Stock Markets Beat Hedge Funds

Warren Buffet made a bet with a hedge fund manager that stocks beat hedge funds in the long run

Actually, all studies of the last 50 years about stock markets would have predicted the outcome of the bet.

Trump Cards: What Hand Have Investors Been Dealt?

Trump on economic policy

Thursday, November 17, 2016 wecbcast by Caroline Miller, BCA Research. She made following points:

• Infrastructure program and tax cuts will increase budget deficit
• Tax reduction will not give a lot of bang for the buck compared to government spending programs regarding GDP growth
• Fed pressured by Trump policy to increase rates, leads to USD strength
• Europe needs 3 to 4 years to return to growth, Europe will not match rate increase
• Japan has still low inflation
• China is exporting structural deflation (overcapacity)
• Dollar strength, Trump protectionism will hurt emerging Asia most
• High corporate debt level in emerging markets
• US Equity: no visibility of corporate earnings growth, wild card of Trump appointees
• US protectionism and backlash are a threat to growth
• US deficit will steepen yield curve
• Trump tax program will benefit small caps not multinationals

Investment recommendations:

• Underweight of duration in US bonds, preference of TIPS
• Underweight of peripheral european bonds
• Overweight of USD vs. EUR
• Overweight in pharma, staples, utilities (defensive stocks)
• Underweight in tech, industrials and commodities (cyclical stocks)
• Underweight in US vs. European equities: strong USD will hamper US profits. Profit margins are very high in the US historically and compared to Europe. They can't grow on that level

We have entered a new economic environment in the US.

Trump Cards: What Hand Have Investors Been Dealt?

Trump about economic policies

Thursday, November 17, 2016 wecbcast by Caroline Miller, BCA Research. She made following points:

• Infrastructure programm and tax cuts will increase udget deficit
• Tax reduction will not give a lot of bang on the buck compared to government spending programs regarding GDP growth
• Fed pressured by Trump policy to increase rates, leads to USD strength
• Europe needs 3 to 4 years to return to growth, Europe will not match rate increase
• Japan has still low inflation
• China is exporting structural deflation (overcapacity)
• Dollar strength, Trump protectionism will hurt emerging Asia most
• High corporate debt level in emerging markets
• US Equity: no visibility of corporate earnings growth, wild cards of Trump appointees
• US protectionism and  Backlash of US is a threat to growth
• US deficit will steepen yield curve
• Trump tax program will benefit small caps not multinationals

Investment recommendations:

• Underweight duration US bonds, preference of TIPS
• Underweight peripheral european bonds
• Overweight USD
• Overweight pharma, staples (defensive stocks) 
• Underweight tech, industrials and commodities (cyclical stocks)
• Underweight US vs. European equities: USD will hamper US profits. Profits margin are very high in the US historically and compared to Europe. They can't grow on that level

I really think that we have entered a new economic environment in the US.

Brexit: Anti-Globalisation Backlash and economic consequences for the UK

The reason for voting for the Brexit can be found in rising economic inequalities in Britain paired with unique British Euroskepticism. The US and UK experience higher inequality and a losing middle class because of their pronounced laissez-faire economic policy. Furthermore, the ordinary Brit does not think of him being European but British only. This is in stark contrast to continental Europeans.

The economic consequences of the referendum is very difficult to forecast, because Britain needs first to define the relationship it wants to have with Europe. Specifically, it has to think hard about what sort of compromises it is willing to make in order to have access to the EU single market. As a reminder, the EU wants for its free market access the right of people to move freely, which was the core argument of the Leave campaign. No free market access creates a big problem for some industries. For instance, many cars produced in Britain are exported to other EU countries. Toyota’s UK factory sells 80% to continental Europe, and a 10% levy on export would most certainly mean that production will move elsewhere. The City of London is relying on its EU passport for financial services which allows banks, insurers and asset managers to operate and offer products across European borders. With the passport gone, relocation of financial institutions to other financial hubs like Paris, Frankfurt, Dublin or Luxembourg would be likely. Even if Britain can keep the financial services passport it has now lost its influence over the rule setting process, which it had as a EU member. In the past it used that influence, to shape the regulation according to its interest.

I expect that enterprises will put many investment projects on hold until the the question of the access to the EU market is answered. Only the the plunge of the Pound lessens the pain of the exporters. But a weak Pound will increase inflationary pressure, and hence, will push interest rates up.

Larry Summers: Rates will stay lower for longer than you think

Today's FT has an opinion piece of Lawrence Summers:

Real rates in the US will only increase mildly because of the following reasons:

1. Real rates are trending down for 20 years.
2. As rates rise in the US, foreign capital is attracted which will strenghten the dollar and in turn reduces demand for traded goods.
3. Low rates have already pulled demand forward, resulting in lower levels of demand for the future (e.g demand for cars).
4. Regularitory pressure is inhibiting lending to small and medium sized companies.
5. Inflation is getting more difficult to measure as services such as healthcare where quality is hard to measure
6. Most importantly is that global growth outlook is too weak for a rate hike of the usual 300 - 450 basis points. The markets expect a more realistic increase of 100 basis points.

Central bankers have less tools in their cupboard than they assume.

Investments and Demographics

BCA Research has published a special report about the economic implications of an aging global population:

• Global population growth has nearly halved over the past forty years and the labor force is expanding very slowly. 
• Health among the elderly in the OECD has been improving, but not quickly enough to compensate for the secular impact of aging.
• The reduced labor force participation rate among the 16-24 age cohort is reflective of deep social changes that won’t be easily reversed.
• A smaller potential workforce will not turnaround the slowdown in real wage growth because of technological destruction.
• An aging population and economic growth in the developing world will create an almost insatiable demand for health care services and products.
• Entitlement will increase as government revenues will be under pressure. Taxes have to rise.
• A more serviced based economy will have less need for energy.
• A smaller workforce means also a slower growing economy, as Japan is already experiencing.

BCA November Forecast

Latest Forecast from BCA:

• The monetary tailwind for global equity prices is strengthening, but the earnings support is weakening.
• It might be necessary to inject more fiscal policy into the mix to rekindle activity.
• Learned behaviors are still supportive of risk assets and more QE in Europe/Japan can be expected.
• Even if the Fed does raise rates in December we doubt more than one or two more will be in the cards.
• Stay neutral on equities, but position defensively and remain long duration in the bond markets.