Mind-expanding links and reading for the weekend

  1. Scary Russia
  2. Why Return on Equity is so dangerous
  3. Watch my new Video Interview
  4. Anyone for a Bad ETF
  5. So which countries had a bumper 2021?
  6. The annual Dang Wang Letter and why you can overdo the services sneer
  7. More China: The world Turned Upside Down
  8. And now for some good news, from Future Crunch
  9. And finally…the end of the world …. Yes, Soylent Green is here – not
  10. Educational reading for the weekend – Passive Funds Won’t Destroy Efficient Markets


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Scary Russia

Washington State, USA. Captive

I think we’re all getting used to the idea that Russia may be an increasing problem for Europeans but the linked article from Desk-Russie.eu by Francoise Thorn might just scare the living daylights out of readers. It’s basically saying that the Russians have put a gun to the head of NATO and want to destroy it in 2022. I’m not sure I entirely buy its hawkish tone (and boy am I a hawk) but here’s the key insight:

“The Russian blackmail is explicit and is directed at both the Americans and the Europeans. If the West does not accept the Russian ultimatum, they will have to face “a military and technical alternative”, according to Deputy Foreign Minister Alexander Grushko: “The Europeans must also think about whether they want to avoid making their continent the scene of a military confrontation. They have a choice. Either they take seriously what is put on the table, or they face a military-technical alternative.”

Happy new year everyone in Western Europe!


Why Return on Equity is so dangerous

In my Monday Macro rundown, I mentioned the excellent interview between Noah Smith and logistics expert when Ryan Petersen, the founder and CEO of the supply chain software company Flexport. Its well worth a proper weekend read but here’s perhaps the most interesting bit for me. Noah Smith asks Petersen what are the big policy changes needed but Petersen chooses to nail the culture of short-termism in investing.

“ In my opinion, what’s caused all the supply chain bottlenecks is modern finance’s obsession with Return on Equity (ROE). To show great ROE, almost every CEO stripped their company of all but the bare minimum of assets. “Just-in-time” everything with no excess capacity, no strategic reserves, no cash on the balance sheet and minimal investment in R&D. We stripped the shock absorbers out of the economy in pursuit of better short-term metrics. Large businesses are supposed to be more stable and resilient than small ones, and an economy built around giant corporations like America’s should be more resilient to shocks. However, the obsession with ROE means that no company was prepared for the inevitable hundred-year storms. Now as we’re facing a hundred-year storm of demand, our infrastructure simply can’t keep up…..Most global logistics companies have no excess capacity, there are no reserves of chassis, no extra shipping containers, no extra yard space, no extra warehouse capacity. Brands have no extra inventory and manufacturers don’t keep any extra components or raw materials on hand.”

Although I’m deeply cynical about ESG investing, one of the positive side effects of the movement may be to focus attention on long-term sustainability of corporates and how they manage not only their workforce but also their capex plans and their environmental footprint. This might in turn produce a new less short termist mindset that goes alongside a reset towards quality investing. And pigs may fly…

Watch my new Video Interview

My colleagues at Doceo – a UK based video content business aimed at funds – have just released a cracking interview with ben Rogoff the highly opinionated manager of the successful Polar Capital technology Investment Trust. I’ve known ben for many years and he’s incredibly knowledgeable about tech investing, so its really worth listening in to why he thinks the meta verse for instance is a big opportunity. Hear Ben’s quick fire views on electric vehicle winners and losers, artificial intelligence, robotics, space investing and much more. We even pioneer my first ever Tech Bingo !!

Anyway, here’s the video – https://doceo.tv/doceo-view/the-big-picture/episodes/1/ben-rogoff-polar-capital-technology-trust

Anyone for a Bad ETF?

You’ve got to hand it to US exchange traded fund issuers. They come up with some cracking ideas. My current fvaourite is a brand new ETf called the BAD ETF. BAD aims to capture areas of growth the market may be shunning most. The ETF will track companies that make most of their cash from selling alcohol or cannabis, casinos or gaming, and developing pharmaceutical products. Basically, it’s another take on the Sin stock idea, which is not a terrible idea ….you can read more about it HERE at Bloomberg.

So which countries had a bumper 2021?

Tis the time for enormous annual financial data dumps. Analysts at S&P Dow Jones last week released their annual dump of underlying data on their array of major benchmark indices. I’ll be returning to the report over the next few weeks – the data on long term returns by sector is fascinating.

The table below has the data. I have to say I wasn’t surprised that the petro states such as the UAE and Saudi did well but how the hell did the Czech Republic manage to score a 43.7% gain? Also, that’s an epic 84% gain since the pandemic first broke in 2020!!!

And what’s with those Indians and their number four slot on a 30% gain. And the bloody Dutch, all smug at number six with a 26% gain. At least the US is in the top ten (best not mention the UK).

S&P Global Broad Market Index(BMI) Global 31/12/2021
$ market cap billion BMI MEMBER FROM 11/3/2020 1-MONTH YTD
$81 U.A.E. 63.79% 0.77% 45.01%
$12 Czech Republic 84.32% 11.99% 43.70%
$291 Saudi Arabia 43.16% 4.81% 31.25%
$1,397 India 56.76% 3.84% 30.11%
$66 Kuwait 30.40% 3.68% 27.54%
$970 Netherlands 48.92% 3.16% 26.58%
$1,535 Taiwan 48.62% 5.29% 26.28%
$48,478 United States 40.73% 3.74% 24.22%
$2,418 Canada 38.63% 4.15% 22.68%
$80 Austria 58.69% 5.97% 22.11%
$240 Israel 42.74% 4.10% 19.83%
$73,984 Developed 35.69% 4.08% 18.37%


In amongst the wad of S&P Dow Jones data, there’s also some fascinating side notes:

o   Credit card applications rose for the year ending in October 2021, as an estimated 27% of U.S. consumers applied for a (new or another) card, compared to 16% for the prior one-year period.  Consumer spending has been the backbone of the recovery (and record sales and profits).

o   The American Council of Life Insurers said death benefit payments jumped 15% last year (2020, USD 90.4 billion), biggest increase since 1918 flu epidemic, as the report cited COVID-19.

o   Of note, the U.S. population grew 0.1% over the 12 months ending June 2021, as low birth rates and COVID deaths were cited.

o   The U.S. Center for Disease Control and Prevention said U.S. life expectation in 2020 declined 1.8 years, to 77 (the largest drop since the 2.9 year decline to 63.3 in 1943), as COVID was the third leading cause of death (heart disease is first, then cancer).  Life expectancy for men declined to 74.2 years from 76.3, as female expectancy declined to 79.9 from 81.4 years.

The annual Dang Wang Letter and why you can overdo the services sneer

China based analyst Dan Wang’s long letter’s have achieved cult status. The Gavekal Research expert spends an age building up these erudite letters, dragging in his perspectives on everything from Mozart through to the Chinese Communist Party. He’s careful to be a realist whilst also providing valuable, optimistic insights into the particulars of the Chinese state. His discussion this year of the differences of policy and attitude between Beijing, Shanghai and the southern cities including Hong Kong is fascinating. is discussion You can read the whole letter HERE – beware, it’ll take the weekend!

Perhaps the most obvious bias in his reports is that wang thinks major powers need a massive strategic focus on industrial and manufacturing policy – and success. Everything else is just flimflam. He repeats his observation from last year:

“With its emphasis on manufacturing, (China) cannot be like the UK, which is so successful in the sounding-clever industries—television, journalism, finance, and universities—while seeing a falling share of R&D intensity and a global loss of standing among its largest firms.” The Chinese leadership looks more longingly at Germany, with its high level of manufacturing backed by industry-leading Mittelstand firms. Thus, Beijing prefers that the best talent in the country work in manufacturing sectors rather than consumer internet and finance

I’m sort of ambivalent about Wang’s industrial bias. I entirely see why he takes this view for a huge strategic view for a huge superpower with over 1 billion people. I also agree that the UK need a more thought through industrial policy that will see us rebuild a few of our industries. But I’m not entirely sure that the deal we have is that bad. Higher education, finance, culture, professionals services – these and many more export oriented sectors employ vast numbers of people and don’t produce huge emissions. They also produce inequalities of income between people and regions but they’re not to be sneered at.

More China: The World Turned Upside Down

Sticking with China, I can’t help but pass on the comment below from a book called The World Turned Upside Down by the wonderful Yang Jisheng who also produced the classic book on the Great Leap Forward. It’s a massive door stopper of a book but its also the essential forensic analysis of what went so terribly wrong with the Chinese Cultural Revolution. Read it and realise why people like me have such a deep seated hatred of all things Marxist related. The gibberish these viscous revolutionaries came up with is simply astounding. The stand out line for me is below from a character called Cai, who was shot in the revolution :

“The experience of socialism in China proves that private assets are the economic basis of human freedom. Once personal assets disappear, personal freedom completely disappears with it; when the system of private ownership is completely abolished, personal freedom also completely disappears.’

I think socialists the world over might want to take note – destroy private property and you destroy people.

And now for some good news, from Future Crunch

I’m a huge fan of the Australian weekly publication Future Crunch. Subscribe if you haven’t. It’s a round up of all the amazing stories from around the world about how solid progress is being made on everything from human rights through to the environment. Every year they put together a compendium of the 99 best news stories available HERE.  As something of a marine conservationist freak, the following section stood out for me:

Two conservation stories in particular should really have received more coverage this year. September saw the creation of the North-Atlantic Current and Evlanov Sea Basin, a vast, protected area off the south west coast of Ireland, and then in October we got news of the new Eastern Tropical Pacific Marine Corridor, a mega-MPA linking the waters of Ecuador, Colombia, Panama and Costa Rica, and containing some of the richest pockets of ocean biodiversity on the planet, including the Galapagos Islands. Together, these two protected areas cover more than a million km² of ocean.”

And finally…the end of the world …. Yes, Soylent Green is here – not

It’s 2022 and it’s the year Soylent Green was set in. Yes, the Charlton Heston sci fi classic (directed by Richard Fleisher from memory). Its one oy my favourite end of the world tales where all the oldies are turned into little green biscuits. The good news is that the world doesn’t look remotely like Soylent Green. Youtube has a fun documentary about the film HERE

Educational reading for the weekend – Passive Funds Won’t Destroy Efficient Markets

Every week my plan is to try and sneak in some useful educational notes for private investors. This week I’ve got a section about why ETFs are not dangerous weapons of mass financial destruction and why they won’t destroy moderately efficient markets.

“ Inigo Fraser-Jenkins, an analyst at Bernstein, made a splash last year when he argued that “passive investing is worse than Marxism.” His argument was that a largely passive stock market will no longer be able to allocate resources sensibly, so we’d be better off with a communist central planner making those decisions.

It’s an interesting argument, but we think it’s wrong. Even though money will continue to shift into passive investments for some time to come, we doubt that markets will be significantly less efficient than they are now.

What are efficient markets anyway?

Before we go any further, let’s quickly clarify what efficient markets are. The efficient market hypothesis (EMH) says that a company’s share price should represent all the information and analysis that is available for that stock at any one time. If new information comes to light, then the share price should change.

The rise of the EMH is one factor behind the huge growth in passive investing. If markets are 100% efficient, it should be impossible to beat the market, and if it’s impossible to beat the market, you might as well invest in plain vanilla passive funds that allocate money on the basis of company market caps.

But if the whole market is held by passive investors, how can new information be incorporated into share prices?

For the market mechanism to work, you need investors who respond to new information and who are also analysing a company in depth and looking for new information and insights.

This would be a valid concern if there was any likelihood of the whole market, or nearly the whole market becoming passive. But we don’t think that’s ever going to happen. For starters, the market is more active than you might think. Index funds, including passive ETFs, still represent less than 20% of global equities, according to BlackRock. What’s more, we shouldn’t forget that a large proportion of equities aren’t held by fund managers whether active or passive. Stocks are also held by pension funds, insurance companies, direct retail investors, and other companies with stakes in a business.

We also shouldn’t forget the dividing line between passive and active is a bit blurry. Passive isn’t just about investing in a fund tracking the FTSE 100 or S&P anymore. Strictly speaking, smart beta funds are passive not active because the stocks are still selected according to a rules-based process, but they feel more active than a Footsie tracker. And even if your portfolio is wholly comprised of passive ETFs, your overall asset allocation decisions – which markets to invest in – are still active.

Perhaps more importantly, if we do ever get to a stage where 70% of the market is passive, that should offer exciting opportunities for active investors. If 70% of money is just following existing market caps, it’ll be easy to spot companies that are clearly under-valued – paying high yields or trading on low price/earnings ratios even though profits are growing fast.

Because of that, we’re fairly convinced that a self-correcting mechanism will kick in if passive investing truly starts to dominate the market. That self-correcting process might take a while and you might argue that such a market – where it takes a while for share prices to react to circumstances – wouldn’t be truly efficient. And that’s fair comment. But we’d argue that even the S&P500 isn’t 100% efficient now, and anyway, the self-correcting mechanism we’ve described should at least mean that the market will allocate resources more effectively than Marxist central planners.