Q1 - 2023
@January 4, 2023
“Most investors believe, rather than marking the start of a new regime, last year’s shifts in inflation and interest rates were an aberration and markets and the economy will soon return to the pre-pandemic paradigm.”
Mr. Market May Be In Denial Over The Shift In Interest Rates
They say there are five stages of grief; the same might be said about bear markets as investors typically go through a similar process beginning with denial. In this regard, the biggest development seen in the markets during 2022 was the breakout higher in interest rates driven by the return of inflation.
Q4 - 2022
@December 21, 2022
The next big thing in 2023 will be rapid resets of companies to eliminate organizational debt and compete with startups.
Coming off a decade of excess, where the easiest way to acquire customers and scale organizations was the throw more money and people at the problem, the world is left with countless bloated organizations, redundant teams, and extraneous processes. But today's economic woes are a much needed forcing function. We're departing the "carbs era," where we satiated our needs with the quick but fleeting benefits of carbs, and entering the "muscle era," where we must solve problems by refactoring how we work and building a more resilient and capable team. Resourcefulness outperforms resources, but only when you're forced to do so.
We're starting to see this happen. The case study of a century is Twitter. While I have a lot of empathy for those afflicted and don't identify with the process, I am fascinated by the impact of collapsing the stack of an organization. What happens when you remove multiple levels of managers and bring everyone doing the work closer together. Do you regain the agility of startups? Do you shed, in an instant, years of "organizational debt" that restrains a product's potential? Organizational debt is the accumulation of decisions that should have been made but weren’t, and the people and processes that have become outdated or redundant yet remain. I suspect we'll see more bold resets of companies around the world, reimagined for a world where most functions can be automated and process management is better accomplished with a stack of SaaS products than legions of people.
The next big thing in 2023 is the separation of great management teams and everyone else. 2023 and even 2024 seem to be likely hard years to navigate. Investors pay high prices for growth stage tech given the implicit agreement that when companies get to massive scale, and are semi-monopolistic in nature, they produce lots of profits, or when the economy turns, managers can pivot their companies to profitability. This will necessarily imply tough decisions, disciplined capital allocations and creative problem solving. 2023 will be the year where the great managers show their greatness.
- Ram Parameswaran, Founder at Octahedron Capital
The next big thing in 2023 will be meaningful dispersion in software valuations. This down market will really show us which software companies are more secular (mission critical) vs more cyclical in nature. The former will show more resiliency and see a meaningful, sustained, valuation premium than the latter.
-Jamin Ball, Partner at Altimeter Capital
The next big thing in 2023 will be primary life fundamentals taking center stage. Primary life fundamentals (think: personal well-being, financial stability, community and belonging, environmental safety) are seemingly obvious components of life, but that’s just the problem — they are increasingly scarce and unreliable, with legacy systems that are woefully insufficient for today’s more dynamic society. Fundamentals have become luxuries. We see an enormous opportunity in the entrepreneurs helping rebuild these core life foundations.
- Kirsten Green, Founder & Managing Partner at Forerunner Ventures
The next big thing in 2023 (at least one can hope) will be a return to humility in the startup world. If there is anything that we learned in 2022, it's that hype can be very shallow and true substance can be hard to come by.
- Mary Ann Azevedo, Senior Reporter at TechCrunch
The next big thing in 2023 will be the realization that some 'regretted attrition' (what we typically call high performers who leave your company) is ok. Determining new work practices coming out of peak pandemic has been a challenge for many organizations and they risk underperforming as a result. No one solution to 'remote' vs 'hybrid' vs 'in-office' will make every employee happy. Instead CEOs will have to embrace a decision about how they want to best run their companies which is stage and situation appropriate. And then deal with the fact that some folks will leave as a result. It's ok, there are equally talented people at other companies who prefer what you are offering. Yes, I see plenty of people who prefer 'in-office' - specifically many early career engineers in major cities.
CEOs should be communicative, empathetic, and provide their leaders with the guidance and resources to be successful in new models. But 2023 will be the year that each company figures out what working style is right for them and lets the chips fall.
- Hunter Walk, Co-Founder & Partner at Homebrew
The next big thing in 2023 will be the shifting of work culture. In the face of market and economic pressures, we will return to a time where outworking creates advantage. Some will resist this and not do it but many will view it as a potential advantage. This means an office-first culture--probably not an office-only culture but a value on in person, dedicated work and time together with team mates vs remote-first. The shift in talent accessibility will further this as it becomes slightly easier to get great talent in hubs.
- Rebecca Kaden, General Partner at USV
The next big thing in 2023 will be employers prioritizing internal talent mobility in a world where people are hiring less and focusing on retention. The research shows that the most effective skill training happens on the job and as employers move away from degrees to focus on skills-based hiring, the power of L&D leaders will grow and job-embedded workforce development initiatives will be prioritized to drive promotions, a raise, or a new challenge for employees. Also, job-embedded education drives the cost of education down to zero for the employees which is important to keep in mind (similar to a nurse getting their entire education paid for from CNA all the way to a masters degree while working). While apprenticeships are helpful, most of these initiatives are low volume/expensive and employers are increasingly seeking workforce development initiatives at scale that can help thousands of people at scale on an annual basis with clear ROI that saves time and money for staff that is administering the program.
- Ruben Harris, Co-Founder & CEO at Career Karma
The next big thing in 2023 will be shifts in learning. Despite behavioral bumpiness coming out of COVID, we will see a continued shift towards learners and families wanting a stronger say in how learning happens versus the old school defaults. Learning will continue to unbundle into its parts--content, outcomes, social, etc--with big direct to learner opportunities across them emerging.
- Rebecca Kaden, General Partner at USV
@December 19, 2022
In the run since the Industrial Revolution, the system we’ve invented is now remarkably detached from the collective intelligence that solving the polycrisis will require. Institutions compete in a world of multipolar traps, where the benefit of the species as a whole is rarely the stated objective and often is shuffled aside, in favor of the success of the institution itself.
Institutional Failure: A Future of Finance Worldview
A week or so ago, I laid out some preliminary thoughts on the agenda for the conference we're hosting in Miami Beach, Florida, on February 5th-8th. (You should come! It's going to be swell.) One of the sessions I'm hosting is a 100-minute block of content on the future of finance.
@December 15, 2022
2023 Outlook Q&A: Get Fully Invested Now
@December 12, 2022
The factual case for fossil fuels
In my previous wire ( How we've prepared for the next bust, 28 November), I noted that recessions can have salutary effects: they usually damage and sometimes destroy the "conventional wisdom" which inflates the boom and bull market - and later collapses into bust and bear market.
@December 13, 2022
We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets. Lenders and bargain hunters face much better prospects in this changed environment than they did in 2009-21. And importantly, if you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead.
That’s the sea change I’m talking about.
sea change (idiom): a complete transformation, a radical change of direction in attitude, goals . . . ( Grammarist) In my 53 years in the investment world, I've seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes.
@December 8, 2022
Explosion in demand was chasing a paucity of supply. Consumers had cash to burn, but producers and service providers lacked capacity. The result was an inflation cycle the likes of which we have not seen since the 1970s. This is the reality that we are still being forced to accept 30+ months later as we come to the end of 2022.
- Passive investing is going to become an increasingly risky strategy. This is because we are entering a much more politically interventionist period now that central banks are largely hamstrung by inflation.
- There is still work to be done in containing inflation. It might be easier to see inflation drop to 4%-5% from base effects and supply issues abating, but getting to 2% is going to be challenging with a tight labor market and 5% wage growth.
- The post COVID-19 consumer spending has depleted much of the excess savings, which means future spending will have to rely more upon debt.
"The Third Phase"- Tom Pence's Annual Investment Strategy Letter.
If the chaos of 2022 has a single over-arching theme, it's that "reality bites." It is our expectation that this will continue to be something that must be confronted by both capital markets and central banks into 2023 and beyond.
@November 30, 2022
The Coppock Curve (sometimes called the Coppock Guide) really shines in helping long-term investors determine when it is an opportune time to get aggressive in the equity market.
Who Says 'You Can't Time The Market'?
It's popular on Wall Street to say, "you can't time the market." However, just because most people are bad at it doesn't mean the tools don't exist to do it fairly well. In fact, there is one market timing tool in particular that long-term investors should pay close attention to and that is the Coppock Curve.
@November 20, 2022
Intangible assets may have previously been an obscure footnote in corporate balance sheets, they now influence markets in key areas like valuation, corporate earnings and the value versus growth paradigm.
How Intangible Assets Shape Markets
Today's newsletter is sponsored by Daloopa You don't have to be an investment analyst to know that data entry sucks. If you are an investment analyst, however, meet Daloopa. Daloopa offers historical data on 3,000+ public companies from all publicly
@November 16, 2022
Trend-Following Is Back, With Some New Enhancements
“After a strong period of performance for trend following, many are worried that they will be “late to the trade” and recent performance will reverse. Based on the likelihood for macro volatility to persist and the current economic backdrop supporting the persistence of large market moves, we think there is a reasonable chance that strong trend-following returns continue.”
@October 14, 2022
Russell Napier: We Will See the Return of Capital Investment on a Massive Scale
Russell Napier: The world will experience a capex boom
Deutsche Version Russell Napier has never been one of the eternal inflation warners. On the contrary: The market strategist and historian, who experienced the Asian Financial Crisis 25 years ago at first hand at the brokerage house CLSA in Hong Kong, wrote for years about the deflationary power of the globalised world economy.
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.
Why is this shift happening?
The main reason is that our debt levels have simply grown too high. Total private and public sector debt in the US is at 290% of GDP. It’s at a whopping 371% in France and above 250% in many other Western economies, including Japan. The Great Recession of 2008 has already made clear to us that this level of debt was way too high.
Back in 2008, the world economy came to the brink of a deflationary debt liquidation, where the entire system was at risk crashing down. We’ve known that for years. We can’t stand normal, necessary recessions anymore without fearing a collapse of the system. So the level of debt – private and public – to GDP has to come down, and the easiest way to do that is by increasing the growth rate of nominal GDP. That was the way it was done in the decades after World War II.
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.
You mean there is always going to be another emergency?
Exactly, which means governments won’t retreat from these policies. Just to give you some statistics on bank loans to corporates within the European Union since February 2020: Out of all the new loans in Germany, 40% are guaranteed by the government. In France, it’s 70% of all new loans, and in Italy it’s over 100%, because they migrate old maturing credit to new, government-guaranteed schemes. Just recently, Germany has come up with a huge new guarantee scheme to cover the effects of the energy crisis. This is the new normal. For the government, credit guarantees are like the magic money tree: the closest thing to free money. They don’t have to issue more government debt, they don’t need to raise taxes, they just issue credit guarantees to the commercial banks.
And by controlling the growth of credit, governments gain an easy way to control and steer the economy?
It’s easy for them in the way that credit guarantees are only a contingent liability on the balance sheet of the state. By telling banks how and where to grant guaranteed loans, governments can direct investment where they want it to, be it energy, projects aimed at reducing inequality, or general investments to combat climate change. By guiding the growth of credit and therefore the growth of money, they can control the nominal growth of the economy.
And given that nominal growth consists of real growth plus inflation, the easiest way to do this is through higher inflation?
Yes. Engineering a higher nominal GDP growth through a higher structural level of inflation is a proven way to get rid of high levels of debt. That’s exactly how many countries, including the US and the UK, got rid of their debt after World War II. Of course nobody will ever say this officially, and most politicians are probably not even aware of this, but pushing nominal growth through a higher dose of inflation is the desired outcome here. Don’t forget that in many Western economies, total debt to GDP is considerably higher today than it was even after World War II.
What level of inflation would do the trick?
I think we’ll see consumer price inflation settling into a range between 4 and 6%. Without the energy shock, we would probably be there now. Why 4 to 6%? Because it has to be a level that the government can get away with. Financial repression means stealing money from savers and old people slowly. The slow part is important in order for the pain not to become too apparent. We’re already seeing respected economists and central bankers arguing that inflation should indeed be allowed at a higher level than the 2% target they set in the past. Our frame of reference is already shifting up.
Yet at the same time, central banks have turned very hawkish in their fight against inflation. How does that square?
We today have a disconnect between the hawkish rhetorics of central banks and the actions of governments. Monetary policy is trying to hit the brakes hard, while fiscal policy tries to mitigate the effects of rising prices through vast payouts. An example: When the German government introduced a €200 bn scheme to protect households and industry from rising energy prices, they’re creating a fiscal stimulus at the same time as the ECB is trying to rein in their monetary policy.
The government. Did Berlin ask the ECB whether they can create a rescue package? Did any other government ask? No. This is considered emergency finance. No government is asking for permission from the central bank to introduce loan guarantees. They just do it.
You’re saying that central banks are powerless?
They’re impotent. This is a shift of power that cannot be underestimated. Our whole economic system of the past 40 years was built on the assumption that the growth of credit and therefore broad money in the economy was controlled through the level of interest rates – and that central banks controlled interest rates. But now, when governments take control of private credit creation through the banking system by guaranteeing loans, central banks are pushed out of their role. There’s another way of looking at today’s loud, hawkish rhetoric by central banks: Teddy Roosevelt once said that, in terms of foreign policy, one should speak softly and carry a big stick. What does it tell you when central banks speak loudly? Perhaps that they’re not carrying a big stick anymore.
Would that apply to all Western central banks?
Certainly to the ECB and definitely to the Bank of England and the Bank of Japan. These countries are already well on their path to financial repression. It will happen in the US, too, but we have a lag there – which is why the dollar is rising so sharply. Investment money flows from Europe and Japan towards America. But there will come a point where it will be too much for the US as well. Watch the level of bond yields. There is a level of bond yields that is just unacceptable for the US, because it would hurt the economy too much. My argument for the past two years was that Europe can’t let rates go up, not even from current levels. The private sector debt service ratio in France is 20%, in Belgium and the Netherlands it’s even higher. It’s 11% in Germany and about 13% in the US. With rising interest rates, it won’t take long until there will be serious pain. So it’s just a matter of time before we all get there, but Europe is at the forefront.
Walk us through how this will play out.
First, governments directly interfere in the banking sector. By issuing credit guarantees, they effectively take control of the creation of broad money and steer investment where they want it to. Then, the government would aim for a consistently high growth rate of money, but not too high. Again, history shows us the pattern: The UK had five big banks after World War II, and at the beginning of each year the government would tell them by what percentage rate their balance sheet should grow that year. By doing this, you can set the growth rate of broad money and nominal GDP. And if you know that your economy is capable of, say, 2% real growth, you know the rest would be filled by inflation. As a third prerequisite you need a domestic investor base that is captured by the regulatory framework and has to buy your government bonds, regardless of their yield. This way, you prevent bond yields from rising above the rate of inflation. All this is in place today, as many insurance companies and pension funds have no choice but to buy government bonds.
You make it sound easy: The government just has to engineer a level of nominal growth and of inflation that is consistently somewhat higher than interest rates in order to shrink the debt to GDP ratio.
Again, this is how it was done after World War II. The crucial thing is that we are moving from a mechanism where bank credit is controlled by interest rates to a quantitative mechanism that is politicised. This is the politicisation of credit.
What tells you that this is in fact happening today?
When I see that we are headed into a significant growth slowdown, even a recession, and bank credit is still growing. The classic definition of a banker used to be that he lends you an umbrella but would take it away at the first sight of rain. Not this time. Banks keep lending, they even reduce their provisions for bad debt. The CFO of Commerzbank was asked about this fact in July, and she said that the government would not allow large debtors to fail. That, to me, was a transformational statement. If you are a banker who believes in private sector credit risk, you stop lending when the economy is headed into a recession. But if you are a banker who believes in government guarantees, you keep lending. This is happening today. Banks keep lending, and nominal GDP will keep growing. That’s why, in nominal terms, we won’t see an economic contraction.
Won’t there come a point where the famed bond market vigilantes would step in and demand significantly higher yields on government bonds?
I doubt it. First, we already have a captured investor base that just has to buy government bonds. And if push comes to shove, the central bank would step in and prevent yields from rising higher, with the ultimate policy being overt or covert yield curve control.
What if central banks don’t want to play along and try to regain control over the creation of money?
They could, but in order to do that, they would really have to go to war with their own government. This will be very hard, because the politicians in government will say they are elected to pursue these policies. They are elected to keep energy prices down, elected to fight climate change, elected to invest in defence and to reduce inequality. Arthur Burns, who was the Fed chairman during the Seventies, explained in a speech in 1979 why he lost control of inflation. There was an elected government, he said, elected to fight a war in Vietnam, elected to reduce inequality through Lyndon B. Johnson’s Great Society programs. Burns said it wasn’t his job to stop the war or the Great Society programs. These were political choices.
And you say it’s similar today?
Yes. People are screaming for energy relief, they want defence from Putin, they want to do something against climate change. People want that, and elected governments claim to follow the will of the people. No central banker will oppose that. After all, many of the things that are associated with financial repression will be quite popular.
How do you mean that?
Remember I said that financial repression means engineering an inflation rate in the area of 4 to 6% and thereby achieving a nominal GDP growth rate of, say, 6 to 8%, while interest rates are kept at a lower level. Savers won’t like it, but debtors and young people will. People’s wages will rise. Financial repression moves wealth from savers to debtors, and from old to young people. It will allow a lot of investment directed into things that people care about. Just imagine what will happen when we decide to break free from our one-sided addiction of having pretty much everything we consume produced in China. This will mean a huge homeshoring or friendshoring boom, capital investment on a massive scale into the reindustrialisation of our own economies. Well, maybe not so much in Switzerland, but a lot of production could move back to Europe, to Mexico, to the US, even to the UK. We have not had a capex boom since 1994, when China devalued its currency.
So we’re only at the start of this process?
Absolutely. I think we’ll need at least 15 years of government-directed investment and financial repression. Average total debt to GDP is at 300% today. You’ll want to see it down to 200% or less.
What’s the endgame of this process, then?
We saw the endgame before, and that was the stagflation of the 1970s, when we had high inflation in combination with high unemployment.
People are already talking about stagflation today.
That’s utter nonsense. They see high inflation and a slowing economy and think that’s stagflation. This is wrong. Stagflation is the combination of high inflation and high unemployment. That’s not what we have today, as we have record low unemployment. You get stagflation after years of badly misallocated capital, which tends to happen when the government interferes for too long in the allocation of capital. When the UK government did this in the 1950s and 60s, they allocated a lot of capital into coal mining, automobile production and the Concorde. It turned out that the UK didn’t have a future in any of those industries, so it was wasted and we ended up with high unemployment.
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.
What about countries that don’t follow the path of financial repression?
That’s going to be tricky. Switzerland, for example, will probably stay away from these policies, but it will see continued inflows of capital, creating upward pressure on the franc. Sooner or later, Switzerland will have to bring back some forms of capital controls. That will be a feature worldwide. We have gotten used to sitting in Zurich or London and investing money in the US, in China, in Malaysia or Mexico. There are some emerging markets that are attractive today, as they have low levels of debt. But in a world where large parts of the global economy are in a system of financial repression, there will be all sorts of capital controls. That means that as an investor, you best invest in jurisdictions where you plan to spend your retirement. To me, that means I don’t want to be invested in China at all, for example. The risks of getting stuck there are way too high, as the example of Russia has shown. Many investors today still pretend that we’re in the system that we had from 1980 to 2020. We’re not. We’re going through fundamental, lasting changes on many levels.
Q3 - 2022
@August 30, 2022
Don’t fret over conflict with China, says the political scientist. Worry about a developing-world debt crisis
What Ian Bremmer thinks 2032 will look like
A s we advance deeper into our crisis-plagued 21st century, east-west conflict is driving headlines. But a closer look reveals that tensions between the West and the Global South, which broadly includes regions in Asia, Africa, Latin America and the Pacific, will pose the most important threats and challenges over the next decade.
Q1 - 2022
- It’s 2022. Your personal information will be hacked. Algorithms fed with biased data will make destructive decisions that affect how billions of people live, work, and love. Online mobs will create chaos, inciting violence and sparking runs on stocks. Tens of millions of people will be dragged down the rabbit holes of conspiracy theories. The one thing that all of these realities have in common is that they emanate from digital space, where a handful of big tech companies, not governments, are the main actors and enforcers.
- Key parts of people’s daily lives, and even some essential functions of the state, increasingly exist in the digital world, and the future is being shaped by tech companies and decentralized blockchain projects that are not good at (or interested in) governance. States will fail to halt this trend. The biggest technology firms are designing, building, and managing an entirely new dimension of geopolitics. In this new digital space, their influence runs deep, down to the level of individual lines of code
- This isn’t just a US or Western challenge. It’s an issue also for the developing world, where governments face even starker tradeoffs between access to the digital services that are required to capture economic opportunities in the 21st century and the risks posed by poor cybersecurity or viral disinformation.