Best Of the Web
Howard Marks Investor Memo: ‘Is it different this time?’ Marks runs through nine popular memes in markets that capture the ‘this time is different mood’. These include, there doesn’t have to be a recession, fiscal deficits can grow without becoming problematic, and interest rates can remain lower for longer. Each of these he treats with due scepticism. For example, on low-interest rates, he argues that 2007 was a similar period to today and that then neutral rates were around 5% (what’s changed?). And what if inflation rises or deficits do start to finally matter. The common thread through all these memes is that they are optimistic. Marks argues that this mindset is historically related to periods of high investment risk. That translates to simple advice: it’s much better to buy when few people believe things will get better.
S&P 500 Buybacks Now Outpace All R&D Spending in the US.The numbers are in. US corporations spent $608bn on R&D in 2018, but a whopping $806bn on share buybacks. They’ve also been by far the biggest buyer of US stocks at $2.5 trillion over the past five years. Compare that to the next biggest at a paltry $0.22 trillion (US households). This comes at a time when US corporations have engaged in their largest expansion of debt on record. This loop of borrowing cheap to buy stocks does not augur well for the stability of asset markets.
Why aren’t oil markets reacting to the attacks on tankers in the Persian Gulf? A short and clear primer on what to know about the recent tensions. It argues that markets believe that the Strait of Hormuz will remain open. This is partly because recent attacks were on ships carrying cargo other than crude oil and also because the US military could easily intervene to secure the Strait if it was threatened. Despite this, insurance markets are reacting with premiums now twenty times their level before the attacks.
Modular construction: From projects to products.McKinsey report finds that offsite construction could be 20-50% faster than onsite construction. This new technology could dramatically improve productivity and significantly lower costs. It’s already used in Japan and Scandinavia and could spread to other countries including the US, especially as better designs and more varied materials become available. The sweet spot for adoption is where there is unmet housing demand and also labour shortages. On the macro level, given that construction/housing (along with medical and education costs) is one of the few areas of inflation, the adoption of modular construction could act as a new disinflationary force. Also worth listening to is this a16z podcast,Construction Under Tech,which gets into the nitty gritty of this subject.
Time-Series Signals and Multi-Sector Bonds.This follows on from last week’s analysis and finds that using factors such as carry, momentum, and valuation on a single asset doesn’t yield stable positive returns. This contrasts with the earlier analysis which showed there were stable positive returns if you use the signals on multiple assets and trade them against one another.
U.S. Demographics: Largest 5-year cohorts, and Ten most Common Ages in 2018 I didn’t realise this, but the prime working age population is now increasing. In terms of cohorts, in 2010, the largest age grouping was 45-49 years old, while today it is 25 to 29 years old. This should be positive for US economic growth and housing.
S&P 500 Earnings – Which Sector’s Growth Rates Have Seen Less Downward Pressure for Q2 ’19 S&P500 companies’ earnings growth is expected to be 12% in 2020 and that forecast hasn’t changed for over four months despite the escalation in the US-China trade war. The sectors which have had the most resilient growth expectations have been energy, financials, healthcare, communications, and utilities.