The end of TINA
Forecasting, peak ESG, active performance, the merge, the future of events and the only prediction we all care about right now ...
Hi folks,
We go from La Rentrée to déjà vu as we find that stocks are down on expectations of higher rates, yet again in 2022. A lot of brain cells have already got burnt up talking the Fed and BoE decisions this week. The Fed came in as expected (and you already know that don’t you), but the work was done in the month before as the world sussed out central bank vibes, worried about inflation data and adjusted to yet more higher rates. The BoE decision was pending at the time of writing.
New expression just dropped - lolsobbing (as in, "I'm literally lolsobbing at that right now"). How did I only just hear this ??!
Inflation nation. Podcast. Mary and I are back with a new season and we're tackling the biggest question of the moment - what does higher inflation really mean, and is it still being underappreciated? (web | apple)
Let's dive in.
But first … the markets mumble
The era of "There is no alternative [to stocks]" (TINA) is officially over, central banks have said so. You can now get great returns investing in government and high quality corporate bonds, for example high quality corporate bonds now yield 6%+. Not long ago you'd have needed to be in emerging market stocks for those sort of returns. There are alternatives to stocks for investors now, and that, surely is a good thing.
So what are we calling this chart - a halfpipe? the wall? a watershed? the channel? the box? Answers on a postcard
It's UK 1-year rates and it ... well, you can see for yourself. Financial markets are now expecting UK rates to get to 4.5% in May 2023 and stay there. Rates are expected to peak at a similar level in the US. One word: mortgages.
John Authers shared this chart in his excellent daily newsletter today, well worth reading for more on the Fed’s decision.
And there's sterling, the fall in purchasing power of the pound over the last 15 years is quite ... a lot. But of course other comparable currencies, like Bitcoin, are down even more. So there's that.
Global stock markets are back at their lows (~ 20% down - it's a psychological level, you know) for the year. Your growthy stuff is down a bit more, but really it’s a one-factor market. Note the difference between market returns in $ and £.
Bonds are hitting new lows, and your index linked gilts are kind of the Nasdaq of the bond world right now.
That's that. Now let's zoom out.
3 things I'm reading.
The 3 most important forces shaping the world - Morgan Housel (blog)
What's he saying: The world is driven by tail events. A minority of things drive the majority of outcomes. It’s one of the most important concepts in investing. But most of what you are paying attention to right now doesn't matter
“World War II, World War I, and the Great Depression influenced nearly every important event of the 20th century. Industrialization and the Civil War did the same in the 19th.”
The bottom line: We’re apt to focus on all the wrong things. Demographics, inequality, and information access will have a huge impact on the coming decades (says Morgan). “How those Big Things end is a story yet to be told. But when it’s told we’ll have a better idea of where it began.”
Forecasting and The Illusion of Knowledge - Howard Marks (memo)
The bottom line: Most forecasts are not valuable, that's because most forecasts are really extrapolations, which are usually right, but not valuable (consensus). Divergence forecasts rarely get made, are usually wrong (but are valuable when made and when made right). So forecasts are rarely both correct and valuable.
So what? "We may not know where we're going, but we sure as hell should know where we stand" » maybe sometimes a nowcast is better than a forecast.
Key lessons: Don't hold your views too strongly - have opinions but don't go too heavily on them. assume the future is broadly like the past and that it's hard to foresee the divergences. Focus on not being wrong rather than being right.
The podcast - behind the memo - where Howard discusses the memo is worth a listen (apple)
There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.
– John Kenneth Galbraith
The end of ESG - (Alex Edmans paper)
Our favourite business academic is out with a new paper, calling peak ESG. But not in a "bad" way, Edman's core point is that ESG analysis is shifting from a niche activity to mainstream...
In a nutshell: Edmans reckons that ESG is no different to other long term intangible value drivers in a business such as management quality or culture. And so it is both incredibly important and nothing special. Implications: do focus on ESG issues where these are material to a business (eg emissions for energy firms), and don't sweat the differences in ratings. Don't: go further than you would or prioritise ESG above other long term drivers of intangible value like management quality, culture and innovation.
Lots to like here, Alex is incredibly thoughtful, and it's hard to disagree with much he says. If you are at all interested in the subject this is worth reading in full.
Yes but, I'm not quite sure this reconciles the systemic sustainbility issues. Universal owners exist and they do care about the impact of externalities on the financial value of the rest of their portfolio beyond the single stock perspective.
Two things I'm listening to
Has active management had a good year? (Trillions podcast - the active vs passive scorecard (web | apple )
In short, not especially, and there's no change to the long-term perspective that only about 10% of active managers outperform. But there's some worthwhile discussion here reframing the debate away from active vs passive and toward active share/conviction (more active vs benchmark huggers) and also on fixed income where the outperformance data I've always thought has been problematic.
The Ethereum merge - [Babbage and oddlots podcast]
Depending on your information bubble you've either heard way too much about the merge or nothing at all.
Merge, say what now? By now you know that cryptos generally required folks to spend exorbitant amounts of energy solving maths problems - akin to a medium sized country for each chain. Now, the world's second largest blockchain - Ethereum has changed their approach, reducing energy use by over 99%.
How? It all comes down to how participants are selected to validate the latest transactions. Under the old model ("proof of work") machines competed to solve maths problems to earn that right (and get granted a coin). The new "proof of stake" approach randomly selects user who have to make a "safety deposit" to keep them honest which can be confiscated if they make a dodgy entry.
Does it matter? One of the big blockers of wider crypto adoption in investment was worries about its carbon footprint, which this starts to overcome. However that isn't the only blocker by any means and of course crypto assets generally are in a monster bear market (bitcoin and ether are both around 70% downfrom their highs).
Ethereum matters because one of the innovations when it was created was the ability to add lines of code into the blockchain paving the way for smart contracts. A lot of applications have since been built on the ethereum blockchain (admittedly none have yet changed the world, but still).
Yes but. It doesn't solve all the issues, far from it. Scalability is still a big problem on ethereum (the number of transactions that can be processed per second is very small), and this doesn't directly address it. There's also something complicated called "sharding" (careful, that’s with a "d") ... Finally the concern is that large holders of ethereum, like Coinbase, an exchange, could end up in a dominant position.
So, did it work? Here's Vitalik Buterin
The bottom line - my dream is to launch a restaurant called "Proof of steak".
Grab bag.
Has Rithotz wealth management just shown us what the future of investment conferences looks like? Future proof festival
I've long thought we need to move past the grubby pay-to-play conference model that serves up limp, empty salespitches to be endured and immediately forgotten in soporific, dark auditoriums (or worse) gaudy hotel ballrooms. The team at Ritholtz wealth point the way to the future of content, in my view (independent, no nonsense and salespitch-free), so maybe they are on to something. Californian weather helps though, of course.
Who will win the mens football world cup? IT'S THE FORECAST WE ALL NEED RIGHT NOW A forecaster boasting a 100% track record - Joachim Klement - offers some insight and highly specific predictions [paper]
Y’all just want to know who’s going to win don’t you? Ok then. He has Argentina beating England in the final. I’m not lolsobbing, you’re lolsobbing …
One thing to brighten your day.
Bad news for tennis fans last week, but maybe it means more scope for pics of the Fed hiking …. ?
Have a great week all. If you enjoyed this why not recommend to a colleague!