David Fuller and Eoin Treacy's Comment of the Day
Category - General

    What Does Population Aging Mean for Growth and Investments?

    Thanks to a subscriber for highlighting this article by Henry McVey at KKR which appeared in the Macro Morsels report on the 23rd. Here is a section on China: 

    Berkshire Hathaway Shareholder Letter

    Thanks to a subscriber for this year’s letter by Warren Buffett. Here is a section: 

    The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.

    The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.

    That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when our portfolio, overall, performed poorly (or the converse).

    This section continues in the Subscriber's Area.

    The Poison We Pick

    This article by Andrew Sullivan for the New Yorker offers a particularly lucid account of the opioid epidemic in the USA. Here is a section: 

    One of the more vivid images that Americans have of drug abuse is of a rat in a cage, tapping a cocaine-infused water bottle again and again until the rodent expires. Years later, as recounted in Johann Hari’s epic history of the drug war, Chasing the Scream, a curious scientist replicated the experiment. But this time he added a control group. In one cage sat a rat and a water dispenser serving diluted morphine. In another cage, with another rat and an identical dispenser, he added something else: wheels to run in, colored balls to play with, lots of food to eat, and other rats for the junkie rodent to play or have sex with. Call it rat park. And the rats in rat park consumed just one-fifth of the morphine water of the rat in the cage. One reason for pathological addiction, it turns out, is the environment. If you were trapped in solitary confinement, with only morphine to pass the time, you’d die of your addiction pretty swiftly too. Take away the stimulus of community and all the oxytocin it naturally generates, and an artificial variety of the substance becomes much more compelling.

    One way of thinking of postindustrial America is to imagine it as a former rat park, slowly converting into a rat cage. Market capitalism and revolutionary technology in the past couple of decades have transformed our economic and cultural reality, most intensely for those without college degrees. The dignity that many working-class men retained by providing for their families through physical labor has been greatly reduced by automation. Stable family life has collapsed, and the number of children without two parents in the home has risen among the white working and middle classes. The internet has ravaged local retail stores, flattening the uniqueness of many communities. Smartphones have eviscerated those moments of oxytocin-friendly actual human interaction. Meaning — once effortlessly provided by a more unified and often religious culture shared, at least nominally, by others — is harder to find, and the proportion of Americans who identify as “nones,” with no religious affiliation, has risen to record levels. Even as we near peak employment and record-high median household income, a sense of permanent economic insecurity and spiritual emptiness has become widespread. Some of that emptiness was once assuaged by a constantly rising standard of living, generation to generation. But that has now evaporated for most Americans.

    This section continues in the Subscriber's Area.

    China will scrap limit on presidential terms, meaning Xi Jinping can stay on

    Thanks to a subscriber this article from the South China Morning Post which may be of interest. Here is a section:  

    The party has in recent decades largely observed an unwritten retirement age of 68 for its top leaders, but its charter does not have any limit on terms. That means there are no restrictions on the general secretary position, but the Chinese constitution does limit presidents to a maximum of two five-year terms. 

    Analysts said ending the two-term limit gives the strongest indication yet that Xi will stay in power longer than his recent predecessors at a time when the leadership was “fixated on stability”.

    There was intense speculation in the lead-up to the party’s five-yearly congress in October over whether Xi would continue to lead the party beyond two terms, with some questioning whether his ambitious plans to “rejuvenate” China could be achieved within 10 years.

    This section continues in the Subscriber's Area.

    Email of the day on China's desire to settle in Renminbi

    Thanks, Eoin for all your recent helpful comments. could you please comment now on the new oil market, I believe run by China, due to start on 01 March 2018 which is backed by gold and how this might affect world markets in so many different ways.

    This section continues in the Subscriber's Area.

    Naspers CEO Exploring Amsterdam IPO for Some Units, FD Says

    This article by Wout Vergauwen and Loni Prinsloo for Bloomberg may be of interest to subscribers. Here is a section: 

    Van Dijk sees investment in e-commerce businesses as helping to reduce a valuation gap with Naspers’s stake in Chinese Internet giant Tencent Holdings Ltd., which is worth more than the company as a whole. E-commerce units, which include online food delivery in India and educational software in the U.S., have the highest potential for an initial public offering, Het Financieele Dagblad cited the CEO as saying. He didn’t set a timeline.

    This section continues in the Subscriber's Area.

    Will Quantitative Tightening (QT), which is deflationary in theory, be inflationary in practice?

    Thanks to a subscriber for this article by Viril's Sokolof for 13d.com which may be of interest. Here is a section: 

    It is equally noteworthy that most of the peaks in M2 velocity shown in the prior chart, with a couple of exceptions, occurred when the U.S. dollar was in protracted bear markets from 1972 to 1980, 1985 to 1995 and 2002 to 2008. Moreover, the first and third of those down-cycles was marked by generally-rising yields on 10-year U.S. Treasuries. In other words, one could argue that rising UST yields were a symptom of capital flowing out of the dollar, which contributed to a higher cost-of-money and higher inflation.

    These relationships shed some insight into the idea that tighter monetary policy — reflected in the slowing growth rate of M2 and the onset of the Fed’s balance-sheet reduction — is likely to be inflationary in practice. When money supply growth slows and the demand for funds increases — such as with the $1 trillion-plus fiscal deficits we wrote about last week — the conditions are ripe for an inflationary surge and a falling dollar. One could also argue that this will be good for real assets (which were hurt by QE during 2010 to 2016) but bad for financial assets (which benefited from QE).

    This section continues in the Subscriber's Area.