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As I write this edition of Weekend Reads, I have not seen the sun for many days now and it is the middle of my least-liked season: winter.
For those of you in the Southern Hemisphere, enjoy that sun! Nonetheless, the weather seems to match my mood.
What am I grumpy about exactly? Mostly the performance of the stock market. It has me worried. I just cannot find data to support the liftoff in share prices. Further, the equity risk premium, based on how I calculate it, is close to turning negative. The last time that occurred? Just prior to the Great Recession.
But my friends who joke about “perma-bears” and investment prognosticators who have called “seven of the last two bear markets” have reason to point their fingers at me. Count me among those in the “Just Don’t Get It” category.
All of that said, I do not think the stories below are gloomy. In fact, there is a candidate for 2018 Story of the Year among the environmental, social, and governance (ESG) selections.
Not that it matters given the rocketing equity prices over the last year, but mounting data demonstrate that not all is well. For example, China is still struggling to control its shadow banking industry, which jeopardizes their economy due to a misallocation of capital. How large an issue is this? Hard to say, because — duh! — the activity is taking place in the shadows.
Meanwhile, the World Bank believes that global economic growth has peaked. Importantly, it does not think this is a cyclical phenomenon. Re-read that sentence. The World Bank believes this is not a cyclical development but a systemic one.
Want a bit of an investment secret? Demographics, though an obvious source of economics and investing information, is often overlooked. This is because so many investors are passive — so data of any kind just doesn’t matter. Or they’re active but are short-term traders or index-huggers despite your protests.
But if you still endeavor to earn alpha by understanding the world well and then placing capital based on that understanding, demographics are worth paying attention to. For example, aside from the United States, all of the world’s top economies have shrinking populations, with Japan leading the descent. As a consequence, many Japanese banks are downsizing in order to survive. Indeed, I read a report earlier this month about Japan’s government paying women to have babies as a way of arresting the population decline.
How investment managers, corporations, and governments manage themselves in a shrinking world will be a major story of the next 25–30 years.
Something that I suspect but cannot confirm with full substantive data: Both China and Russia are building financial architecture and infrastructure, think oil pipelines, to move the world off the petrodollar and propel the renminbi and the ruble to reserve currency status.
To that end, and this could just be trade-talk bluster meant to warn the US executive branch to pipe down its rhetoric, but Chinese officials said they may slow their purchases of US Treasuries or halt them altogether.
I promised in my last edition of Weekend Reads that I would take up the mantle and continuously cover fintech. Something to watch in this space is the disintermediation of traditional investment banking roles. While crypto-this and crypto-that have sucked the air out of many fintech conversations, to me, such developments are also long-run game changers. Just ask Spotify, which is foregoing traditional investment banks for its forthcoming IPO. Hmmmm!
A friend in the big data analytics space sent me this outstanding summary of viability predictions about major new technologies that have techno-fools drooling. This is a nice reality check from someone qualified to weigh in on such matters.
Admittedly the following story is not so much about behavioral finance as it is about the power of meditation and human creativity. Why? The piece details how neuroscientists mapping the human mind have found a statistically significant connection between brain interconnectivity and intelligence quotient (IQ). This is a claim that I made in Meditation Guide for Investment Professionals. The original article — I LOVE primary source data — is also worth a read.
Environment, Social, and Governance (ESG)
Did you know researchers have used data and smarts to determine good locations for future solar farms? While on the subject of ESG, in the “G” for governance category, a UBS analyst claimed he was fired because he issued overly bearish reports, and a court agreed with him. What a shock. “What, you mean there is pressure on the sell-side to hype?” Say it isn’t so. Kudos to the analyst for standing by his independently derived opinions. Well done.
Oh wait, more ESG! Many in the ESG community have long believed that insurance companies will be among the first businesses to acknowledge that climate change is real. After all, insurance firms pay attention to data so that they can properly underwrite risks. Lo and behold, insurers are going cold on the coal industry.
Last, this candidate for 2018 Story of the Year 2018 details BlackRock’s recent call to businesses to contribute to society or risk losing its support. Wow! Prediction: This is not the last time we will see activist asset owners get serious about global issues.
In keeping with this month’s theme, I didn’t feature a “Fun Stuff’” article. If you have read something fun in the last month, paste the link in the comments section!
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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