Market Macro Myths


Market Macro Myths: Debts, Deficits, and Delusions

Hyperinflations, Hysteria, and False Memories

The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp


I always think that the ratio of deficit/GDP may not be as danger as people believe. We might see 200% or 300% deficit/GDP as insane just like a thousand years ago people would feel government deficit was unforgivable sin. James Montier holds a similar view and verify it from some simple macroeconomic perspectives.


“Sound finance”

Governments should seek to balance their budgets. Or simply not having deficits of more than X% of GDP.

“Functional finance”

government deficits should be judged only by the degree to which they help us reach the goals of macroeconomic policy (generally held to be full employment and price stability)

“The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science… The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance.” by Abba Lerner1943 

Why people holds sound finance?

Myth 1: Governments are like households

Over-accumulation of private sector debt is a problem. But this may not apply to governments and their deficits. 

For either nations with monetary sovereign status or nations without, public debt is different from private debt.  [1]

expenditure model of GDP:

Y = C + I + G + (X – M)

income model of GDP:

Y = C + S +T

-> (S – I) = (G – T) + (X – M)

-> if the private sector wishes to save in excess of its investment, then there must be a government deficit and/or a current account surplus.

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1.The private sector generally runs surpluses with the counterpart coming from the government’s fiscal deficits.

2. wherein the private sector has run significant deficits with neither experience ending well.
1st was the TMT bubble, when firms drove the private sector into deficit.
2nd was the housing bubble with households driving the private sector into deficit.

-> The dangers of debt seem accumulated by the private sector rather than the government sector

–> mind-bogglingly large national debt won’t be repaid, given the counterpart nature of the government deficit, the national debt could easily be relabled as national saving.

Myth 2: Printing money to finance budget deficits is inflationary



If one is willing to make rather unrealistic assumptions such as velocity and output being fixed, changes in money must cause changes in prices.

PY = C + I + G + (X – M).

-> It is certainly possible that running government deficits can create inflation (if doing so pushes the economy beyond its limits), but so could any other element of GDP (e.g., consumption or investment).


In neither case of US or Japan, there is any evidence of a strong link between fiscal deficits and inflation. [2]

Myth 3: Budget deficits/high debt lead to high interest rates


The biggest issue is that the model assumes that savings must precede investment.

“This is a reasonable assumption if you are living in a onecommodity, corn-based economy. If you want to invest in more corn, you must save some corn first. However, when we move to monetary-based economies this ordering is no longer true. Investment can (and does) precede savings in such a system. When you want to invest, you go to the bank and ask for a loan. The bank decides whether or not to grant such a loan, but it isn’t constrained by deposits or reserves. It will make the loan, and then worry about how to ensure regulatory compliance with reserve requirements, etc., afterward.”


The real world model acknowledges that when a government runs a fiscal deficit, it creates excess reserves at the bank. [3]
-> No bank willingly sits on excess reserves, and so money is lent out in the interbank market.
–> This has the effect of lowering the interest rates towards zero (or to the level that the central bank pays on reserves).

—-> So the prediction from the real world model is that interest rates get driven down by budget deficits, not up as per the loanable funds framework.


Budget deficits and high debt levels don’t seem to be associated with higher interest rates at all. 
<- weak economic growth is likely to cause both high deficits and low interest rates

Myth 4: Budget deficits are unsustainable

In essence this comes down to whether the real interest rate (r) is higher or lower than the real growth rate (g).


s is the primary surplus (the budget position before interest payments), d is the initial level of debt to GDP


The biggest problem: Is it reasonable to assume that real rates and real growth will be the same for the next 750 years?

because the central bank sets the interest rate, they should pretty much always be able to ensure that the real interest rate is below the real growth rate.

<- The obvious issue for Greece (in the chart above) is that it isn’t monetarily sovereign, and also not fiscally sovereign

Myth 5: Debt is a burden on future generations

“There may well be distributional issues if all of those bonds are owned by, say, the grandchildren of Bill Gates, but these will be intragenerational issues, not intergenerational ones.”

How this matters

1. Given monetary policy is largely impotent with regard to the real economy,  fiscal policy offers a real alternative, if we understand the nature of government debts and deficits.

2. A greater reliance upon fiscal policy rather than monetary policy could also be good news for value investors. 

Reliance on monetary policy as an effective stabilising device would involve…a high degree of instability …in the capital market…The capital market would become far more speculative… longer run considerations of … profitability would play a subordinate role. As Keynes said, when the capital investment of a country “becomes the by-product of the activities of a casino, the job is likely to be ill-done.” — Kaldor, 1958


Why “business” doesn’t like the idea of fiscal policy?

“The reasons for the opposition of the “industrial leaders” to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment.” by Kalecki 1943 [4]




Monetarily sovereign are those that issue their own currencies, have floating exchange rates, and issue debt in their own currency, such as the United States, the United Kingdom, and Japan. While the Eurozone is a prime example of those that lack such sovereign status.

Those nations that enjoy monetary sovereign status can, in effect, borrow from themselves. They have the ability to create money and spend it – essentially ex nihilo. Thus they can’t ever be forced into insolvency.


The only evidence of any linkage that I could find in the U.S. data was around the time of World War II, when the U.S. was running major deficits due to the war, and then seeing inflation as a result of the shutdown in trade and eventually the return to a peacetime economy with the unleashing of pent-up demand.


When a government spends it simply tells the central bank to credit the government’s account with funds (created by keystrokes).5 Similarly, when a government taxes, these funds eventually end up as a credit to the government in their account at the central bank.


Kalecki notes that in a system without significant active fiscal policy, business is in the driver’s seat, and their animal spirits may determine the state of the economy.

On the “dislike of the direction of government spending,” Kalecki notes that industrial leaders hold a “moral principle of the highest importance” to be at stake.

“Under a regime of permanent full employment, the ‘sack’ would cease to play its role as a ‘disciplinary’ measure… ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. ”



Productivity puzzle and make-work


The great American make-work programme

Osborne’s unorthodox solution to the UK productivity puzzle

Banks, businesses or the bust? Deeper into the UK productivity puzzle


UK Productivity Puzzleuk-disposable-income

The UK has outperformed at creating jobs since the crisis, yet has done poorly at boosting living standards.

<- the problem is a combination of collapsing productivity and insufficient capital investment.

uk-gdp-decompositionquality-adjusted labour input” — hours worked adjusted by education and experience

More talented people are working more than ever — UK labour input has grown at an annual average rate of 2.5 per cent since the middle of 2011— yet the reported value of what all those people are doing has collapsed.

Possible theories:

1.After financial crisis the financial system cut lending, especially to upstart businesses  [1]


But the growth rate of underlying productivity plus the capital stock had begun slowing by mid-2004.


And lending wasn’t expensive

Composition of corporate is also not a good explain, as all businesses experienced a big drop in underlying productivity since 2008. [2]


2. “general demand weakness coupled with flexible wages”

Businesses take advantage of low nominal wage growth and low interest rate to survive in a low-demand environment [3]

A solution:

Firing a bunch of low-wage workers raises the average pay of whoever is left and therefore raises measured productivity. [4]
In America, the savage cuts in employment during the crisis caused a temporary spike in measured productivity.


But American also suffers after 2010

fredgraphfredgraph-1chartMoreover, a more secular problem is
A staggering 96 per cent of America’s net job growth since 1990 has come from sectors known to have low productivity
(construction, retail, bars, restaurants, and other low-paying services were responsible for 46 percentage points of total growth)

and sectors where low productivity is merely suspected in the absence of competition and proper measurement techniques
(healthcare, education, government, and finance explain the remaining 50 percentage points)

Even given the fact that gap between low and high productivity industry is expanding


It’s tempting to conclude

  1. many of these additional workers are doing little to boost real living standards
  2. their continued employment is effectively the product of subsidies extracted to provide make-work, rather than the result of competitive market conditions
  3. part of the slowdown in measured productivity to these shifts in the composition of the workforce

If we check changes in employment since 2000


94 per cent of the net jobs created were in education, healthcare, social assistance, bars, restaurants, and retail, even though those sectors only employed 36 per cent of America’s workforce at the start of the millennium


Average hourly pay in these sectors, weighted by their relative sizes, has consistently been about 30 per cent lower than in the rest of the economy. (even lower considering the less work time [5] )

One could argue these are things that can’t be done either by machines or, to a lesser extent, by far cheaper foreign labour.
And aging society implies somewhat greater spending on healthcare and more employment in the sector.

A simple conclusion:

Employment booms in 21 century are no longer caused by the rapid growth of the most-productive enterprises like it used to be.



Is it something familiar? Yes, We’ve seen some picture about Japan that shows a high work participation but growth dominated by part-time labors. And don’t forget, Japan has the biggest aging problem in world and its labor productivity has been essentially flat for 20 years!



Economists at the Bank of England and the Institute of Fiscal Studies recently suggested that an impaired financial system since 2008 has prevented resources from being moved to their best uses, which in turn has dragged down output per hour by a significant amount.

Manufacturing firms in the US, Japan, and Western Europe are far more productive than firms in places like India and China because the gap between the best and worst manufacturing firms in poorer countries is much wider than in the rich world. That, in turn, is because the best firms in China and India often face constraints on their ability to expand. In theory, narrowing the gap could boost aggregate manufacturing productivity by around 40 to 50 per cent.


A fascinating new paper from the National Institute of Economic and Social Research, which shows the UK productivity problems aren’t concentrated in any particular sector.

And businesses that died off in 2008 were of lower average quality than those that died off in previous years, which should also raise the overall productivity of the remaining companies.

According to the NIESR researchers, productivity growth within surviving manufacturing firms accelerated during the early 1990s.


The recent recession was different to the previous recession because productivity growth collapsed within firms. This is unlikely to be directly related to credit restrictions, which would not have prevented businesses from laying off workers. It is more likely to be associated with the lack of cost pressures, including low nominal wage growth, that allowed businesses to survive in a low-demand environment. High nominal interest rates, an overvalued exchange rate and continued wage growth in the earlier recession are likely to have incentivised surviving businesses to continue to boost productivity growth to a far greater extent than was the case in the most recent recession.

However, there is no intuitive connection between the rate of inflation (a nominal variable) and the propensity for businesses to boost productivity (a real variable) .
In fact, the 1990s consensus was price stability led to faster productivity growth because businesses could only boost profits by cutting costs with the help of technological and process improvements.

(QE might create a invisible inflation that matters for business decisions.)


If the labour on offer isn’t worth this minimum price, employers will prefer to substitute people with machines, or invest in other improvements to offset the declines in hours worked, or perhaps even endure lower sales if it means better earnings.

Hence a lot of economists are wary of raising the minimum wage too much because it would reduce employment among those who already have the lowest living standards and most volatile incomes.



And since typical jobs in bars, restaurants, and retail involve far fewer hours than normal, weekly pay packets for workers in these growing industries were more than40 per cent lower than workers in the rest of the economy. Average weekly earnings are now 3 per cent lower than they would have been if the distribution of employment had stayed the same as in January, 2000:



The stock market is vanishing


The stock market is disappearing

Activity has all but dried up in the riskiest part of the stock market

The stock market is vanishing


Buyback :

~20% of S&P 500 companies have reduced their share count by at least 4% yoy in each of the last five quarters, and that appears to be continuing into Q2:

But not completed one [1]

However, it means earnings per share is 4% higher and P/E is 4% lower than a year ago for those companies, which helped stocks outperform.


The question might be the price [2]


One thing certain: There is simply less “stock” in the stock market. 


As of the end of 2014, outstanding share count was well below where it was about 10 years ago, and the lowest in FactSet’s data set.


While net flows into US stocks have been relatively flat since 2006,  net issuance has plummeted.


The biggest factor behind the decline in IPOs is the heightened volatility in the stock market. [3]


Secondary offerings is also dropping.

Listed firms is disappearing 

The number of firms with shares publicly listed in the University of Chicago’s Center for Research in Security Prices aggregate index has fallen to 3,267 from a peak of 6,364 in 1997. Reason:

“Between the lack of IPO activity, the pick-up of M&A, and buybacks, the US equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes. [4]
Companies may not want to come public due to the additional cost of Sarbanes-Oxley or the fact that the private market has become a bigger source of financing than it has been in the past.”





In 2015, announced buybacks are up 50% compared to 2014.

however, that the increase in announced buybacks is not bringing about an increase in completed buybacks and also notes that much of the increase in buyback announcements comes from a few big players.

For example, Apple and General Electric have both announced $50 billion buybacks this year, while the Home Depot said it would be repurchasing $18 billion worth of shares. And Gilead Sciences, Qualcomm, Pepsi, American Express, and Merck also have all announced buybacks worth $10 billion or more.[


Buying back stock is, for example, Warren Buffett’s preferred way of returning cash to shareholders (rather than paying a dividend). But Buffett thinks share buybacks make sense when stocks are undervalued.


“IPOs are a higher-risk proposition because the market isn’t totally sure of their value. So you want a relaxed market when you enter with that higher risk.”

“January and February are typically bad months for IPOs anyway,” “Typically, these companies have financial periods ending in March so they wait for that next set of statements before going to market.”


The argument is that with fewer companies to choose from, active managers are forced to crowd into certain stocks. Crowding makes it impossible to differentiate returns and causes these managers

UBS outlined 3 major trades in the market right now that seem to look a lot like bubbles: long US healthcare, short US energy, and a bet against emerging markets.






The diverging US Housing Industry


Conditions Are Ripe for a Big-City Exodus

So What If New York Is Unaffordable? That Helps the U.S.

Rich City, Poor City: How Housing Supply Drives Regional Economic Inequality




In late 1990s, despite dotcom bubble that eventually crashed back to earth, from a money flows standpoint, the bigger imbalance was that high valuations of large-cap stocks relative to small-cap stocks

The U.S. housing market is similarly positioned today as it is growing more unequal.



The pack of most expensive markets is diverging from the rest.
– The priciest metros were 144% more expensive than the least expensive metros in 1986 but that differential has grown to over 319%.


– What’s more, expensive markets almost always had bigger price gains -> the housing rich are getting richer while the housing poor are getting poorer.


The economic fortunes of homeowners who bought in the 1980’s have been tied closely to the random fortunes of U.S. geography [1]. But long lived the West Coast, Northeast, greater Washington, D.C., and Denver.

Even Techies Can’t Afford San Francisco Anymore


The 30-year change in home value across the largest 100 metros is strongly correlated with

1. income growth


2. the amount of housing construction relative to demand


supply elasticity is strongly correlated with house price appreciation
– a lack of housing construction in many metros induced home price appreciation. [3]


A.  Just buy homes in the most expensive metros !!!

B. Since the priciest metros continue to diverge from others, these geographic disparities are sure to persist into the near future. [2]



But there are also good things:

 a wealth transfer from the most desirable communities to the upwardly mobile ones
– The tens of thousands of people who leave New York and California every year act as sources of new demand in the places to which they move, like Florida, Texas and Colorado, where job migration is the driving force of the economy


— Some economists argue that this migration from high-cost to low-cost cities acts as a drag on productivity and national output, because less dense cities are less productive than more dense cities.

+++ 1 This theory is running up against a new reality, however. If you think of wages as a proxy for productivity, the numbers back this up: San Francisco tech workers have less and less of a salary advantage over tech workers in other cities.

+++ 2 Even if the productivity argument holds, there are economic equality and civil rights benefits to migration from coastal metros to less-developed ones. [3]

Therefore, Density limits in leading cities fuel the economies of rising cities like Atlanta  
– > thus decrease economic inequality between metro areas and lead to economic interdependence that drives civil rights




Valuations converging of large-cap stock and small-cap stocks will be replicated in the housing market. Reason:

1. There’s a limit to everything. Substitution dynamics — consumers weighing the value of various goods — applies to housing just as much as it does to food.

2. internet will lead people and jobs leave primary metro areas for secondary ones [4]




There is wide regional variation in the amount of wealth generated from homeownership. Homeowners’ return on investment in Rochester, N.Y., and Wichita, Kans., have been +85% and +89.9%, respectively, while the return in San Francisco and San Jose has been +557.6% and +496.5%


These findings are meaningful, since wealth is often passed down to future generations, who in turn might use such inheritance to also purchase homes, which continues the cycle of wealth accumulation. See Family Tradition: Kids Are More Likely to Own a Home If Their Parents Did


スクリーンショット 2016-09-03 19.32.01スクリーンショット 2016-09-03 19.32.11スクリーンショット 2016-09-03 19.32.23

Despite a need for more housing, and despite the labor shortage and the wage growth, construction industry employment fell 6,000 in April and 16,000 in May and showed no growth in June. This is the first time in more than five years that construction employment has shown no growth for three months.

While the signals from the economic data are very strong, the market signals have been more muted. What’s clear is that 2-3 percent construction wage growth and 5-6 percent house price appreciation isn’t anywhere close to creating strong enough price signals to encourage the market to build all the housing we’re going to need over the next decade.


Job convergence between metros “spreads the wealth,” ensuring that tech workers in Raleigh and Atlanta and manufacturing workers in South Carolina and Alabama have access to good jobs too.

Over the past 50 years, Southern communities with more-developed business interests have made progress on civil rights before those with less interdependence with the national economy.One of the reasons Atlanta made more progress on civil rights in the 1960s than Birmingham was the local business community was afraid of losing access to Northern capital.Similarly, when “religious freedom” bills and other measures seen as anti-gay arose in Indiana, North Carolina and Georgia, national business interests like Apple and Pfizer (not to mention Nascar) pressured politicians to stand by gay rights. Donald Trump’s shrinking electoral map is in part due to the spread of well-educated professionals to Virginia, Colorado and North Carolina.


The conventional wisdom that the internet would allow people and jobs to leave primary metro areas for secondary ones has run up against the fact that over the past 20 years. BcauseThis at the height of the last housing boom the impact of the internet on daily lives was still quite small

Now, with a labor market approaching full employment and the housing market nearing a normal recovery, it would be fair to evaluate the question of whether people will move.

The latest Case-Shiller home price report shows that Portland and Seattle have the fastest home price growth in the country, benefiting from Bay Area transplants.Additionally, Sun Belt metros such asDallas, Tampa and Miami now have faster home price growth than San Francisco or Los Angeles.

The history of the last transformative technology the automobile, offers another counterargument. The Model T Ford was produced between 1908 and 1927. Yet the Interstate Highway System was not approved by Congress until almost 30 years later, and the Sun Belt boom occurred even after that. The automobile was a revolutionary technology incubated in Detroit, but its biggest beneficiaries were the suburbs in Atlanta, Houston, Dallas and the Southwest.





The U.S. Recovery Debate


Economic Survey of the United States 2016

The U.S. Economy Is in Great Shape (Compared with Its Peers)

The U.S. Recovery Is Not What It Seems

CEOs Turn More Bullish About Business Investment


Strongest recovery in the OECD

スクリーンショット 2016-08-22 3.55.32スクリーンショット 2016-08-22 4.01.12.pngスクリーンショット 2016-08-22 4.10.56.pngスクリーンショット 2016-08-22 4.00.16スクリーンショット 2016-08-22 3.59.49

スクリーンショット 2016-08-22 4.02.33

Actually the investment is no longer an advantage.

Facts holding back business investment:

  1. the ample availability of workers at modest wages, with firms choosing labor over capital
    (“Employment growth could slow as labor becomes more scarce,”  “At the margin, businesses might find it more efficient to increase capital expenditures”)
  2. the retrenching of the energy industry
    (“That trend might be over with crude oil prices returning to the $50 range.”)


Not the case: Taking account of population growth


The U.S. population is growing much faster than those of either Europe or Japan, so its economy should almost automatically grow faster as well.

スクリーンショット 2016-08-22 4.12.55

The U.S. is still ahead, but not by much. And within the euro area, Germany actually exceeded the U.S. by 5 percentage points.


スクリーンショット 2016-08-22 3.48.49.png

The fraction of those aged 25 to 54 with a job was about 2.5 percentage points lower in 2015 than in 2007. In the U.K. and Japan, the prime-aged employment-to-population ratio already exceeds its 2007 level.

If the U.S. recovery actually hasn’t been so comparatively strong,

  • Federal Reserve’s unconventional monetary-policy measures – e.g large-scale asset purchases – have been not so much effective than other central banks.


2 More important Figures

スクリーンショット 2016-08-22 4.21.59.png


Inflation shouldn’t be Worried


The stuff we really need is getting more expensive. Other stuff is getting cheaper.

Why slightly higher inflation might benefit the U.S. economy

Overcoming Our Inordinate Fear of Inflation


Fixing America’s Roads Is a Great Opportunity


1. The conception of inflation itself may deserve a revision.

(Although eating and housing are still the most important parts for common life, so does smart phone in 21th)



  1. Most of the things falling in price are manufactured goods, due to technological improvements and productivity gains for decades.
  2. International trade is another reason. Many manufactured goods come from overseas, where labor costs are cheaper. So does global competition.


  1. things like education and medical care can’t be produced in a factory, insulted from global competition
  2. Private and public insurance companies pay most medical costs, so there tends to be little incentive for individuals to shop around for cheaper medical care. So does student loan


2. How about a higher inflation target

fredgraphThe U.S. Federal Reserve Board hasn’t hit its stated inflation target of 2% in more than four years

a higher inflation rate of, say, 4 percent would

  • allow inflation-adjusted interest rates to go even further below zero to help boost economic growth during a possible future downturn.


  1. price dispersion happens
    “when companies want to change their prices but for some reason can’t, inflation distorts prices from what they should be, which decreases economic efficiency.
  2. price hikes happen more frequently when inflation is higher, which gives more credence to “menu-cost” models of price setting

 (but studies find during the late 1970s and early 1980s, an era of high inflation, the absolute price changes don’t vary that much regardless of the inflation rate.)


3. We shouldn’t care inflation!

  1. Inflation time was also a time of slow growth, deep recessions and terrible asset returns.
  2. Harms like shoe-leather costs and menu costs don’t matter that much in a digital age.
    (economists shows inflation has almost no perceptible impact on productivity — and hence, on human well-being.)
  3. The costs of 10 percentage points inflation is only about as harmful as a 1 percent reduction in gross domestic product, investigated by professor Robert Lucas
  4. Real problems is that when prices rise fast, they also tend to bemore volatile — high inflation equals uncertain inflation [1]
  5. Although the historical correlation between inflation and inflation uncertainty is well-documented, that doesn’t mean the one causes the other.

a higher inflation target can get more people back into the ranks of the employed and shouldn’t be worried as long as it’s stable [2]


4. Government spending on Infrastructure

スクリーンショット 2016-08-19 1.18.02There is considerable unused labor remaining in the economy, especially prime-aged men who would benefit the most from an infrastructure push.

Government spending to roads and bridges benefits

  • If private-company interest rates rise, it means that capital is becoming more scarce for businesses because the government is crowding them out. If that looks like it’s starting to happen, we can always hit the brakes.




If inflation is predictable, lenders and borrowers can build it into their financing deals; nominal interest rates simply rise to take into account the shrinking value of money.Workers can ask for cost-of-living increases in their paychecks, effectively indexing wages to inflation. And businesses can build inflation into their investment plans.


The Fed’s so-called dual mandate, as laid out by Congress, is “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

Investment Themes in US market


Eight Investment Themes for Global Growth: 2016 & Beyond


Digitalization of the global economy brings opportunities as well as negative implications [1]

– Profit themes are on areas of the market that have demand tailwinds: pricing power and rising ROI

1. Millennials (born at 1981 – 2000)

スクリーンショット 2016-08-17 22.17.56.pngThe Millennial generation (Generation Y) is the largest in U.S. history

スクリーンショット 2016-08-17 22.22.29.png

this demographic transition will pressure consumer spending dollars by roughly 1% a year until 2019, at which point spending should then accelerate.

demographic theme for Millennial:

  1. Homebuyers (U.S. has a shortage of entry-level housing. ) but late marriage and Rental Culture
  2. E-commerce-Biased consumption and Social Media as advertising, not brand-conscious
  3. Experiences than material goods
  4. Higher Health-Conscious
  5. Lower financial obligations but also lower income
  6. Thus larger part of disposable income spent on fixed housing and education

(Social consumption as whole will surely be depressed under the new behavior pattern of  Millennial along with less shopping of baby boomer.)

スクリーンショット 2016-08-17 22.39.31.pngA recovery of aging after 2020

2. Digital Disruption


  1. pivoting by moving to asset-light, subscriptionbased services
  2. leveraging shared infrastructure that can adapt quickly to rapidly changing trends
  3. capital expenditures (capex) is often rationalized and converted into operating expenditures (opex) (reason for the underperform in many capital-goods sectors and muted inflation)

3.The Internet of Things

スクリーンショット 2016-08-17 23.01.06.png



personal IoT (Wearables)/ The Automated Home/  Lighter, Connected and Intelligent Car/ Mass Manufacturing to Mass Customization (3D printing and advanced robotics)

4. Data Wars

User trends continue to drive exponential growth of data and traffic

  1. Social media now accounts for 90% of traffic
  2. users checking their social media site an average of 14 times a day
  3. internet impatience: every 100-millisecond delay can cost an e-commerce site 1% of revenue
  4. Consumer appetite for bandwidth remains insatiable

スクリーンショット 2016-08-17 23.20.29.png

Given the prospects of traffic growth from content-rich applications and device proliferation

– opportunities in companies that provide the infrastructure to manage, move, store, and analyze this data in cloud-based architectures

5. Biotechnology

Challenges: A high R&D hurdle + Prices of biotech drugs have risen and managed-care firms have steadily restricted prior authorization  [2], but

  1. many biotech firms are well-capitalized
  2. The FDA seems more open to approvals than it has been in the past [3]

Two primary challenges of gene-therapy companies

  1. clinical trials typically include no more than 10 patients, which makes the trials very risky.
  2. If one adverse event occurs, such as an unfortunate death, the trial could be doomed.

6. Health Care

スクリーンショット 2016-08-17 23.36.38.png

The Affordable Care Act (ACA) is to increase health-insurance coverage and have contributed to multi-year outperformance in the Health Care sector, but this tailwinds may diminish:

  1. an increase of 4% in national health-care expenditures on programs
  2. the rate of change in the newly insured is slowing
  3. offset to cheaper plans is higher out-of-pocket expenses
  4. demographic shifts are causing an increase in the Medicare population at the expense of the commercially insured demographic cohort

スクリーンショット 2016-08-17 23.43.29.pngThe digitalization of health care remains a longer-term byproduct of reform. 3 primary areas: business intelligence-driven opportunities, population health management and big data/predictive analytics.

(innovative, disruptive technologies aimed at high return on investment (ROI) solutions.)

7. Fiscal Spending

スクリーンショット 2016-08-17 23.46.47

The economic cycle has reached a natural transition as the baton is passed from monetary easing to fiscal spending.
State and local government expenditures are growing again, a trend that began in 2014, and federal spending followed

スクリーンショット 2016-08-17 23.46.54


  1. Infrastructure upgrading, particularly among construction and materials companies
  2. Defense sector particularly programs tied to cybersecurity, intelligence and surveillance
  3. renewable energy, health care sector

8. U.S. Energy

スクリーンショット 2016-08-18 1.07.31.pngTechnology-driven explosion in U.S. oil and gas production: the U.S. energy renaissance isn’t dead.

  • The U.S. is a major swing oil producer. Low prices will cause supply to fall and demand to rise. The world will probably need the U.S. to start ramping up production to meet demand by 2017.
  • companies with balance sheets that can weather the 2016 speed bump and be poised to take future market share.
  • natural gas infrastructure is a compelling area to invest in volume growth, as U.S. natural gas prices remain well below international prices.



  1. Barriers to entry are rising for a few dominant companies such as Amazon and Google, but are crumbling for many companies.
  2. The sharing economy should improve asset efficiency, but capital spending as a percentage of GDP may have forever peaked.
  3. Software and connectivity are ubiquitous, but traditional measures of productivity are stagnating.


  1. biotech drugs are far more complicated to manufacture than small molecule drugs and require greater capital expenditures and knowledge. Biotech drugs are manufactured in a living system, such as plant or animal cells, and tend to be large, complex molecules. Any company attempting to enter the biosimilar market would have to invest in bioreactors, mass spectrometers and other similarly highpriced laboratory equipment, which would require seasoned Ph.D.’s and other well-trained individuals to properly operate them.
  2. the U.S. Food & Drug Administration has historically cast a dim view on such drugs and has seemed reluctant to yield to market entrants. While it has always set a high bar that some may view as overly cautious, the FDA would likely respond by saying that such caution has been prudent.
  3. doctors have resisted the idea of switching their patients from proven biotech drugs that, while expensive, do save lives.

the collective inflation for biotech drugs was roughly 30% in 2014, the highest annual increase on record) but recently


possibly because of progress in Europe, where biosimilars have been a safe and cheaper alternative to branded biotech drugs for several years.

The aging population and a “new normal”

An outlook report from Prudential Investment Management offers an interesting view towards recent turbulence from the perspective of demography


The Turbulent Teens at Halftime: Will Low Rates and Slower Growth Continue?

A world of  a “new normal” with the relatively modest economic growth and record low interest rates of the past several year [1]

The aging population helps explain: labor force growth will be slower

female labor force participation soared and then peaked
the Baby Boom phenomenon has not been repeated



The lowest interest rates in human history

Interest rates in nature reflects the behavior of borrowing and lending money.

スクリーンショット 2016-08-02 19.11.12スクリーンショット 2016-08-02 19.11.53

Long sovereign interest rates tend to be around 5%.

Slow growth and deflation alone cannot explain if one reviews the history full of financial crises, worse growth and deflation.

Globalization of product and capital markets might help keep rates low

greater global competition helps keep inflation low, reducing inflation expectation
increased capital flows might mean lower returns in some parts of the world and help keep rates down everywhere


But maybe it’s just Central bankers have never been as aggressive as they are today at using monetary policy to try to influence economic activity.

スクリーンショット 2016-08-02 19.27.18.png

From 1651 to 1934, policy rates tend to be around 4%, ranging from 2-6%.
During the Great Depression and World War II, rates hit new lows below 2%.
During the inflation of the 1970s, rates soared into double-digits.
In response to the financial crisis of 2008/09, rates hit all-time lows.

In addition to low rates, central banks buy bonds on the open market, paying for them with central bank credits.

スクリーンショット 2016-08-02 19.55.18.png

If it’s all about artificially low rates due to the emergency of the financial crisis, the Fed funds rate might rise to that 2-3% range over the next few years like FOMC expects

However, market prices suggest that investors are not buying the Fed’s expectation, and rates will likely stay low by historical standard for the foreseeable future.

What rates would be without Central Bank intervention?

If rates are artificially low, we would expect borrowers to borrow as much as possible [2]

banks is clearly not trying to borrow more
Households have been de-leveraging

スクリーンショット 2016-08-02 20.14.18.png

It is  possible that today’s rates might not be far below fair prices. If so, why the lowest interest rates in human history?


The aging population

only one fundamental factor that is bigger now than it has ever been before: the greater number and higher prosperity of older people.

スクリーンショット 2016-08-02 20.19.01.png

That upward kink of 65+ corresponds roughly to

“savings glut”: the idea that excessive savings (assumed to be mostly from Asian nations with high savings rates) was holding down rates below

the housing bubble in the US: excessive demand for fixed income product relative to supply

The older get richer

スクリーンショット 2016-08-02 20.27.00.pngスクリーンショット 2016-08-02 20.33.50

Skew in wealth distribution to older Americans helps explain investment flows:

during the bull market of the 1980s and 1990s, when Baby Boomers were in their 30s to 50s, equity funds received the lion’s share of flows

but over the past ten years, reduce risk in portfolios by shifting from equities to fixed income
(There also could be a change from active to index)

スクリーンショット 2016-08-02 20.35.39.pngスクリーンショット 2016-08-02 20.37.18.png

In terms of spending, borrowing and saving:

Older people are more price sensitive and more likely to skew purchases to necessities like health care

older folks save more and borrow less



1. interest rates might stay relatively low, even as Central Banks, led by the US Fed, start to “normalize” rates

6%is gone, 3% for the 10-year Treasury bond yield might be a new average, as the aging of the population will both increase the demand and suppress the supply of debt

bonds might deliver returns of 2% or so and the expected nominal return of stocks might be 6-7% (with a 4-5% risk premium unchanged)

2. Inflation is unlikely as older people have greater price sensitivity and a lower marginal propensity to consume than younger people




Continue reading “The aging population and a “new normal””