Email of the day on secular change and the Autonomies
Comment of the Day

March 21 2023

Commentary by Eoin Treacy

Email of the day on secular change and the Autonomies

Dear Eoin, When you started the Corporate Autonomies Fund it was based on the correct hypothesis that globalisation was the future trend and therefore it was wise to invest in companies that had, or would have, a global footprint. Now it seems that there is a trend away from globalisation and towards the repatriation of national production. What does this mean for the fund and for our investment strategy?


Thanks for consequential audio Friday in both content and timing. Overlaying today with 2007-09 is key at this time.

Your focus on the 1980 - 2022 bull market in bonds I found spot on and would like a little more commentary on that. The bubbles of housing (2007) and technology (2000) have been put away but Japan (1990) has not. We've punctured a rather big bubble. How do you see this playing out moving forward as far as global U.S. Treasury ownership is concerned in scope (range in long rates) and timing (years to repair damage) considering how many bonds are and will stay underwater if not sold? It took U.S. stocks 25 years to unwind the 1929 bubble and Japan is 33 and counting.

Considering the bond bubble is arguably the mother of all bubbles this side of 1929 and 1980 I would find it helpful to at least make a run at how it ranks in the standings.

Eoin Treacy's view

Thank you for these topical questions which should be of interest to other subscribers. The basis for the bull trend, which the Autonomies benefit from, was based on a confluence of factors. The assumptions we made were:

1. The rise of the global consumer, driven by economic growth, adoption of capitalism and demographic sweet spots would boost demand for just about everything.

2. The shale revolution would allow the USA to become energy independent and a lengthy contraction in energy prices would boost demand and economic potential.

3. The march of technological innovation would create efficiencies that drive profitability for both creators and consumers.

4. The best hedge against inflation is companies that have growing business and solid competitive edges.

The list of Autonomies was compiled with these characteristics in mind and picked only the most attractive companies from each sector that offered exposure to these themes. In many respects it is a list compiled of oligarchies which dominate specific niche businesses.

Let’s consider the main questions everyone is considering today.

1. Are we in a new inflationary cycle, where rates will peak at levels similar to 1980?

One of the hallmarks of major market peaks is supply balloons. A big bull market creates the incentive to sell more of whatever is surging in price. The longer the bull market goes on for, the more likely there will be a supply response. The peak of bond issuance arrived during the pandemic when the academic dalliance with modern monetary theory took over the decision making of politicians. Deficits exploded in several countries and the jump in yields has now forced reassessment of spending and taxation.

The root cause of inflation was the massive increase in liquidity against a background of social change; where daily patterns of behaviour changed and millions of people left the workforce. The only way to get that back under control will be to endure a recession which reduces available liquidity and allows the number of available jobs to more closely approximate the number of workers.

That’s a tall order and requires central bankers and politicians to have strong fortitude. Regardless of whether it is the best course of action, this is a recipe for social unrest and therefore political uncertainty. That suggests the next decade will most likely be a middle ground where we get occasional bouts of inflation and restrictive central bank action that don’t quite get the issue under control.

In many respects the 1970s deflation was about maturing baby boomer generation’s demand for houses, credit and jobs. Spending to fund that devalued the Dollar and fuelled the oil embargoes. This decade’s inflation issue is being driven by the mass retirement of the baby boomer generation, the need to fund the retirement promises already made and all with fewer workers and twin deficits. The alternative to inflation is a significant downshift in living standards and consumption which is deflationary. 

The Merrill Lynch 10-year+ Treasury Futures Total Return Index broke the long-term uptrend in 2022. It has now posted a higher reaction low which improves scope for a reversion towards the 1000-day MA.

It’s important to consider we have already had an inflation scare. A deflation scare during a recession could easily be the causal factor in spurring the next part of the inflationary trend. I expect to see 10-year Treasury yields closer to 2% than 6% this year. However, I do not expect a return to zero interest rates.

2. Are China and Russia going to form a new power couple that will compete with the west and bifurcate the global economy?

I think this is already underway and we will have rumbling conflicts over much of the next decade. China has manufacturing capacity and Russia has materials and energy resources. The rapprochement with China in the 1980s was about removing support from Russia. That is not possible at present. In fact the attitudes toward China and Russia are pushing them together.

China is the primary trade partner for most of Africa, Asia and a large swathe of Latin America. Most countries are going to want to sit on the sidelines during an escalating conflict.

At the very minimum armies need to be resupplied. That’s a decade-long trend. In a World War scenario spending would rapidly escalate.

The trend of reshoring / friend shoring is immature at present. One thing for certain is labour intensive projects are unlikely to return but will instead separate into the factories suppling China and its allies and those serving the USA/NATO and its allies. That suggests significant duplication of processes which means higher costs and less efficiency. That implies lower valuations but not necessarily bargain basement levels because supply chains will adjust.

Countries like Brazil, Mexico, Nigeria, India and Indonesia all stand to benefit from this trend. I don’t believe there is urgency to buy into these countries’ stock markets today but they could easily be among the first to bottom following a US recession.

3. Is decarbonization going to push up the price of all energy assets over the next decade?

The Inflation Reduction Act, China’s decarbonization rhetoric and the EU’s commitment to decarbonization all point to significant spending and reduced energy efficiency over the next decade.

The incentive for traditional energy companies to invest in new supply has been damaged and that is a fundamental support for pricing over the medium term. That is contributing significant volatility to prices and reduces the ability to invest in new supply.

The only way to increase the volume of electricity the grid can accept from wind and solar is with batteries. Load shedding is currently turning away electricity from these sources because the flow is too volatile for the grid to handle. Battery technology is improving all the time but it is not free and many different kinds of batteries are required to fulfill unique demands.

That’s not efficient and the intellectual property surrounding some of the designs is not defensible. This is going to make it a very difficult industry to invest in. Utilities are currently tacking on the cost of revitalizing the grid to energy bills and that is another source of inflationary pressure for consumers.

If politicians were serious about improving economic potential and reducing inflation, we would be building more nuclear reactors. The fact it is still even a discussion suggests the world is not truly serious about decarbonization.

4. Is technological innovation going to continue to provide deflationary downward pressure on prices?

The advent of the mobile internet helped to fuel the success of the Nasdaq-100 over the last decade. For that to be repeated artificial intelligence will have to provide the same kind of living changing productivity enhancement and at an affordable cost. Bill Gates certainly believes that is the case. 

I agree that the commercialization, of what were until recently back-burner research projects, is the best bet for a new productivity enhancer. The promise of the technology sector now relies on it.

The biggest companies with global franchises are all aware of these challenges. Individual companies will experience stress but on aggregate the Autonomies have weathered the challenges of the last decade very well and I don’t expect that to change. A recession is inevitable as credit tightens. That will not be the end of history. Instead it will create attractive buying opportunities. 

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