Blogs y opiniones de economia en ingles

The Best Investment Writing Volume 5: Brian Barish, Cambiar Investors – The Virus Plaguing Value               Author:  Brian Barish is the President and CIO at Cambiar Investors and is responsible for the oversight of all investment functions at the firm. Prior to joining Cambiar in 1997, Mr. Barish served […]

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Education:

American colleges and universities now enroll roughly six women for every four men. This is the largest female-male gender gap in the history of higher education, and it’s getting wider. Last year, U.S. colleges enrolled 1.5 million fewer students than five years ago, The Wall Street Journal recently reported. Men accounted for more than 70 percent of the decline.

The statistics are stunning. But education experts and historians aren’t remotely surprised. Women in the United States have earned more bachelor’s degrees than men every year since the mid-1980s—every year, in other words, that I’ve been alive. This particular gender gap hasn’t been breaking news for about 40 years. But the imbalance reveals a genuine shift in how men participate in education, the economy, and society. The world has changed dramatically, but the ideology of masculinity isn’t changing fast enough to keep up.

Side hustles:

An undisclosed share of Gatorade’s profits flow to a Gatorade Trust. The trust then sends 20% to the [The University of Florida], which employed the professor who invented the drink nearly 60 years ago.

In 2015, Florida announced it had accumulated ~$250m from the royalties. Its annual take over the last few years has been ~$20m, according to the university.

Wealth:

Unprecedented YoY change in household net worth. pic.twitter.com/59JnvyM74X

— Cullen Roche (@cullenroche) September 23, 2021

Progress:

mRNA cancer therapy works (in mice). … “Nineteen of 20 mice treated with the four-component mixture had complete tumor regression.”

Savings:

If I had to convince my 22 year-old self to save more money, here is what I would say: Go big, then stop.

What I’m talking about is a savings philosophy so effective that it can put your future finances on easy mode. It can help you to build wealth for decades while you literally do nothing. It may just be the lowest effort way to set yourself up for a nice retirement.

Have a good weekend.

On Sunday, Germany will elect a new parliament and with it a successor for Angela Merkel. After the election Merkel will remain in office until a new coalition is formed and a new chancellor elected. After 16 years in office, Merkel led Germany and the European Union through three major crises, starting with the Global Financial Crisis in 2008, followed by the European Debt Crisis in 2011, and then the pandemic in 2020.

That her policies have been criticised by left-wing politicians is no surprise. After all, Merkel and her party are Germany’s conservatives and ostensibly follow centre-right policies. Yet, Merkel has invited a lot of criticism from conservatives alike and in particular from conservative pundits and politicians in the United Kingdom and the United States. Yet, despite the dire warnings of these Anglo-Saxon “experts”, the European Union is alive and well and the Euro is still around. And in my view, no one can take more credit for that than Angela Merkel.

It is instructive to see how far detached from data and facts her critics on the right have become and how ideologically blinded especially the conservative wings of the UK Conservative Party and the US Republicans have become. It shows how ideologues need to ignore reality in order to keep their ideological system intact in the face of contradicting evidence. And it shows why countries that elect ideologues and extreme parties (be it on the right or left wing of the political spectrum) always suffer economically. And it is the reason why I am a radical centrist and a technocrat when it comes to politics.

To do this, let me take a couple of quotes from an opinion piece by conservative commentator Allister Heath published in the Telegraph on 1 September 2021. What starts out as a critique of Boris Johnson quickly turns into a comprehensive takedown of Angela Merkel’s 16 years in office.

Heath writes: “The German Chancellor’s strategy was to put herself first, and to court popularity by making all sides believe she was one of them” just to add a few lines later that “her mishandling of the 2015 refugee crisis fuelled the populist Right and created a permanent fissure with Eastern Europe which, in time, will destroy the EU”.

That is an obvious contradiction though cleverly disguised by taking these two sentences apart from each other and digressing into other ad hominem attacks in between. But Angela Merkel was not a populist who put popularity above the good of her country. Her actions during the 2015 refugee crisis were severely criticised by her own party and fuelled the rise of the populist right because they were so unpopular. The chart below shows Angela Merkel’s popularity figures during her time in office and in 2015 her willingness to accept refugees with an open border policy cost her dearly in terms of popularity.

Merkel’s popularity amongst voters

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Source: Politbarometer

On her economic record, Heath writes: “Its economy only survives thanks to her predecessor’s labour market reforms, and the fact that the euro is much cheaper than the Deutsche Mark would have been” and “the result is a gigantic, disastrous mess: a Germany in structural decline, the most over-rated political leader of her generation, and yet the most popular”.

To which I say that first, it is ironic that a conservative commentator credits her predecessor with labour market reforms. Did he forget that his predecessor was the centre-left social democrat Gerhard Schroder? And even so, the facts don’t prove him right. I have looked at the average annual real GDP growth in Germany during Angela Merkel’s term in office. It was 1.1% per year. That sounds like stagnation and structural decline, but it is still better than the 0.7% average growth over the same time by the Eurozone overall. And since Heath likes to think that the Brits do everything better, let me clear that up. Over the same time period, the average UK real GDP growth was 0.6% per year. Compounded over the 16 years of here chancellorship it means that the German economy has created 7% more income and wealth than the Eurozone on average and 10% more income and wealth than the UK.

Now, I can hear conservatives in the UK claim that this is all fine and well, but the UK had a Labour government until 2010 and was only governed by the Tories since December 2010. Starting in 2011, the average real GDP growth in Germany was 1.25% vs. 0.8% for the Eurozone overall and 0.8% for the UK. Over the last decade, Angela Merkel and her government have created about 5% more national income and wealth than the UK government has.

And unlike the UK government or the Eurozone overall, this growth did not come at the expense of future generations. Germany’s debt/GDP-ratio declined by 4.8 percentage points during her time in office. Over the same time, the Eurozone’s debt/GDP-ratio increased by 29.6 percentage points and the UK’s debt/GDP-ratio increased by 78.3 percentage points. When Angela Merkel became chancellor, the UK’s net debt was half that of Germany in terms of GDP. When she leaves office, the UK will have twice as much debt relative to GDP than Germany. When it comes to fiscal discipline and not living off borrowed money no country (except maybe Switzerland) even comes close.

And with regard to the point of a weak Euro let me give you some more facts. During her time in office, the Euro has appreciated(!) on a trade-weighted basis by 3.0%. Over the same time, Sterling has depreciated 25.0%. During the time of a conservative government in the UK, Sterling depreciated on a trade-weighted basis by 3% while the Euro depreciated by 1%.

It is a persistent myth in Anglo-Saxon countries that the Euro is a weak currency when in fact it is Sterling that is weak and should have given the UK economy a growth boost that has narrowed the growth gap between the UK and Germany.

Plus (and my conservative readers may forgive me for that comment), if the weak Euro was such an advantage for Germany, I suggest the UK abolishes Sterling, adopts the Euro, and re-joins the EU?

Finally, Heath states that Germany has a decrepit infrastructure and is in terrible shape and bound for structural decline. Well, the WEF’s last assessment of the competitiveness of different countries puts Germany in 7th place vs the UK in 9th. Germany’s infrastructure is ranked 8 in the world vs. the UK in 11th place. When it comes to having a skilled workforce, Germany ranks 5th, while the UK ranks 11th. And in the category of business dynamism, Germany ranks 5th, while the UK is in 9th place.

In other words, Angela Merkel leaves behind a dynamic economy that is growing at a faster pace than the majority of other European countries despite the headwinds of a stable to stronger Euro. And she did all that without the use of government deficits to inflate growth.

And in my view, the reason why she achieved that is because she is not associated with any ideology or grand plan of how the world works. Heath criticises this lack of beliefs as a negative, but in my view, it is exactly why she was so successful. Angela Merkel is at heart a technocrat and that is a good thing. Instead of dithering about keeping the economy open as so many politicians did during the first stages of the pandemic, she followed the evidence of scientists and probably saved thousands of lives. And guess what, against the dire forecasts of conservative pundits, locking the economy down in spring 2020 didn’t cause the end of the world. Germany’s economy declined, but far less than the UK economy.

Throughout her career, Angela Merkel was willing to follow the evidence and the data no matter where it took her. Did that lead to mistakes? Absolutely. We know today that austerity measures to reign in debt in Southern European countries were counterproductive and caused more harm than good. But back in 2011 it seemed like the sensible thing to do based on empirical evidence and data. Nobody knew back then that in a low interest rate world, austerity measures have a different effect than in a high interest rate world. A decade later, our knowledge has evolved and so have my views and Merkel’s views. Why else would she have agreed to the pandemic bonds and effectively the introduction of Eurobonds in spring 2020 which also means that another European debt crisis like the one in 2011 can never repeat itself?

I don’t agree with all of her policies, though. I think her appeasement politics towards Russia (e.g. the Nordstream 2 pipeline) and her exit from nuclear power in 2011 while giving in to the German energy lobby’s desires to continue to run lignite and coal power plants are a historical error. Nevertheless, Germany is at the forefront of the green revolution and will be one of the first countries in the world to become fully sustainable. In the end, her pragmatism may have led to some policy mistakes but on the whole, I think Angela Merkel was popular in Germany and abroad not because she was a populist, but because she was competent. And that is more than can be said for almost all political leaders these days.

Last month the UN’s Intergovernmental Panel on Climate Change (IPCC) published its latest report which made clear that temperatures today are higher than any time in the last 125,000 years, and methane emissions are a primary culprit.

While methane makes up a smaller share of overall greenhouse emissions compared with carbon dioxide, some estimates indicate it’s close to 80x more powerful than CO2 when it comes to warming the planet.

Unfortunately, atmospheric methane concentrations continue to climb:

When you look at where all that methane is coming from, the livestock industry emerges as one of the largest contributors.

And among livestock, the world’s 1.6 billion cattle are responsible for the majority of the livestock industry’s greenhouse gas emissions.

While plant-based milks and vegetarian beef alternatives are on the rise, so are beef and dairy consumption — projections by the Food and Agriculture Organization of the United Nations show significant growth in the demand for livestock products through 2050.

With that in mind, solutions aimed at mitigating methane emissions stand to have a meaningful impact on climate.

That’s why we recently got behind a team of animal scientists, engineers, product designers, and veterinarians called ZELP (Zero Emissions Livestock Project).

As its name suggests, it’s on a mission to drastically lower greenhouse gas emissions across the livestock industry. It’s developed an unobtrusive wearable for cattle that measures, captures, and oxidizes up to 60% of methane emissions from the mouth and nostrils of cows, which is where they emit nearly all of their methane.

In addition to neutralizing emissions, ZELP can also tell cattle farmers quite a bit about the welfare of their livestock by capturing and analyzing lots of data about their feeding habits, rumination, and rest, which are useful inputs in caring for the health of each animal and help boost farm productivity.

You can follow ZELP’s journey here.

A selection of correspondence

When I was much younger than today, and still enjoyed the benefits of youth like a concave belly, we used to say that when the US sneezes, the rest of the world catches a cold. Today, that still is true, but the same can be said about China – at least if you live in Europe or Asia.

The common explanation for the steeper declines in European asset prices when there was a crisis in the US was the international trade links between Western Europe and the United States. But in 2008, the housing market collapsed in countries like the United States, the UK, Ireland, while Germany or Switzerland had no housing crisis at all. Yet, German stock markets were down more than US stock markets.

In fact, a recent study showed that only about one-third of the spillover from US crises (and I presume Chinese crises) to other countries is explained by macroeconomic ties between countries. The other two-thirds are explained by financial market integration. Countries where institutions and households own a larger share of their wealth abroad and where their assets are held all over the world experience steeper declines in asset prices.

The driver of these steeper declines is quite straightforward. First, when the US economy hits a rough spot economically, US investors think about their investment portfolio. Psychologically, they will reduce their holdings in assets they are less familiar with and that thus appear to be riskier. This means they will keep their US stocks, but sell their foreign stocks. But also, they will tend to sell more of the stocks in countries that are heavily integrated with the US stock market, that is UK, Western Europe, and developed Asia. Why? Because it makes sense. First, these markets are typically the most liquid, so it is easy to sell these stocks at a moment’s notice. Second, because these markets are so integrated with the global markets and your home market, they offer less diversification benefits. Technically speaking, their correlation to the US market is so low that there are diversification benefits to be had, but these diversification benefits are so subtle that for most investors it simply appears as if the correlation between US and European stocks is about 1.0. When the US goes down, so do the UK and Europe. And as a result of this mental shortcut, US investors tend to sell UK and European stocks more than emerging market stocks, for example. And it is this psychological effect that creates a higher correlation and becomes a self-fulfilling prophecy. Because people think European stock markets are highly correlated in a US downturn, they act as if they were and sell these stocks first. And these actions in turn increase the correlation and turn perception into reality.

So the next time something happens on the economic front in the United States of China and somebody tells you that it is all going to be contained because it is a purely domestic problem, make sure you check the list below and look at the financial integration of different countries. The countries with higher financial integration will sell off more, whether that makes sense economically or not.

Financial and trade integration of different countries

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Source: Londono (2021)

On Monday I ranted a bit about benchmarking and how it turns businesses and asset managers into mediocre performers. The argument I often hear in favour of benchmarking is that it limits underperformance and the damage done by inferior managers.

On the other hand, in recent years, the evidence has mounted that fund managers generate their performance almost exclusively from their high conviction overweights. 

Average annual outperformance of US equity fund managers net of fees

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Source: Panchekha (2019).

So, fund managers have started to create high conviction funds as a way to counteract the trend towards passive investing and closet indexing. But, a new study argues that a key problem for fund managers is that if you reduce the number of stocks in your portfolio you may need a different approach to identifying the right assets and constructing the right portfolio. This is true and I recommend this article as the first stop for those who want to become more active and think about what that means for their portfolios. 

But the study also argues that being active alone is not enough to create outperformance.

No kidding.

That is the whole point about being very active. Both outperformance and underperformance are more accentuated, making it easier for investors to identify which fund managers are doing a good job and which ones don’t. This way the underperformers have fewer places to hide and will hopefully exit the market instead of being able to stay around for years as closet indexers convincing their clients to give them one more chance since the underperformance so far wasn’t that bad and one can catch up in the right environment (which of course is true for a truly active manager but an illusion if the fund is a closet indexer).

If the active fund management industry wants to grow its assets it needs to weed out the unskilled managers that stick around forever and are able to dupe investors year after year. And being highly active makes it harder for the truly unskilled managers to hide and easier for the truly skilled managers to shine.

In my job at Liberum, I run 10 model portfolios with 20 stocks each, so they are highly active and highly concentrated. Yet, since I launched these portfolios in spring 2020, they have outperformed their benchmark by 15% to 35% after transaction costs (and if you are interested in getting these portfolios you have to become a research client of Liberum). Obviously, a track record of 15 to 18 months in my current role is too short to draw conclusions if I am skilled or not, though my previous track record as a fund manager from 2010 to 2016 indicates that this outperformance is no accident. 

Nevertheless, the point is that my highly active portfolios outperform their benchmarks by a wide margin after costs both on an absolute and a risk-adjusted basis. So being very active and running highly concentrated portfolios can add enormous value if done right and will mercilessly expose underperformers. And that’s how active management should be. It should be a marketplace for different opinions where fund managers put their money where their mouth is and where underperformers exit and make room for new entrants trying their luck. In my view, we should all encourage more active management but the tendency to benchmark fund managers does exactly the opposite and thus helps to keep the flows from active to passive funds alive and contributes to the demise of active management. It turns the investment world into a world full of mediocre funds.

The biggest takeaway from history is that the characters change but their behaviors don’t. The technologies, trends, tragedies and winners – the events that take place – are always in flux and can be nearly impossible to predict. But the behaviors that drive people into action, influence their thoughts and guide their beliefs, are stable. They’re the same today as they were 100 years ago and will be 100 years from now.

Markets change, but greed and fear never do.

Industries change, but ambition and complacency don’t.

Laws change, but the tribal instincts of politics don’t.

My deepest forecasting belief is that you can better understand the future if you focus on the behaviors that never change instead of the events that might.

And those behaviors have a common denominator: They follow the path of least resistance of people trying to simplify a complex world into a few stories that make sense and make them feel good about themselves.

Simple stories, feel-good stories. Those are some of history’s most seductive beliefs, and they always will be.

A few that stick out:

1. An illusion that other people’s bad circumstances couldn’t also happen to you.

Most of history is slow progress amid constant bad news and occasional terrible news. A seductive story when hearing about tragedy is to believe this awful thing happened to this person, company, or nation, but it almost certainly couldn’t happen to me.

And you may be right about that. Your country may be more stable than the one that collapsed, your business may be stronger than the one that went bankrupt, and your health may be better than the person diagnosed with cancer.

The problem is that people don’t like to think in probabilities; it’s so much easier to think about risk as black or white, it will happen or it won’t.

So rather than thinking your business has a 10% chance of failure, it’s easier to think that what happened to Sears and Lehman Brothers could never happen to you. Before 2008 you didn’t think there’s a 5% chance of a banking collapse in America; you just looked at what had been happening in Latin America for decades and thought, “that can’t happen here.” Most of the world didn’t look at Wuhan China last February and think, “there’s a 25% chance that this is our future.” You thought, “I can’t even imagine my town being on lockdown.” Couldn’t even fathom it happening here. That was easier to understand and made you feel better.

When you go through life thinking low-probability events are zero-probability events, you’re bound to get stuck in an illusion that what happened to someone else couldn’t also happen to you.

That’s especially true when you add up the low odds of lots of unfortunate events. If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … pretty good. “History is just one damn thing after another” the saying goes.

A few years ago I interviewed Yale economist Robert Shiller. He talked about the possibility – not quite a forecast – that home prices could decline adjusted for inflation for a decade or longer.

I asked him why he thought that, or how it could happen. “Well, it happened before,” he said. Real home prices fell for most of the 20th century. “So of course it could happen again,” even if it seems crazy.

2. Imagining an unrealistic world where progress and success don’t demand a fee, and a belief that hassle, nonsense, disagreement and uncertainty are bugs rather than a cost of admission to getting ahead.

Jeff Bezos recently talked about the realities of loving your job:

If you can get your work life to where you enjoy half of it, that is amazing. Very few people ever achieve that.

Because the truth is, everything comes with overhead. That’s reality. Everything comes with pieces that you don’t like.

You can be a Supreme Court Justice and there’s still going to be pieces of your job you don’t like. You can be a university professor and you still have to go to committee meetings. Every job comes with pieces you don’t like.

And we need to say: That’s part of it.

That’s part of it.

It’s part of everything. His advice applies to so much more than careers.

A simple rule that’s obvious but easy to ignore is that nothing worth pursuing is free. How could it be otherwise? Everything has a price, and the price is usually proportionate to the potential rewards.

But the price is rarely on a price tag. You don’t pay it with cash. Most things worth pursuing charge their fee in the form of stress, doubt, uncertainty, dealing with quirky people, bureaucracy, other peoples’ conflicting incentives, hassle, nonsense, and general bullshit. That’s the overhead cost of getting ahead.

A lot of times that price is worth paying. But you have to realize it’s a price that must be paid. There are few coupons and sales are rare.

A seductive belief throughout history is people expecting an idealized world where you demand perfection and assume that having little tolerance for error, variability, and disagreement is an asset.

It’s a simple story, and it feels good. I wish it were true. But it’s so at odds with reality that it leads to people never achieving what they want because they’re unwilling to pay the required price, and over-idolizing those whose success was harder than it looks and not as fun as it seems.

3. An assumption that your view of the world is the view of the world, and a belief that what you’ve seen and experienced are the sights and experiences that explain how the world works.

Harry Truman once said:

The next generation never learns anything from the previous one until it’s brought home with a hammer … I’ve wondered why the next generation can’t profit from the generation before, but they never do until they get knocked in the head by experience.

Here’s at least one reason why: No lesson is more persuasive than the one you’ve personally experienced.

You can try to be empathetic and open-minded to other people’s lives, but when you’re trying to figure out how the world works nothing makes more sense than the unique circumstances of what you’ve lived through firsthand.

And the idea that you’ve never seen or experienced 99.999% of what’s happened in the world is hard to swallow because it’s intimidating to admit how little you know.

A more comforting story is convincing yourself that what you’ve experienced is the story of how the world works. This is how your career went, so that’s how economics works. These policies benefited you, so this is how politics works. You think what you’ve seen is a reflection of how the world works. What could be more seductive? Yet given how oblivious everyone is to the majority of experiences, what could be more wrong?

So everyone goes through life a little blind to the lessons that have already been learned by other people.

And it goes well beyond generations: There are massive experience gaps between different nations, socioeconomic classes, races, industries, religions, educations, on and on.

The person who grew up in poverty thinks about risk and reward in ways the child of a wealthy banker cannot fathom if he tried.

The person who grew up when inflation was high is scared in a way the person who grew up with stable prices isn’t.

The stockbroker who lost everything during the Great Depression experienced something the tech worker basking in the glory of the late 1990s can’t imagine.

The Australian who went 30 years without a recession has experienced something no American ever has.

It leads to all kinds of issues.

One is that we’re constantly surprised by events that have been happening forever.

Another is that it’s hard to distinguish people who have experienced something you haven’t from people who aren’t smart enough to understand your experiences.

A third is that topics like risk, greed, and fear are not the kinds of things that we can learn about and master as a society, like we did with, say, agriculture. As Michael Batnick says, “some lessons have to be experienced before they can be understood.” Every generation has to learn on its own, over and over.

The question, “Why don’t you agree with me?” can have infinite answers.

But usually a better question is, “What have you experienced that I haven’t that would make you believe what you do? And would I think about the world like you do if I experienced what you have?”

4. An assumption that history is a guide to the future and that things will continue working as they did in the past.

A $45 million dam in Colorado designed to prevent flooding turned out to not really be needed because the river it blocked slowed to a trickle. In Rotterdam, the opposite: A dam needs to be replaced a quarter-century sooner than once estimated because it’s under unprecedented stress.

Journalist Shayla Love explained the common denominator:

Stationarity is the idea that, statistically, the past can help you predict and plan for the future—that the variations in climate, water flow, temperature, and storm severity have remained and will remain stationary, or constant.

Nearly all the infrastructure decisions with which we live have been made with the assumption of stationarity. Engineers make choices about stormwater drainage pipes based on past data of inches of rain. Bridge engineers design foundations that can withstand a certain intensity of water flow based on the severity a certain location has experienced in the past. Reservoirs are designed to hold water based on historical information about water flow, and the historical water needs of a community.

A seductive belief that exists in almost every field is that things will keep operating like they always have. It’s an almost necessary belief in a world where you have to base a prediction off something.

But as Stanford professor Scott Sagan says, “things that have never happened before happen all the time.”

All the time.

In fact in most fields – especially business and investing – the most important events that changed everything and determined the majority of future outcomes are things that had never happened until they did.

The most important economic events of the last century are probably the Great Depression, World War II, the 40-year collapse in interest rates, and globalization. And while each had analogous ancestors, anyone predicting what those events eventually did to the world could be brushed aside by those who pointed out that, say, negative interest rates had never happened before. A nationwide housing bubble and bust had never happened before. A weapon like the nuclear bomb that could deter future wars had never happened before.

Then all those things happened. And they totally changed the world.

All history is the study of what’s changed, but it’s often used as a guide to the future. The irony is overlooked because the idea that if we gather enough data and read enough books we’ll acquire a map of the future is so seductive – it’s so simple, and makes you feel great.

That will never change.

Many fundamental investors really don’t like the momentum effect. And to be honest, it does feel a bit like an insult to one’s intelligence that after all the hard work of fundamental analysis, one can just go out and buy the stocks that have gone up in the past and buy them it will be fine.

But one criticism of momentum investing is that it is extremely prone to momentum crashes, that is sudden massive downturns that are much worse than what the market experiences at the time. In November 2020, we experienced such a momentum crash after the news of a successful vaccine trial broke, and in spring 2009 when the Fed stopped mark-to-market reporting of liabilities on the balance sheets of banks we had a similar-sized momentum crash. In each of these cases, momentum investors lost several years of outperformance vs. the market in a month or two which is why momentum investing is sometimes compared to ‘picking up pennies in front of a steam roller’.

But what if the steam roller announces its arrival with a loud siren and there was a simple way to get out of its way when it comes too close? That is what a new paper from the University of Münster in Germany suggests. The researchers did something quite simple. They looked at the typical momentum factor (WML for ‘winners minus losers’) which is constructed by buying the stocks with the highest returns from 12 months to one month ago and selling stocks with the lowest returns over the same time period. Then they split this time period into two different periods that vary for each stock. They simply looked at the returns from twelve months ago to the peak share price over the last twelve months (HTP) and the return from the peak share price to the share price a month ago (PTH). And then they sorted stocks based on these two measures and formed the usual momentum portfolios based on them.

The result was stunning. The portfolios formed on the HTP momentum factor not only had a better performance than the traditional momentum factor but showed much fewer momentum crashes. In fact, during the 2009 momentum crash, the HTP portfolios had no drawdowns at all. Most of the stocks that crash seem to be captured by the PTH factor, indicating that before they crash many momentum stocks already stop their advances and start to decline from recent peaks. And by eliminating these stocks from the momentum portfolio investors can drastically reduce the probability and severity of momentum crashes. We need to better understand the causes for this effect but it seems to me that this could be a worthwhile avenue for research since markets often seem to ‘smell a rat’ when they see one.

Avoiding momentum crashes with a simple twist to the momentum factor

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Source: Büsing et al. (2021). Note: MKT is the excess return of the US stock market over 3M T-Bills, WML is the return of the traditional momentum factor, HTP is the return of the momentum factor based on historic returns to peak share price, PTH is the return of the momentum factor based on historic returns from peak share price to last month’s share price.

The incipient China Evergrande default finally caught up with global markets. The $200 trillion question on the table IS - is this the global Minsky Moment and is hyper asset deflation imminent?

Today Zerohedge was boasting that they had "predicted" the Evergrande global contagion. And yet they continue to constantly push their hyper-inflation hypothesis. If this IS a global Minsky Moment then we are on the verge of hyper-deflation, not hyper-inflation. Hyper-deflation being a situation in which EVERYTHING is on sale at the same time and no one wants to buy ANYTHING because they are all busy raising cash.

The "trigger" for this event may well be the most leveraged property developer in world history (Evergrande), however from there the downstream effects will ripple out to EM currencies which have been rolling over for months. And from there, crypto currencies will be another domino that already entered bear market back in May of this year. From there it will be a short jump to retail speculators many of who own both stocks AND cryptos in their Robinhood accounts. Of course the Gamestop debacle way back in January was a widely ignored warning of potential retail panic turning into stock market systemic risk.

Remember this?

What we saw back in March 2020 and what we are witnessing again, is that cryptos and stocks are highly correlated. To the downside. We see in the top pane, S&P breadth began rolling over back in May at the same time that crypto peaked. And then they both bottomed at the same time. And then both completed a second wave retracement to a LOWER high:

Nevertheless, U.S. stock bulls remain sanguine as they bought the overnight Evergrande dip amid no signs of panic whatsoever. Here we see via the % of S&P stocks above the 200 day moving average, that breadth is the weakest of 2021:

It should be noted that Dow Transports never confirmed the late August "Jackson Hole" high in the S&P 500. Now we see Transport breadth is back in the crash zone. 

As I noted on Twitter, Bill Gross top ticked the S&P Jackson Hole high with his "Cash is trash" comment. The same way Ray Dalio top ticked the market in 2018 AND 2020 just before the pandemic meltdown. Meanwhile, for those who will say there was "no warning". Record option skew was right AGAIN. Albeit it was the second high that accompanied the rollover. The same as last times. 

In summary, the Fed is on the verge of tapering their monetary policy at a time when the markets are already beginning to crumble. 

Capital markets are now 100% dependent upon monetary welfare for the rich. 

Which is by far the biggest unspoken risk - social mood collapse as evidenced by decade low consumer sentiment and impending bailout failure. There is no way under these conditions that billionaires will get another bailout. The losses will fall where they may. 

Worse yet, the economy that essentially drove the entire world out of deflation in 2008 was China. This time around, China is the weakest link. Therefore they will be flooding the world with deflation on a massive scale via competitive debasement.

Now imagine all of this dislocation taking place while Chinese markets are on a two day holiday break. They will be back in session Wednesday morning Asia Pacific time.

Carvana Co. (CVNA) saw continued growth over the past year, significantly outperforming the S&P 500 and rising by approximately 271.8% compared to the S&P’s gain of about 38.5%. Despite the stock’s continued growth and positive second-quarter results, hedge funds were selling as institutions added.

Carvana is an e-commerce platform for buying and selling used cars. As most of its business involves contactless online sales, the company has benefited from the coronavirus pandemic in many ways. Consumers’ preferences toward remote interaction and shopping have changed during the pandemic. Carvana allows them to browse, purchase and finance through a convenient online platform. Consumers may then choose between getting their vehicle delivered directly to them or picking it up at one of Carvana’s automated car vending machines. Also, the pandemic has created significant supply chain disruptions, leaving new car dealerships with minimal inventory and creating more demand for used cars from both dealerships and companies like Carvana.

Mixed Results from Hedge Funds and Institutions

Carvana saw mixed results during the second quarter activity. The aggregate 13F shares held by hedge funds decreased to about 42.8 million from 42.9 million, a mild decrease of approximately 0.1%. Of the hedge funds, 22 created new positions, 59 added to an existing holding, 31 exited, and 33 reduced their stakes. In contrast to hedge funds, institutions were buying. Overall, institutions increased their aggregate holdings by about 0.1%, to approximately 93.2 million from 93.1 million. The 13F metrics between 2017 and 2021 are a good reflection of Carvana’s rising stock price and demonstrate the potential for the stock to continue an upward trend.

(WhaleWisdom)

Two-Year Forecast has Neutral Feel

Analysts expect to see an initial decline in earnings per share, though eventually earnings and revenue are predicted to continue forward on a positive trend through to 2022. The company is forecast to have a loss of -$1.05 in December 2021, which is expected to then improve to -$0.33 by December 2022. Year-over-year estimated increases could bring over $12 billion in revenue by 2021 and $15.6 billion in revenue by 2022.

(WhaleWisdom)

Optimistic Analysts

Citigroup analyst Nicholas Jones was bullish on the stock, citing better than expected results in the second quarter. Jones raised the firm’s price target on Carvana to $405 from $375 and kept a Buy rating on shares. Chris Pierce of Needham & Co. was also enthusiastic about the stock and raised the firm’s price target to $421 from $400. Pierce noted that the pace at which Carvana’s shares have been gaining ground has accelerated, and he maintained a Buy rating on the stock.

Favorable Outlook

Carvana continues to build its customer base and show growth, benefitting from the unique environment created from the pandemic. Analysts appear bullish about this e-commerce company, raising price targets as demand for used vehicles increases. Future revenue estimates are also encouraging for investors.

Note: This article originally appeared in the CFA Institute Enterprising Investor blog on 18 August 2021.

Time and again throughout my career I have ranted about the nonsense of benchmarking in all its forms. By now I have given up on the hope that we will ever leave benchmarking in business or investments behind, so I don’t expect this post to change anything except to make me feel better. So, indulge me for a minute or come back tomorrow…

I had a conversation recently with a friend about an organisation that we are both intimately familiar with and that has changed substantially over the last couple of years. In my view, one mistake the organisation made was to hire a strategy consulting firm to benchmark the organisation to its peers. Alas, the outcome of that exercise was to be more like their peers in order to be successful and as a result the organisation engaged in a cost-cutting and streamlining exercise in an effort to increase ‘efficiency’. And guess what, thanks to that effort many people now think that what made that organisation special has been lost and they are thinking about no longer being a customer of it.

The problem with benchmarking a company against its peers is that it is typically the fastest way into mediocrity. Strategy consultants compare companies that have a unique culture and business model to its peers and tell these companies to adopt the same methods and processes that made their peers successful in the past. But benchmarking a company that is about to change the world is outright stupid. In 2001 and 2002 Amazon’s share price dropped 80% or so. If Jeff Bezos had asked McKinsey what he should do, they would have told him to be more like Barnes & Noble.

Name a single company that has turned around from being a loser to a star performer or even changed the industry it is active in based on the advice of strategy consultants…

Or as Howard Marks put it so clearly: “You can’t do the same thing as others do and expect to outperform.”

Which brings me to investing, where pension fund consultants and other companies have introduced benchmarking as a key method to assess the quality of a fund’s performance.

Of course, if you are a fund manager your performance needs to be evaluated somehow, but why does it have to be against a benchmark set by a specific market index? The result of being benchmarked against a specific index is that fund managers start to stop thinking independently. Having a portfolio that strays too far from the composition of the reference benchmark means that a fund manager creates career risk. If the portfolio underperforms by too much or for too long, the manager gets fired. So, the result is that over time, fund managers invest in more and more of the same stocks and become less and less active. And that creates herding, particularly in the largest stocks in an index because fund managers can no longer afford not to be invested in these stocks.

Ironically, by now, the whole benchmarking trend has become circular because benchmarks are designed to track other benchmarks as close as possible. In other words, benchmarks are by now benchmarked against other benchmarks.

Take for instance the world of ESG investing. Theoretically, ESG investors should be driven not just by financial goals but also by ESG-specific goals. So their portfolios should look materially different from a traditional index like the MSCI World. In fact, in an ideal world, ESG investors would allocate capital differently than traditional investors and thus help steer capital to more sustainable uses.

So, I have gone to the website of a major ETF provider and looked at the portfolio weights of the companies in its MSCI World ETF with the weights in its different ESG ETFs. The chart below shows that there is essentially no difference between these ETFs, sustainable or not.

Portfolio weights of the largest companies in a conventional and several sustainable ETFs of the same provider

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Source: Bloomberg

The good thing about this is that investors can easily switch from a conventional benchmark to an ESG benchmark without much concern about losing performance. That helps getting institutional investors to switch.

But the downside is that there is little difference between traditional investments and sustainable investments. If practically every company qualifies for inclusion in an ESG benchmark and then has roughly the same weight in that benchmark as in a conventional benchmark, then what’s the point of the ESG benchmark? Where is the benefit for the investor? Why should companies change their business practices when they will anyway be included in an ESG benchmark with minimal effort and don’t risk losing any of their investors?

ESG benchmarks that are benchmarked against conventional benchmarks is like benchmarking Amazon against other retail companies. It will kill Amazon’s growth and turn it into another Barnes & Noble.

Alpha Female 2021: Just 11.8% of portfolio managers are women… and that’s an improvement It is based on Citywire’s database of 16,353 portfolio managers who run active mutual funds, or their equivalents, around the world. It found that globally 1,932, or 11.8%, of these managers are women, up from 11% in 2020. For the US alone, the percentage of female fund managers is 10%. This is an improvement on 9% in the 2020 ...

The post This Week in Women appeared first on The Belle Curve.

A selection of correspondence

Learn more about the 5 highest yielding German dividend stocks. They all yield more than 4% and provide you with an attractive passive income.

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CEOs aren’t the kind of people that are commonly known for their humility. Instead, many CEOs are type-A personalities who are extremely competitive. But in some instances, competitiveness can go too far and CEOs in an effort to outdo their peers start to make poor decisions. It’s the classic ‘hold my beer’ moment, where one CEO sees some other guy do something stupid and then decides he can top that.

Nowhere is this reaction more dangerous than at the high stakes game of M&A. The sums involved are large and the impact on a company’s fortunes equally so. Yet, because these are events that often attract a lot of media attention, the temptation to outdo your peers is extremely high for some CEOs. So, instead of acquiring smaller companies that may be a better fit to an existing business and can more easily be integrated into the existing corporate structure (and adopt the existing corporate culture), they are going for fewer but larger mergers and acquisitions. That might end well, just as sometimes a drunk at a bar says ‘hold my beer’ and then performs some amazing feat. 

But usually, giving a CEO a lot of liquidity to spend on M&A is like giving a drunk a barrel of beer. You know exactly what is going to happen, you just don’t know which wall he is going to hit.

Examining 751 takeovers in the UK by 202 CEOs between 2007 and 2016, Tom Aabo and his colleagues showed that some CEOs are prone to making fewer but much larger acquisitions for their firms than others. The humbler CEOs made on average three acquisitions during these ten years, each worth about £57m. The high stakes CEOs, on the other hand, made on average one acquisition worth about £351m.

By pursuing these larger takeovers, these CEOs may strike their egos but create costs for shareholders because the share price reacts much less favourably to these large takeover bids than to smaller ones. On the day of the announcement, the large takeovers on average lead to an abnormal share price increase of 0.6% while the smaller takeovers lead to an abnormal share price increase of 2.7%. and because the CEOs who acquire larger targets do so less often than the CEOs who acquire smaller firms, this effect accumulates over time and leads to a better share price performance for companies that make smaller, less costly acquisitions.

So, who are these CEOs that go for fewer but larger acquisitions? How can we identify them as investors? And how can directors of a company identify them in order to limit their acquisition budgets to avoid destroying shareholder value?

In the above-mentioned study, the CEOs that went big were the ones that showed more signs of narcissistic behaviour. And while the study measured narcissism in different ways all of which had similar outcomes, one easy way to measure it is to listen to the CEOs during earnings calls (or rather, analyse the transcripts of these calls). Narcissistic CEOs use more personal pronouns that point to them like ‘I’, ‘my’, ‘mine’ than personal pronouns that point to a group or other people. The higher this ratio of first person personal pronouns to all personal pronouns is, the more likely it is that a CEO will try to engage in dumb outsized acquisitions that will lead to lower shareholder value.

CEO personality and takeover activity

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Source: Aabo et al. (2021)