I received many emails from readers feeling the same as me regarding the comments I made in my prior weeklies on assets with no intrinsic value. So far, some of those assets have shown genuinely outstanding performance, and I am happy for everyone who made money with it! Well done!
Where is it?
Here I am, sitting in my office at home on Thursday evening after 8 pm, and still no crash anywhere to be seen. (Due to the covid-19 pandemic, we have reduced physical presence in our offices in Schaan, Liechtenstein and, we often work from our individual homes).
A Question of Liquidity
How come this crash does not materialize. So many analysts, bankers, brokers, journalists, social media people are expecting a crash for months, and it just does not happen. Well, I believe that we will not see a significant crash in equities markets as long as central banks keep injecting liquidity into the system. Valuation in some stocks seem stretched; personally, I think that, especially in some Nasdaq stocks, a correction would probably not be a surprise and yet, here I sit and wait, and stocks are trading within normal boundaries after yesterday’s Fed meeting.
Expectation
Fed Chairman Jerome Powell was very clear about it yesterday and does not seem intrigued by the temporary inflationary pressure we currently experience. However, if towards the end of summer, inflationary pressure has not ceased, central banks may feel urged to counteract and interfere verbally or act by reducing their asset purchasing program, by suspending their asset purchasing program, or even by increasing interest rates. Such measures could lead to an adverse reaction in equity markets. As I have mentioned before, I still believe that the current inflationary pressure is temporary, but I obviously may be wrong.
Positioning
Quite some people are contacting me regularly asking for advice. Ladies and Gentlemen, it would be not very sensible to advise people I hardly know. Investing depends on total wealth, age, risk tolerance, cash flow needs, etc., and this is why at Incrementum, we invest much time in filling in risk- and client profiles for our private clients before accepting a mandate. Furthermore, and for regulatory reasons, I am not allowed to give any advice just like this. Therefore, please do not take it personally if I cannot answer your questions the way you may expect them to be answered. Thanks for your understanding.
Please do not hesitate to write back to me and please let me know your views!
… but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!
Ladies and Gentlemen, I wish you an excellent start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Today I would like to point out some thoughts on the relativity of value.
…but first just some more on Inflation
Ladies and Gentlemen, I do not feel entirely comfortable in an environment of exploding central bank balance sheets and government budget deficits. We see helicopter money, small amounts for the time being, but eventually, why not rain down millions per person, as one of my readers pointed out? You know, if eventually money has no value anymore and is a simple lubricant for the economy and cannot be used as a store of value no longer, any outcome seems possible.
But enough for inflation so far. Maybe you want to have a look at the timber price chart. Timber is significant for the U.S. housing industry, and this chart looks rather «topish». Now, I know everyone is forecasting higher inflation right now, but I believe, if salaries are not following price increases on a recurring basis, higher inflation or even hyperinflation will not occur. We will certainly come back to this in a few months from now.
Unprecedented Times
We truly live in unprecedented times. Ladies and Gentlemen, I genuinely do not like using the term «unprecedented times». Too many analysts and journalists have overused this term in too many publications. However, the term is accurate after all, and yet, looking back at the last 120 years, was this not always the case from time to time (at least more or less)? Ask people who have lived through WWII, experienced the Vietnam war, the fall of the iron curtain, the Berlin wall, etc.
Migration in Asset Management?
I read an intriguing article the other day, and I did mention my view to Mark, one of my readers, about it. The article somewhat created a blurred vision in my head that maybe we live at the brink of a time of an ongoing migration from what I would call a period of classic asset management (connected to a classic value approach) to a form of asset management of exponential growth, exponential opportunity and exponential loss potential. I cannot think much of some of those «assets» out there, yet they still show phenomenal price increases. Maybe my “value- and positive cashflow-based” investment approach not only is old school but outdated. We will only know in the future what approach still holds in a few years from now. If investors are willing to pay the price for what I would call an asset without any intrinsic value, it clearly shows that value is relative according to and depending on an investor’s point of view.
Uncomfortable
Nevertheless, I just feel uncomfortable looking at «assets» with now intrinsic value exploding in price also because members of specific social media platforms push them to unexpected levels. To me, this has almost a Ponzi schemes character. Again, I am old school in many ways, so do not take my perspective too seriously.
Please do not hesitate to write back to me and please let me know your views!
… but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!
Ladies and Gentlemen, I wish you an excellent start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
This quarter’s advisory board call we talk about inflation and what fundamental changes will likely lead to it. This time we welcome Otavio Costa as our special guest.
Thank you very much for all your feedback. I received many emails from people who so far have never shared their thoughts with me. I take this as a compliment to have picked a topic of interest and also as a sign that inflation is on many of my reader’s minds.
Detecting Inflation
As I replied to feedback, I received: «When it comes to detecting inflation, deflation or anything, really, it always fascinates me to realise that we humans often see facts ex-ante but cannot correctly classify them and then rub our eyes in amazement ex-post.» Everything is on the table; maybe we can see it, and maybe we can not. Maybe we can draw the correct conclusions from what we are seeing, and maybe we can not. Nevertheless, my partners and I are trying to draw the correct conclusions and yet, often fail to predict the right outcome. Mea culpa!
I maybe need to clarify
Maybe, Ladies and Gentlemen, I have not expressed myself precisely in my last weeklies on inflation; I am not against looking at history and considering findings, adding them into the inflation equation; however, I think it is dangerous to extrapolate history into the future.
Very exciting!
In my next weekly, I would like to look at what we can expect from markets in the upcoming months and maybe share some of my thoughts on the relativity of value with you. I hope this will be exciting for all of us.
Please do not hesitate to write back to me and please let me know your views!
… but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!
Ladies and Gentlemen, I wish you an excellent start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
«The key is not to predict the future but to prepare for it.»
Feedback
You know, Ladies and Gentlemen, Anton and I received many messages, i.e. feedbacks to the last two issues of «Stefan’s weekly». Thank you very much, Barbara, Gabriel, Bob, Garry, Mark, Anton, Stephen, Robert, Paul and many others, for your precious feedbacks and discussions. The quote by Pericles (Pericles—facts and information (nationalgeographic.com)) was sent to me by Bob. Many thanks, it fits perfectly our discussion on inflation!
And yet
We firmly believe comparing historical events and conclude that “this may be so from now on” is a shortcut to fundamental analysis. In the end, Anton, me or whoever, we do not know; we may assume and try to make sense of it. I can assure you, my partners and I are trying very hard to give our best possible view, but more we cannot possibly do.
This time is different
As Anton wrote to me, if we look back at the last 120 years, economies have changed their composition a lot! Therefore, the mechanisms for transmitting monetary policy and fiscal policies are different. Furthermore, the size of companies and governments is very different. The world today has almost no resemblance to that in the 60s or 70s, or 90s. Ladies and Gentlemen, I am always amazed at how analysts, bankers and investors can ignore this fact. By definition, «this time is different.» Even if we may draw certain conclusions from the past, and I can quickly agree to that, and even if we recognise correlations, historical events can not reproduce one for one.
Custom-tailored inflation
I mentioned to Gabriel in a mail last week that inflation is something rather personal. I did write a weekly about the topic last year. The shopping basket used by governments to measure inflation first of all changes from country to country and the composition changes from economic period to economic period, and yet it still is most probably not comparable to the shopping baskets of most individual citizens of any given country. This is why I recommend those interested in creating their own inflation measure, doing so by composing your shopping baskets and noting down prices of your household’s 20 most important products used in your household (for example, in an excel sheet) and write down the price changes quarterly. It probably makes sense to weigh the individual products used in your household in % of the total household budget for more advanced statisticians.
Please let me know your views!
… but please do not forget (instead of hitting the reply button) to send your messages tosmk@incrementum.li
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
I received a lot of feedback to my last weekly. I would like to come back to that feedback next week, for this week I have a “special” by my friend Anton to share with you. Please enjoy the read:
“Rational Hope
There is a certain amount of consolation, or relief, in looking at the past, no matter how distant and turbulent it was, and concluding that tomorrow will, at least to some extent, look like yesterday. This line of thinking is a form of rational hope: the human world is somewhat cyclical, but this circular quality is in direct opposition with another aspect of our existence: entropy (which means change).
Investors are required to understand if and how things changed. This means assessing what parts of our world will resemble the past and not going to do so. This is not an easy task, and maybe it can never be done with absolute accuracy; however, it is a necessary endeavour to successfully (i.e. profitably) invest.
The backbone of all investment analysis is data. We often look at charts and tables to understand how various parts of the economy and financial markets have changed and how they may do so going forward. It is on this subtle but inevitable step of judgment – between the data that captures the past and our mental extrapolation into the future – that our discussion will focus.
Inflation Expectation
At the moment, inflation is at the forefront of investors’ conversations. There is widespread expectation that, due to what the central banks and governments across the world have done in response to the COVID-19 pandemic, consumer price inflation is, more or less, “inevitable”.
Why has this consensus formed? One answer can be found in the words of Joseph Gagnon, a senior fellow at the Peterson Institute of International Economics: “The stimulus is five times bigger than any conceivable need. […] We have never done this since World War II, and there was massive inflation. They put on price controls, but there was still inflation.”
In other words, previous events were extrapolated into the future. Gagnon is not alone, of course. As seen in the above chart, the majority of market participants expect these actions to lead to inflation because the past says so.
However, today was not yesterday, and tomorrow is not today. Here is how the world looked during the time of Gagnon’s example.
In the aftermath of WWII, the world economy was different: the US was the world’s major economic force, having won the war. Manufacturing was still a dominant sector in the economy for many countries. The monetary system was anchored in the Bretton Woods agreement, signed in 1944. The demographic makeup was very different, too, with only 2.5 billion people in 1950. The first hedge fund was established in 1949 by Alfred W. Jones, and there were no ESG products and no internet. The structure of money markets was different, with the first money market fund launched in 1971. Not to mention that societal values were different back then, and global trade was less interconnected.
Massive Changes
Today, all of these dynamics (and many more) have changed: developed economies are more service-orientated, with manufacturing representing a smaller contributor to their GDP (see two examples below). The dominant economic force is no longer the US alone but also China and the European Union. The monetary system is fiat with a tilt towards credit money. We have many more types of assets to invest in, and more people are playing in the markets. The world’s population grew from 2.5 billion to 7.8 billion in 2020. The hedge fund industry is now around $3.1 trillion. The structure of money markets is fundamentally different: the Federal Reserve (and other central banks) have shaped the channels of liquidity supply multiple times, more prominent following the GFC of 2008 and again during the COVID-19 pandemic in March 2020. With all of these changes, the mechanisms for transmitting monetary and fiscal policies have also changed. The past succumbed to entropy.
For successful investing, looking at data alone is not enough. If we make decisions based only on data, they will likely be wrong. Why? Because data are the traces of socio-economic activity. In other words, the numbers and their by-products (charts, tables and so on) are outputs of a broader environment, which is an open system with an “n” number of factors that collide to provide a single data point.
Sure, 50% in 1950 meant the same thing as now. And so did a correlation of 0.8, for example. Nevertheless, these statistical figures need context. Often, however, we like to isolate certain factors and attribute them weight in the cause-effect dynamic to justify our judgment. For example, let us say that CPI inflation has reached 2.2%. We can view 2.2% as a weighted-average, where we divide each factor by its weight (importance) in deciding the direction of CPI inflation. We can make a mistake to attribute higher weights to factors that confirm how we see the world.
Money Supply
In the context of inflation, this can be money supply aggregates. We see the spike in M2 or M3 and link that growth in money supply to higher inflation. It is almost an automated mental process: because of A, then B must happen. This induction is further strengthened by comparing historical events without understanding that because it happened back then it may not happen now, for all the reasons we discussed above.
The argument that an increase in M2 or M3 leads to inflation is based on Fisher’s “butter argument“: if the total of goods produced in the economy is the surface of the bread when we put more butter (money) on the bread, we will have an increase in butter relative to the surface of the bread, i.e. inflation, unless the surface of the bread also expands so that it can absorb more butter.
Here is just one reason why the above chart may not lead to higher CPI inflation. As Ray Dalio explained, if you put money back into the economy by roughly the same amount that it was taken out / cancelled, then consumer inflation will not pop up. The equation is: – X (money destroyed by crisis) + X (money printed to replace them) = 0 CPI. Assuming this money gets directly in consumers’ hands and they spend it on CPI-related goods, not on stocks etc.
The Past will not come back
Some things are indeed repetitive or cyclical: human nature. Our needs have remained the same as 100, 1000 and 10.000 years ago: shelter, food, rest and so on. Although our nature may offer some element of stable cyclicality, the changes in our environment and how we have adapted to them can make comparisons with past situations less relevant. Sometimes, we have to accept that the world around us is new, that the past is not coming back, and the future is simply uncertain.”
Thank you very much, Anton, for sharing your thoughts! Please, Ladies and Gentlemen, let Anton and myself know your views!
… but please do not forget (instead of hitting the reply button) to send your messages tosmk@incrementum.li.
Many thanks, indeed!
Ladies and Gentlemen, I wish you a good start to the day, a wonderful weekend, and above all, good health!
Yours truly,
Stefan M. Kremeth
Wealth Management
Incrementum AG
Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
