A Repetitive
RIF
|
There’s no direct link in real time between
the growth of the economy and the growth of the stock market. (There’s a very
strong link over the fullness of time, but in the long run we’re all dead, as
someone once said.) If you ever needed proof of this, it came Tuesday. The
latest GDPNow index from the Atlanta Federal Reserve suggests that the U.S.
economy is now growing at an annualized rate of barely 0.5%. The “reflation
trade” and “post-pandemic boom” that we were all looking forward to have been
deferred:
|
This number won’t have come as a surprise
to the world’s money managers. The latest Global Fund Manager Survey from
BofA Securities Inc. is available, and shows a sharp shift in sentiment. A few
months ago, fund managers were expecting an “inflationary boom,” with both
growth and inflation well above average. They still expect the inflation, but
are no longer so optimistic about the growth:
|
All of this is happening against a
background of a growing, if grudging, acceptance that the Fed will be raising
rates over the next year. As the Bloomberg WIRP function illustrates, two hikes
by the Fed’s meeting in January 2023 are now fully priced in:
|
Illustrated differently, this is the
implicit path of the fed funds rate until that January 2023 meeting. The
conversation has well and truly moved on from tapering and quantitative easing.
The question is now all about the old-fashioned issue of how far interest rates
will rise and how quickly:
|
This sounds like a horrible environment for
investing in equities. And yet, the S&P 500 nearly got back to an all-time
high Tuesday. Comparing stocks to bonds using my favorite simple measure, the
ratio of the “SPY” and “TLT” exchange-traded funds, respectively tracking the
S&P 500 and Treasury bonds of 20 years and longer, we find that stocks have
broken decisively to the upside. This is how the measure has moved over the
time that both ETFs have been available:
|
How to explain this? TINA (There Is No
Alternative — to stocks), appears to have morphed into her fearsome sister
TINA RIF (There Is No Alternative — Resistance Is Futile). With yields low
and inflation on the horizon, bonds are regarded as unbuyable. The BofA survey finds
that more asset allocators are underweight bonds than at any time since they
started asking the question some 20 years ago:
|
It’s worth looking at how some of the
previous extremes of pessimism toward bonds worked out. None were
justified, as the steady historic fall in bond yields continued throughout. In
July 2007, a run on Treasuries was the prelude to the unwinding of the
structured credit market, and then the full-blown credit crisis. Bonds did
well, while scarcely anything else did. The February 2011 scare presaged the
crisis surrounding the debt ceiling and the Standard & Poor’s downgrade of
federal debt — when it turned out that the best way to take evasive action
was to buy bonds. In 2013, investors overreacted to the “taper tantrum” and
life soon returned to normal; and in early 2018, fund managers’ pessimism was
the cue for bond yields to provoke an outbreak of volatility in equities
and, ultimately, to dissuade the Federal Reserve from pressing ahead with
quantitative tightening. So it may not be safe to assume that bond yields are
heading upward, but fund managers are more convinced that the trend is about to
turn than they have ever been before.
It isn’t just fund managers. As
demonstrated by this research from David Kostin, U.S. equity strategist at
Goldman Sachs Group Inc., broad positioning in stocks as opposed to bonds and
cash is at a historic extreme. This chart smooshes together holdings by
households and foreign investors with those of U.S.-based institutions, and
finds equity allocations have recently overtaken the all-time high set just
before the dot-com bubble burst in 2000:
|
(As with the numbers on bond pessimism,
it's worth noting what happened after the last such peak in equity weightings;
it’s not necessarily a healthy sign.) That demonstrates the steady shifting of
the tectonic plates in favor of the optimism that accompanies equities. For a
more current number that demonstrates serious risk appetite, there’s
bitcoin.
We have just witnessed the second most
successful ETF launch in history, of the
first such fund based on bitcoin futures. I have turned into too much of a
curmudgeon not to notice how painfully similar that sentence was to many
I wrote 22 years ago as the first wave of internet speculation was
cresting. History might not repeat itself; it just seems very likely to do
so to someone who lived through the dot-com mania.
My colleagues can tell you all about the 24 million shares traded in
the ProShares Bitcoin Strategy ETF, which produced plenty of intrigue, and
helped bitcoin reach yet another record. The new ETF, which can be traded 24 hours per day,
should in theory make it that much easier for a wider range of investors to buy
into bitcoin, and the model could be extended to other cryptocurrencies.
Many are impressed by the precedent of gold ETFs, whose arrival boosted the
price and broadened the precious metal’s pool of investors.
The excitement seems to be indicative of a
mood across the market. Bitcoin hit a new high, and its surges since the
pandemic have noticeably overlapped with ebbs and flows in bond yields. I’m not
trying to say that it’s correlated with bonds; but moves in bitcoin are more
clearly being driven by “risk-on” sentiment, and its ebbs and flows are now
overlapping with belief in inflation:
|
What is strange about this, and
disconcerting, is that the optimism is reaching these peaks in a situation where
confidence in growth has declined, and fears of rising inflation and rates are
back. Bonds indeed don’t look like a buy — but a lot is being built on the
notion that they leave us no alternative but to buy something more risky.
Mexico: A
Difference of Opinion
|
Writing for Bloomberg Opinion carries the
disclaimer that it reflects the views of the writer, not of Bloomberg. This
means that columnists are free to disagree with each other. So, let me very
respectfully, and regretfully, explain why I disagree with a column about Mexico by my colleague
Tyler Cowen. Tyler has been visiting Mexico regularly for 40 years,
and believes it’s ready for a period of steady and unspectacular growth, which
could turn it into Denmark. I’ve only visited Mexico regularly for 25 years,
but I did live there for four years, and like Tyler I love the place. It’s a
wonderful country, much misunderstood and unfairly disdained by its neighbor to
the north. But, sadly, I don’t buy that Mexico is ready for
Scandinavian-style growth.
Tyler runs through many valid reasons for
optimism. It’s next to the U.S., has a growing middle class, a great startup
community, sensible economic leadership with impeccable academic credentials, a
democracy that is slowly and painfully becoming more functional, and it
naturally stands to benefit from any decline in U.S. trade with China. I have
made many of these points myself. The problem is that most have been true for
decades, and they haven’t helped Mexico to deliver for its population, or for
foreign investors. This is Tyler’s conclusion:
Many investors
and economists have been unduly pessimistic about Mexico because it has not grown
at the pace of China. At this point, it’s best to concede that it probably
never will. Yet many of the world’s more successful countries, such as Denmark, never had major growth spurts as China did.
Instead, they managed a steady pace of growth with a few big dips.
Mexico, with
its strong connections to the U.S., is well-positioned to achieve that kind of
growth stability over the coming decades. Unlike in the 1980s, the Mexican
central bank is run by well-educated technocrats. Even during the pandemic,
which hit the Mexican economy very hard, credit ratings remained acceptable.
The problem isn’t so much that Mexico
hasn’t grown as fast as China. After all, nobody has. And Denmark, a small and
prosperous trading nation, has long had a more developed economy than Mexico’s.
Danes were much wealthier than Mexicans 75 years ago, and they still are.
No, I suggest that if there is a fair
comparison for Mexico, it is South Korea. And that is a painful one.
Alternatively, look at Greece. Both countries had significantly lower GDP per
capita than Mexico’s at the end of the war. Remarkably, even Japan was poorer
than Mexico in the late 1940s. This chart, which I produced on Our World in Data, tells the
sad story (for Mexicans) of what has happened since then:
|
South Korea, like Mexico, is a medium-sized
country with an economy traditionally built around peasant agriculture. Like
Mexico, it spent most of the post-war period under a relatively benign
autocratic governmental system, shifting to a rather messy democracy in the
last few decades. Like Mexico, its corporate sector is dominated by a few large
conglomerates. Both countries endured massive financial crises in the 1990s.
Both have a painful history of humiliation at the hands of more powerful
neighbors. Both had big economies nearby with which to trade. And yet somehow,
the relative wealth of the two has inverted since the war. In 1946, Mexican GDP
per capita was more than triple South Korea’s; now South Korea’s GDP per capita
is more than double Mexico’s. What happened?
Alternatively, how did Mexico slip so far
behind Greece, another agrarian society (and another of my favorite countries)
that has been over-reliant on tourism and generally suffered governance at
least as corrupt? Unlike South Korea, Greece is nobody's idea of a
great economic success story. But it’s still fared far better than Mexico.
If pressed, I would name two problems.
First, education. Korea’s is ruthlessly efficient, producing generation after
generation of great managers and skilled workers. Mexican education is a mess.
An elite go to a few great universities at home, and then generally to the
U.S.; broader education has far too many gaps.
Second, there is the curse of resources.
Mexico traditionally has a strong mining industry, and it still has a lot of
oil. Successive Mexican governments have treated the state oil company as a
“milch cow” that can support growth and sustain the state. South Korea (like
Japan) has had to find a way to grow without such resources.
Could Mexico finally take off, as Tyler
suggests? It could. Its progress has been slow and steady, but unmistakable for
those who know the country. The middle class is growing, and wealth is
spreading. But there is no particular reason to expect this now.
Judged as an investment opportunity, Mexico
has done better than might be thought. Since the 1994 Tequila Crisis, in which
a sudden peso devaluation triggered a banking collapse, Mexican stocks
outperformed the rest of the world, and even the U.S., for more than a decade.
But it has been lagging behind steadily for a decade now:
|
If there is a reason for optimism, it might
be more old-fashioned. Mexico and other resources-led markets of Latin America
have tended to rise and fall with commodity prices. Those in turn tend to gain
during times of inflationary angst in the West. The region enjoyed an investment
boom during the last bull market in metals. But, fascinatingly, the latest
resurgence in metals has done Latin American assets no good:
|
There are many good reasons why Mexico
should start to perform. But the greatest chance would lie in a return to the
belief that the region and its natural resources offer a refuge in times of
inflation. Its path to Danification isn’t an easy one.
No comments:
Post a Comment