finding a place to stand (iii)

the macroeconomic situation: recession on the cards?

As a stock market investor, given the possibility of owning companies in the major developed economies, as well as the fact that about half the earnings of US-based companies come from outside the US, a key high-level question in portfolio positioning is whether I want to have exposure to the US economy (either through US-based or foreign-based companies) or to the rest of the world. Where will growth be better?

Looking outside the US…

China, the largest economy in the world, is being slowed by three major difficulties:

—a housing lending crisis that I think falls somewhere in severity between the US savings and loan crisis of the early 1980s and the mortgage loan crisis of 2007-08

—movement to bring fast-growing companies like Alibaba and Tencent more directly under the control of the Communist Party–slowing their expansion in the process, and

—failure of locally-produced vaccines to bring covid under control.

All this implies that for a while at least China will no longer be the growth engine for the world.

Japan is in its fourth decade of stagnation, the result of adhering to: protection for industries of the past, no immigration, marginalization of women and members of minority groups–policies whose negative effects are offset by low interest rates and a weak currency. Essentially the economy Trump was trying to create in the US. The largest economy in the world in the 1980s, it’s now an afterthought.

Europe, though younger than Japan, is another fast-aging area with, generally speaking, the similar long-term economic problems as Japan. Same roots, too. Its current issue, however, is that it is paying for Russia’s invasion of Ukraine, and the implied threat to the rest of eastern Europe, by buying Russian oil and gas. Sanctions against Russia are making hydrocarbons more expensive. Making the positive assumption that current hostilities end at worst in stalemate for Ukraine, weaning itself from Russian fuel will be an expensive and disruptive task. Italy appears to be perking up for the first time in decades; on the other hand, the UK, lost in dreams of past naval glories, is only beginning to work out how badly it damaged itself through Brexit.

To sum up, China is unlikely to take up its pre-pandemic role of engine of world growth. No help from Japan. The Russian threat may end up reinvigorating Europe economically, although that area also has greater exposure to possible negative fallout from the war in Ukraine. From an earnings momentum view (meaning without considering whether high risks are mitigated by low valuations), then, it seems to me that the US could be the only game in town.

PS. When I look at media worries about possible recession, it seems to me that a large part of the argument (assuming there is any rationale for reporters’ posturing) is that the situation outside the US is not that cheery.

more on Monday

finding a place to stand (ii)


Given the intellectual carnage of the Mao era and the chronic inability of central planning bureaucrats to make economically sound decisions, Deng turned to “socialism with Chinese characteristics,” that is, American-style capitalism, in the late 1970s. What followed was a half-century of explosive economic growth, with huge fortunes created by the bold, the economically savvy and the politically connected. Western consumer firms, from McDonalds to Hermes, soon realized that they had an addressable market of, say, the wealthiest 10% of the population. Given that the overall population is so large, this translates into an almost totally untapped market of 150 million potential customers. Even at prices 40% above those prevailing in their home markets, luxury goods companies found their wares flying off the shelves. A massive market for imported building materials developed as well.

These salad days are long since over, however. When Xi Jinping took charge in 2012, he faced two related issues that were undermining the authority of the Communist Party: widespread, very visible, corruption among public officials who arranged permission and financing for entrepreneurs; and the raw economic clout of the non-Party entrepreneurs themselves (think: Jack Ma boasting that he would use Ant Financial to destroy the state-owned banking system).

So he set about bolstering the position of the Party. One direct result has been slower growth overall. Two current pressing issues: what appears to be wild overbuilding of residential housing, financed by state-owned banks; and the decision to use locally-developed anti-covid vaccines that don’t appear to work very well. Both imply that the near-term economy is much more likely to surprise on the downside than the upside.

more tomorrow

finding a place to stand

It has always seemed to me that there are two relatively distinct kinds of analysis that an equity investor should do:

–one is to understand the inner workings of individual companies and (as a growth investor) to own stock in firms that are well-managed, have industry-leading products and are growing profits quickly.

–the second is to understand how the overall world economic winds are blowing and to position holdings where they are likely to be helped the most by economic tailwinds and hurt the least by economic headwinds.

On the second point, it seems to me we’re in an unusually complex situation today. Here are what I think are the most important considerations:


For large parts of the past half-century, during periods of cyclical economic expansion, growth in emerging economies, and stock markets, has been significantly faster than in mature markets like the US and Europe. Not so over the past 15 years or so, however. Two reasons, I think: everything that can be offshored has long ago been–and as robots replace manual labor, reshoring has become a thing; and what offshoring there continues to be is movement into markets that are simply not investable. For example, early in my investing career I saw textile machinery in Taiwan that had originally been used in the US and Japan–and which was in the process of being shipped off to Thailand. Those machines are likely still around, but now scattered in places like Bangladesh or Cambodia or Peru, where they’re not important enough to move the economic needle.

invasion of Ukraine

The biggest stock market issues I see are: agriculture, metals mining, oil, natural gas and contract software engineering. There are two aspects to each–the loss of production in Ukraine and boycotting Russian products to deny that country hard currency.

My uninformed guess is that increased wheat planting in Canada, the US, South America (?) + substitution of other grains will make this a non-issue by 2023. Similarly, I think skilled/cheap software engineers from Ukraine and Russia will relocate to other parts of Europe and reemerge as workers for US multinationals. As for mining of things like lithium, I have no idea.

Oil is playing out more or less as I’d thought. The actual loss to worldwide oil production appears to be much less than pessimists had expected. The Middle East is unwilling to up production enough to depress prices, however, but it is clearly not in their own best interest to do so. And having lost their shirts so recently by imprudent lending to shale oil drillers, junk bond funds aren’t rushing to do so again. The ultimate result: today’s higher oil prices will remain and will likely lead to sharply accelerating the development and widespread use of electric vehicles.

Natural gas is a somewhat different issue, since it requires very expensive transmission facilities. The ultimate result here will likely be that the EU limits purchases of natural gas from Russia and switches to imported LNG as quickly as possible (which means several years, I think).

more tomorrow