conversation from October 7th with Daniel Yergin and Angela Stent (Senior Fellow at Brookings Institute) on the Ukraine War is worth watching.
7. This amazing Twitter thread did the rounds this week and its one to enjoy and even show to your kids. It shows a piece of art from each decade since 1300! And it's not country or region specific – its global.
B. Deep Survival
Survival is critical. In order to finish first, first you have to finish.
We all take risks for a living. Sometimes events go against us. How we act in those crucial moments is the difference between living and dying, between prospering and decaying.
Laurence Gonzales has written many books on survival, my favourite is titled: Deep Survival: Who Lives, Who Dies, and Why.
Laurence is the author of numerous books and has won many awards, including two National Magazine Awards and the Distinguished Service Award from the Society of Professional Journalists. In 2015 he received a Journalism Fellowship from the Santa Fe Institute and in 2016 was given an appointment as a Miller Scholar there.
Even if you aren’t going to be going to sky diving or climbing Mount Everest today, understanding risk and how to manage your own behaviour when things aren’t going your way is critical to finishing.
The big ideas I got from this book and how I applied them to investing:
Face Reality and Be Open To Change: Don’t pretend that bad things aren’t happening. It’s ok to be scared. All that matters is what you do next. Manage the fear. Live in the present moment, observe what is happening rather than what you wish was happening. Ignore past analogies or maps, sit in the present.
Translation: Mark to market your reality. Accept any mistakes you have made. Then pay attention to what’s working, where the opportunities are today and going forward.
Get Trained: Know how you need to behave when bad things happen. Build it into your emotional system rather than just relying on your “skills”. Have a plan, but be open to that plan changing. Turn that fear you feel into anger and focus.
Translation: Know your emotional reactions when your investments are falling in value, and have processes in place to survive it psychologically and not be a forced seller.
Don’t Give Up: Slow down, conserve energy. Ask what’s great about this problem? Believe you will get out of this.
Translation: Don’t be in a rush to react to the markets daily gyrations. Extend your time frame beyond the daily, weekly news cycle.
Here are some great tips for everyday life:
C. Charts That Make You Go…..
P.S. I am going to Barcelona early November for the Club B Annual Asset Allocation Conference. Are you coming?
Some humour before I go…..
George Noble on forward guidance is worth a listen