The Investor November 2020

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ShareFinder’s prediction for Wall Street for the next six months:

November 2020

Announcing a NEW ShareFinder

By Richard Cluver

What would you give to have invested a chunk of your life savings into a company like the Nasdaq-listed Facebook company back in 2012 soon after it was first listed? In September of that year you could have paid $17.55 for a share that today hovers around $280.

Care to do the maths; Facebook shares have climbed at compound 26 percent a year over the past eight years growing your capital sixteen-fold over the interim to become a $540-billion market capitalization giant. The company, which owns well-known titles such as Instagram, WhatsApp and Messenger, boasts that 2.8 billion people use at least one of its services: that’s getting on to every second citizen of planet Earth. My graph below illustrates its price history:

Over the same period, Amazon shares have soared from $166.97 to $3 399.66 representing a compound annual average growth rate of 25.72 percent. And there are more, Google has risen from a low of $237.44 in mid-2011 to a current $1815.05 representing compound 15.96 percent. Collectively these shares have become known by the acronym of FAANGs and they are seemingly unstoppable.

To put just one of these market leaders under the microscope, Facebook is now enormously profitable. In 2018 revenue increased 38 percent to over $55-billion. Diluted earnings-per-share increased 40 percent, to $7.57. However, you should note that total costs and expenses increased 51 percent that year which caused its operating margin to contract by five full percentage points, Facebook, however, made up for this with a huge drop in its effective tax rate from 23 percent to 13 percent which understandably stung the tax authorities who have begun to fighting back on a global scale.

Prepare yourselves for a Christmas treat if you enjoyed Richard Vane’s three previous novels, Thomé & Heloise, Universe and Jane. Like the three that preceded it, Jenevivre is a love story with a distinct difference, racy, pulling no punches and yet deeply sensitive as, like all his previous works, it gently explores a new spectrum of human relations.

Like all the works that preceded it, however, Jenevivre is a tale with an inspirational lesson for humankind which gently picks apart preconceptions and social conventions and culminates in offering insight into better alternatives.

True to its founding philosophy, the 5-Dollar Publishing Company will never charge more than $5 US for any of its on-line publications. However, as a Christmas special you can click here to download it at a once-only price of $4 anytime between today and Christmas Day. On Christmas day it will revert to the standard $5.

You may also download the complete set of Richard Vane’s four novels for an all-in Christmas special price of just $10.

Happy reading!

Not surprising then, in the year to December 2019, taxes doubled and earnings per share fell back to $6.43 from $7.57 the previous year. But if you compare that to earnings of just $0.10 in 2009, it is still some going. Furthermore, profits for the third quarter of 2020 were up 28 percent on the comparable figure in 2019 but again accompanied by an effective tax rate decline from 17 percent to 4 percent which virtually guarantees the Tax Man will be increasing his attention on this company.

But while these heady increases are happening, investors are clearly happy to plunge in as if there is no tomorrow. It’s understandable when, by contrast, the Nasdaq composite index has risen just 13 percent compound over the same period, The New York Stock Exchange representative S&P500 Index has delivered compound 13.8 percent, the JSE All Share Index 6.8 percent, Germany’s Dax 11 percent and London’s FT100 Index 2.4 percent.

So how would you go about identifying in advance that a particular stock-market-listed share was likely to deliver such auto-enriching growth? Throughout my career as a financial journalist, the answer always used to be relatively simple. There was a set of rules that clearly defined Blue Chip shares; a category of investment beloved of the trustees of “widows and orphans” trust funds who understood that the management of such companies were people of integrity committed to good and prudent management principles who, to quote a friend who was a doyen of that former era “We simply got on with consistently delivering good products and services and paid no attention to things like newspaper Top 100 lists!”

That philosophy translated year after year into steady dividend increases which normally exceeded the inflation rate. Even the most modest wage slave thus understood that if he was prepared to put aside a monthly portion of his income to buy the shares of such companies he would be assured of a comfortable retirement ….until it no longer was the case. It was how the old order worked before greedy ‘get rich quick’ operators came onto the scene.

The good news however, is that the old methods DO still work. There are still many authentic old-fashioned Blue-Chip companies whose boards still play by the rules by which my ShareFinder system is still delivering record-breaking capital growth.

The problem, however, is that they are being eclipsed, at least in the public perception, by a new category of management whose business playbook is attracting increasing alarm from opinion-makers and leading governments.

In the wake of a series of giant business collapses by the likes of Enron in the US and, closer to home, Steinhoff and Tongaat, investors have begun to realize the risks of chasing some of these apparent share market stars. Yet, in an era when a new monetary order has seen the build-up of unprecedented levels of private, corporate and government debt, orthodox economists are increasingly warning of the imminent collapse of the global monetary system and the concurrent global economic stagnation. As a consequence of unprecedented levels of debt, further blighted by the Covid-19 pandemic, economies are stagnating and reliable old corporates are finding it increasingly difficult to maintain profits.

Worse, because of the advent of Exchange Traded Funds which appear to take the hard work out of portfolio selection, the average investor no longer appears to understand the huge risk these pose to his life savings because many of the shares they target have abandoned orthodox investment rules. To put it in stark terms, if you are currently committing a dominant portion of your life savings to the so-called FAANGs category of securities, you are gambling with your future security.

I built my ShareFinder computer programme around the Old Order principle that enlightened managements consistently rewarded their shareholders with dividend increases which exceeded the inflation rate and, to its credit, the programme has continued to deliver portfolio growth that equals these market-beaters combined with the advantage that you can trust such portfolios to keep on growing year after year.

As proof I offer you the performance graph of the “Prospects Portfolio” whose transactions are published monthly in my Prospects newsletter so that subscribers can mimic any changes I make:

That red trend line shows that the portfolio has grown in value annually over the same period at compound 16.8 which means it has done four times better than the average long-term growth rate of ALL South African unit trusts which only managed an average of 4.37 percent. Add in an average dividend yield of 3 percent and it is clear that our tried and tested selection methods actually produce world-beating growth results backed by the secure knowledge that their share prices are unlikely to collapse overnight because someone is found to have been fiddling the books.

Compare our Total Return of 20 percent with the FAANGS average growth rate of 21 percent and ask yourself if one percent is too high a price to pay for that insurance?

The sad truth, however, is that the reliable old ShareFinder programme which has guided several generations of investors with algorithms that automatically tailor customized portfolios to the particular risk profiles of individual users, would not ever have recommended the purchase of FAANGS shares because its selections relied upon the tried-and-tested principle of fundamental quality. ShareFinder 5 and all of its predecessors only selected shares that delivered consistent dividend growth over extended periods of time.

In contrast, only one of the FAANGS would have qualified by that test – Apple – and for one very simple reason, the others do not generally pay dividends which implies there is no solid fundamental reason to recommend such an investment.

The reality about a solid record of dividend payouts is that it represents proof positive that the company you are investing in is growing in a satisfactory manner. It speaks of consistent management excellence over the long-term.

You can fudge earnings figures but I have only once encountered a company which delivered solid dividend growth out of non-existent profits…and it, of course, did not last long enough ever to have made it to the ShareFinder database.

Other balance sheet statistics can, quite frankly, be cooked in such a manner that they escape the efforts of the world’s leading firms of auditors. If you for a moment doubt this, just remember Steinhoff and Tongaat which were doing splendidly in the marketplace…until they weren’t.

Here a note, ShareFinder never recommended Steinhoff either

Consider their graphs below:

Now I am not saying that there is necessarily anything wrong with the FAANGS companies whose shares have risen so spectacularly over recent years that investors have been happy to buy the shares simply for the mouth-watering capital gains they have been making. The simple fact, however, is that, with the exception of Apple, you do not have the guarantee of a healthy dividend track record to reassure you that your money is safe. Apple, furthermore, with a ten-year average annual dividend growth rate of just 1.55 percent, would never make it into the old ShareFinder 5 investment recommendations.

Nevertheless, many investors would still like to enjoy the lazy opportunity of a computer algorithm that will auto-build you a portfolio that includes the FAANGs as well as other top-price performers and so, in our latest ShareFinder 6 module which this month has moved to full commercial status rather than the free Beta version that many of you have tested over the past many months, we have launched an addition to the Portfolio Builder function that will do just that. If you care to invoke this added algorithm you will, however, be warned that the shares selected for you by this new process will not necessarily offer you the safety that the Blue Chips have always done.

If you open the SF6 Portfolio Wizard which generates suggested portfolios tailored to your personal risk profile, you are offered the following template. Note I have entered that I had a million dollars to invest and that I am prepared to take “…substantial risk for much higher returns”:

ShareFinder 6 thus built this portfolio within the Nasdaq:

As you might notice from the heading figures, this portfolio has historically delivered capital growth at compound 40.71 percent annually for the past five years and, assuming the market continues to roar upwards because of the monetary excesses of the world’s central banks, it might be expected to continue delivering at a similar scale in the future. But be warned, these companies have little or no dividend history so there is a high risk.

The bad news for the thousands of investors who have been using the beta version at no cost is that with the launch of a fully-operational commercial version, we are closing the Beta. The GOOD news for Investor readers who would like to take advantage of it, is that we are offering a Christmas Special. In it we have bundled together the new ShareFinder 6 which offers you access to our FULL analytical service of the world’s top five share markets: the New York and Nasdaq in North America, The Australian and London exchanges as well as the full JSE analysis that has always been available in SF5.

In addition, subscribers will receive FREE daily data updates in respect of all five markets as well as a FREE subscription to the Prospects and Predicts newsletter services, all of this for just $14 a month or, even better, a further-reduced $140 a year. This subscription rate represents a massive discount on the standard commercial rate which our largely overseas users will be paying.

The new ShareFinder 6 product has the following improvements to the tried and tested ShareFinder 5:

  • It daily updates itself: No more user-downloading of data nor the associated subscription costs.
  • 4 new markets: The New York Stock Exchange, London Stock Exchange, NASDAQ and Australian Stock Exchange are now available in addition to the JSE.
  • Improved algorithms. We have tweaked ShareFinder 5’s algorithms to be even more accurate and profitable in ShareFinder 6.
  • Web/Mobile version. The improved web and mobile versions now contain the quality list, graphs with projections and analysis of your portfolios.

To take advantage of this offer you need to please sign up for the special package at our Sharefinder Client Portal, or phone us on 031 940 0012, or email us at

Investors bet on low inflation risk

By Anna Hirtenstein of the Wall Street Journal about Covid-19 vaccines is raising hopes the economy will recover faster than expected. Investors are betting a rebound won’t come with a bout of inflation.

Investors began exiting 10-year Treasury inflation-protected securities, or TIPS, after the U.S. election, as hopes for a large fiscal stimulus package began receding and worries about inflation abated. The yield on TIPS, known as the real yield, rose to minus 0.768% on Nov. 9, the highest level since early July. It had fallen to an all-time low of minus 1.104% at the end of August.

The TIPS yield has since again edged down modestly to minus 0.852%. Meanwhile, the yield on regular 10-year Treasuries has climbed to 0.872%, from 0.692% at the end of August. Yields rise when bond prices fall.

Debt investors are particularly sensitive to inflation because their cash flow is often fixed, which means the income will be worth less when prices are rising. TIPS increase their payout to holders if inflation measures exceed certain thresholds.

The extent to which prices may rise has been a key question in markets this year.

The pandemic has triggered unprecedented levels of stimulus from central banks and governments. The Federal Reserve has said it would keep buying bonds to backstop markets. It will also allow inflation to exceed its 2% target as long as it averages this level over several years. This stoked concerns about hyperinflation, though there are no signs of it yet.

Real yields fell further into negative territory in recent months as investors rushed to buy TIPS in a wager that inflation would pick up pace, and dropped to a record at the end of August. Gold, an investment that is also seen as a hedge, rose to an all-time high in August.

But a spike in prices hasn’t materialized. Data showed that consumer prices in the U.S. were flat in October from the previous month.

The importance of lower long-term interest rates

By Brian Kantor

An SA economic revival will depend on lower real long-term interest rates. Only a credible commitment to restraining government spending over the long run can therefore relieve SA of the burden of expensive debt.

Central Banks have more to offer a distressed economy than just lower interest rates. Interest rates cannot or will not be allowed to fall much below zero, however central banks can supply their economies with more of their own money, in the form of the deposits they supply to their private banks, if necessary. They can add money by lending more of their cash to their governments, private banks and even businesses. They may choose to buy back assets from banks or buy the debt or even the equity of private businesses.
Central bankers will hope that the banks will lend out more of the extra cash they will be receiving automatically from the central bank. If the banks and their borrowers respond favourably to these monetary injections, the supply of private bank deposits and of bank credit will increase by some multiple of the additional central bank money. The extra money (deposits) supplied will then not be hoarded by the public but exchanged for goods and services and for other assets.  Higher share prices, more valuable long-dated debt  and real estate will translate into more private wealth, leading to less saved and more spent (asset price deflation has the opposite, depressing impact on an economy).
An economy that delivers less income and output than it is capable of, is distressed. Lockdowns have disrupted output and sacrificed the incomes of businesses, households and governments in a serious way. Getting back to an economically normal state requires a mixture of increasing freedom and willingness to supply goods, services and labour. It also needs more spending to encourage firms to produce more and hire more people.
Money creation on a large and urgent scale is helping to stimulate demand almost everywhere. M2 in the US has grown by nearly 25% over the past 12 months. It has led to a more helpful response from US banks than occurred after the Global Financial Crisis (GFC), as the monetary statistics in figure 1 show.

Figure 1: Money supply growth in the US (M2)Money supply growth in the US (M2) graph

Source: Federal Reserve Bank of St.Louis and Investec Wealth & Investment

The SA Reserve Bank has adopted a very different strategy and rhetoric. It has decided that it has done all it can for the economy by cutting its repo rate associated lending rates by three percentage points, to 3.5%. It has rejected any quantitative easing (QE) that might have reduced pressure on interest rates at the long end of the yield curve. It argues that a structural inability to supply (over which it has limited influence),  is the cause of our economic distress, not the state of demand, which it could influence if it chose to do so – with still lower repo rates and money creation.  It is an argument that can be challenged.

Yet perhaps all is not lost on the SA monetary front. The deposit liabilities of the banks (M3) had grown by about 11% by August, compared to a year before, while the money base is up by 12.5%. This is a welcome acceleration, as figure 2 shows. Less helpfully, bank lending to the private sector was up by only 3.9%.

Figure 2: Growth in monetary aggregates

Growth in monetary aggregates graph

Source: SA Reserve Bank and Investec Wealth & Investment 

It is possible to reconcile the faster growth in the deposit liabilities of the banks with the slower growth in the credit they have provided. The difference between the growth in bank deposit liabilities (up 11%) and assets (up by about 4%) is accounted for by a large increase in the free cash reserves of the banks. The negative difference between cash and repos narrowed by about a net R60bn in 2020. The banks have been provisioning against loan defaults on a large scale. These provisions reduce their reported earnings and therefore dividends, but it increases their cash and free reserves – represented as an increase in equity reserves.

As figures 3 and 4 below show, the equity reserves and their provisions rise during times of stress, as they are doing now and did during the GFC, which led to a sharp recession in SA.

Figure 3: SA banks’ free reserves – cash less repurchase agreements with the Reserve Bank and others

SA banks’ free reserves – cash less repurchase agreements with the Reserve Bank and others graph

Source: SA Reserve Bank and Investec Wealth & Investment

Figure 4: SA banks’ capital and reserves (R millions)

SA banks’ capital and reserves (R millions) graph

Source: SA Reserve Bank and Investec Wealth & Investment

The banks, however, have an attractive alternative to providing credit for the private sector.  They borrow short (raise deposits) and can lend to the government at higher rates without risks of default.  The currently very steep slope of the yield curve adds to this attraction as well as to the profitability of borrowing short and lending long. If long rates are the average of expected shorter-term rates over the same period, the currently steep slope of the yield curve implies that short rates are expected to increase dramatically over the next five years. A one-year RSA bill is now offering 3.2%. A three-year bond currently offers 5.06% and a five-year bond of 6.72% (all annual rates). The one-year rate would have to rise to more than 8.3% in three years’ time and to 11.3% in five years, to justify the current slope of the yield curve. Unless inflation or real growth surprise significantly on the upside, these higher short rates, as implied by the yield curve, make such outcomes unlikely. Borrowing short to lend long to the SA government looks like a good profitable strategy for SA banks, for now. Similarly, for the government, it favours a strategy of issuing short-term debt and then rolling it over, rather than raising long-term debt at much higher rates.

Figure 5: The spread between RSA 10-year bond yields and money market rates

The spread between RSA 10-year bond yields and money market rates graph

Source: Bloomberg, Iress and Investec Wealth & Investment

Figure 6:  The RSA yield curve and the implicit one-year forward rates

The RSA yield curve and the implicit one-year forward rates  graph

Source: Thompson-Reuters and Investec Wealth & Investment

The banks have been holding significantly more government paper over recent years in response to presumably weak demand for credit from private borrowers and the availability of relatively attractive interest rates on low-risk government paper. Government debt as a share of all bank assets is now 13%, a share that has doubled since 2010. The banks invested a further (and significant) R110bn in additional government debt between January and June 2020.

Figure 7: Bank lending to the government 

Bank lending to the government graph

Source: SA Reserve Bank and Investec Wealth & Investment

Figure 8: Composition of bank lending to the SA government

Composition of bank lending to the SA government graph
Source: SA Reserve Bank and Investec Wealth & Investment

Such extra investment in government bills and bonds by the banks is helpful to the government, given the ballooning deficit it has to fund one way or another. The growing deficits are the result more of a collapse in revenue than a surge in spending as the chart below shows.  But for the banks to prefer government over private debt would effectively crowd out the lending to the private sector that could contribute to economic growth.

Figure 9: National government expenditure and revenue (monthly, seasonally adjusted and smoothed)

National government expenditure and revenue graph

Source: SA Reserve Bank and Investec Wealth & Investment

Figure 10: Annual growth in government revenue and expenditure (smoothed)

Annual growth in government revenue and expenditure graph
Source: SA Reserve Bank and Investec Wealth & Investment

Viewing all these forces at work leads to one important conclusion: any revival of the SA economy will depend on lower real long-term interest rates and less expensive debt for the government and taxpayers. It will also mean lower real required returns for any business. These required returns are currently extremely high, given high nominal bond yields, low inflation and the additional equity risk premium. The returns required to justify an investment in the SA economy are thus of the order of a prohibitive 10% or more after inflation. The Reserve Bank can help in the short run by managing long rates lower. However, only a credible commitment to restraining government spending over the long run can lead SA out of the burden of expensive debt.

A needed shot in the Arm

By John Mauldin

John Mauldin

“Revamp” Capitalism

Whenever I mention The Great Reset (most recently here), people ask me to explain exactly what it will look like. I can’t answer because I don’t know in terms that can be labelled “exact.” The Great Reset is simply my term for climactic events that resolve our global debt overload while at the same time dealing with slow economic growth, high unemployment, and social unrest. It could happen in many different ways, some better than others. But I firmly believe we will see some kind of resolution. The present course is unsustainable.

Another source of confusion is that I’m not the only one to use this term. Others have used it for their own purposes.

You probably know of the World Economic Forum, whose annual soiree in Davos, Switzerland gathers the world’s wealthy and powerful to discuss/solve our common problems. That’s what they say, at least. Somehow the problems they discuss never seem to get solved, so it’s fair to wonder what they do there. It is, however, a great way to meet fellow elites. (Somehow, my invitation keeps getting lost in the mail.)

Now, in the spirit of “never let a good crisis go to waste,” the WEF sees the coronavirus pandemic as an opportunity to reset capitalism. Really. Founder Klaus Schwab says it quite openly.

COVID-19 lockdowns may be gradually easing, but anxiety about the world’s social and economic prospects is only intensifying. There is good reason to worry: a sharp economic downturn has already begun, and we could be facing the worst depression since the 1930s. But, while this outcome is likely, it is not unavoidable.

To achieve a better outcome, the world must act jointly and swiftly to revamp all aspects of our societies and economies, from education to social contracts and working conditions. Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a “Great Reset” of capitalism.

WEF calls this effort its “Great Reset Initiative.” For the record, it has nothing to do with my conception of The Great Reset. In fact, I think much of what they propose will make the version that I see even worse. I agree capitalism has gone off track and needs some adjustments, and not just minor ones. The current morass of crony capitalism and lobbying for special government favors is abhorrent. But “revamp all aspects of our societies and economies” sounds ominous. Especially coming from the people already nominally running the global economy.

Furthermore, what they really propose is that we change our lives while Davos Man continues undisturbed, maybe paying a few more taxes but with the brunt of the change affecting those further down the food chain. And, of course, they are not long on specifics.

When you start talking about resetting the educational and social contracts and working conditions, you are talking a radical social agenda. I believe we are going to have to have considerable change in the social structure of this country. That is what the current partisan politics is telling us. Too many people on both sides feel the current “social contract,” whatever you might think it is, is not working for them. Income and wealth inequality are very real. I am not convinced a WEF-style “Great Reset” is the answer.

Fortunately, I don’t think WEF will get very far. More likely, this is another example of wealthy, powerful elites salving their consciences with faux efforts to help the masses, and in the process make themselves even wealthier and more powerful.

The real problem may be simpler: We have too many “elites.” History shows this rarely ends well.

Excess Elites

The December issue of The Atlantic magazine has a fascinating interview with Peter Turchin, a University of Connecticut professor with some unique ideas about human history.

Turchin is actually a zoologist. He spent his early career analyzing population dynamics. Why does a particular species of beetle inhabit a certain forest, or why does it disappear from that same forest? He developed some general principles for such things, and wondered if they apply to humans, too. Answering that requires data, so he went from studying beetle history to human history.

One recurring pattern, Turchin noticed, is something he calls “elite overproduction.” This happens when a society’s ruling class grows faster than the number of rulers it needs. (For Turchin, “elite” seems to mean not just political leaders but all those managing companies, universities, and other large social institutions as well as those at the top of the economic food chain.) As The Atlantic describes it:

One way for a ruling class to grow is biologically—think of Saudi Arabia, where princes and princesses are born faster than royal roles can be created for them. In the United States, elites overproduce themselves through economic and educational upward mobility: More and more people get rich, and more and more get educated. Neither of these sounds bad on its own. Don’t we want everyone to be rich and educated? The problems begin when money and Harvard degrees become like royal titles in Saudi Arabia. If lots of people have them, but only some have real power, the ones who don’t have power eventually turn on the ones who do…

Elite jobs do not multiply as fast as elites do. There are still only 100 Senate seats, but more people than ever have enough money or degrees to think they should be running the country.

“You have a situation now where there are many more elites fighting for the same position, and some portion of them will convert to counter-elites,” Turchin said.

The excess elites become counter-elites, who then try to make alliances with the lower classes which usually don’t work out. But my eyebrows went up when I saw how Turchin describes the endgame.

The final trigger of impending collapse, Turchin says, tends to be state insolvency. At some point rising insecurity becomes expensive. The elites have to pacify unhappy citizens with handouts and freebies—and when these run out, they have to police dissent and oppress people. Eventually, the state exhausts all short-term solutions, and what was heretofore a coherent civilization disintegrates.

Terrifying? Yes. It sounds amazingly like what the WEF proposes. I am sure Klaus Schwab and the others there recognize the frustration that many people have. They are proposing programs to alleviate that frustration—expensive, society-altering programs. But they would still let the game at the top continue.

But it gets worse.

Instability Spikes

In 2010, the scientific journal Nature published a collection of opinions looking ahead 10 years, i.e., where we are right now. Nature then published a short response from Turchin in its February 2010 issue.

Quantitative historical analysis reveals that complex human societies are affected by recurrent—and predictable—waves of political instability (P. Turchin and S.A. Nefedov, Secular Cycles, Princeton Univ. Press; 2009). In the United States, we have stagnating or declining real wages, a growing gap between rich and poor, overproduction of young graduates with advanced degrees, and exploding public debt. These seemingly disparate social indicators are actually related to each other dynamically. They all experienced turning points during the 1970s. Historically, such developments have served as leading indicators of looming political instability.

Very long ‘secular cycles’ interact with shorter-term processes. In the United States, 50-year instability spikes occurred around 1870, 1920, and 1970, so another could be due around 2020. We are also entering a dip in the so-called Kondratiev wave, which traces 40-60-year economic growth cycles. This could mean that future recessions will be severe. In addition, the next decade will see a rapid growth in the number of people in their twenties, like the youth bulge that accompanied the turbulence of the 1960s and 1970s. All these cycles look set to peak in the years around 2020.

Again, that was from 2010. Right on schedule, we are experiencing the “instability spike” Turchin says tends to come along every 50 years.

Why 50 years? It relates to the human lifespan. Consider who was “in charge” during the period around 1970. We Baby Boomers were all 25 or younger at the time. Managing the chaos fell on older generations, who remembered it well and spent the rest of their lives trying to prevent more of it. But after 50 years or so, they are mostly gone. We who remain must learn the lesson again.

I’ve talked before about Neil Howe’s “Fourth Turning” idea, and George Friedman’s geopolitical cycles, both of which are peaking in this decade. Interestingly, Friedman also sees a different geopolitical 50-year cycle playing out in the mid- to late ‘20s. Which overlaps with his 80-year geopolitical cycle for the first time. The mid- to late ‘20s should see the climax of Neil Howe’s Fourth Turning. Now we see Peter Turchin postulating a similar time frame for different reasons. None of them, to my knowledge, expected the pandemic we are now experiencing. What is its effect?

Well, we know the pandemic triggered a recession that may, before it’s over, rival the Great Depression. For millions of Americans, it is not just something they read about. They feel it.

You’ve probably seen this famous 1931 photo of Al Capone’s Chicago soup kitchen.

Source: Wikimedia

The 2020 equivalent is this from my former hometown Dallas last week. That was very emotional for me and brought a tear to my eye.

Source: CBSDFW via Twitter

We do see progress in these images. The people obviously have cars and fuel. Those were elite luxuries in 1931. Some of these people may be educated and intelligent, but they’re not elites. Actual elites don’t have to wait in line for food. They call Whole Foods or DoorDash and have it delivered.

The problem, borrowing Turchin’s framework, is that some thought they were elites, or if not exactly thinking of themselves as elite, did enjoy the benefits of good jobs, at least until recently. This year took away that illusion, and they’re naturally disappointed. They may join the “counter-elites” and seek more power.

This is where we are. The hard times we’ve long anticipated are here. That 1931 soup kitchen photo was just the beginning of a long, dark period. It got a lot worse.

Will our situation similarly worsen? That remains to be seen. As I’ve said, good things keep happening even in the darkness. The mRNA technology behind the new coronavirus vaccines may lead to breakthrough treatments for other conditions. mRNA technology allows the delivery of specific proteins to the human body. If you have a disease, and there are many of them that simply come along as part of the process of aging, it may soon be possible to deliver specific proteins that cure or at least mitigate your condition.

I want to further explore Peter Turchin’s ideas, but in fairness to him, I want to read more of his work first. He has a number of books and articles. I will even try to reach out for discussion. What I see so far is worth deeper study.

But the more important part is that I especially pay attention when I see multiple smart people reaching similar conclusions for different reasons. We are now at what Turchin calls the final stage, when elites try to pacify the masses with bread and circuses. Doing so racks up the debt and suppresses economic growth. Debt is accumulating faster than I expected, so The Great Reset may happen sooner than I expected.

Whenever it comes, we should welcome it. The alternatives maybe even worse.

What Do We Do with All That Debt?

But that still doesn’t answer the question that is on our minds: What happens when we come to the place where we have to deal with all that debt? Fortunately, my favorite central banker, Canadian Bill White who was the BIS chief economist, did a brilliant interview with my friend Mark Dittli in Switzerland this week which gives us some answers.

Today, the Canadian criticizes the central banks: “They have pursued the wrong policies over the past three decades, which have caused ever-higher debt and ever greater instability in the financial system.” He suggests that the current crisis should be used to rethink in order to build a more stable economic system, one in which fiscal policy plays a greater role and that relies more on productive investment. In this in-depth conversation, White says what should be done—and he demands more humility from decision-makers: “We know much less about the economy than we think we do.”

But Bill is not calling for austerity at this time. He recognizes we are in a recession/potential depression. But he wants more emphasis on the fiscal policy and not central banks.

We’re on a slope where monetary policy has become increasingly ineffective in promoting real economic growth. Every crisis was met with monetary easing that caused debt and other imbalances to accumulate over time, and that caused the next crisis to be bigger than the previous one.

The next crisis then needed more punch from central banks. But since interest rates were never raised as much in upturns as they were lowered in downturns, the capacity to deliver that punch was decreasing.

[The recent March, 2020] episode perfectly encapsulates my view of what’s wrong with our monetary policy of the past decades. True, the Fed had no choice but to step in to prevent a financial meltdown. But this meltdown only happened because of the monetary policy followed over previous years.

… my point is: Central banks create the instabilities, then they have to save the system during the crisis, and by that they create even more instabilities. They keep shooting themselves in the foot.

William Dudley and other central bankers are beginning to admit that they have come to the end of their effective ability to manage their respective economies. Governments have to step in with fiscal policy that is actually targeted and productive.

Then Bill lists four ways that we can deal with the debt, not all of them palatable:

There is no return back to any form of normalcy without dealing with the debt overhang. This is the elephant in the room. If we agree that the policy of the past thirty years has created an ever-growing mountain of debt and ever-rising instabilities in the system, then we need to deal with that.

In theory, there are four ways to get rid of an overhang of bad debt. One: Households, corporations and governments try to save more to repay their debt. But we know that this gets you into the Keynesian Paradox of Thrift, where the economy collapses. So this way leads to disaster. Two: You can try to grow your way out of a debt overhang, through stronger real economic growth. But we know that a debt overhang impedes real economic growth. Of course, we should try to increase potential growth through structural reforms, but this is unlikely to be the silver bullet that saves us. This leaves the two remaining ways: Higher nominal growth—i.e., higher inflation—or try to get rid of the bad debt by restructuring and writing it off.

When later asked about write-offs he said this:

That’s the one I would strongly advise. Approach the problem, try to identify the bad debts, and restructure them in as orderly a fashion that you can. But we know how extremely difficult it is to get creditors and debtors together to sort this out cooperatively. Our current procedures are completely inadequate.

I expect that we will be coming back to this interview again. (Over My Shoulder members can read my marked copy here.)

How long can this go on? Longer than you might think. From Rosie (David Rosenberg) Friday morning:

We had core CPI data out of Japan and the YoY trend went further into deflation to -0.7% in October from -0.3% in September. The is the sharpest move into deflation terrain since March 2011. A country with a 700% total debt-to-GDP ratio, two decades of zero interest rates, and a central bank balance sheet that is 130% of GDP. Nice to see how all the credit creation has managed to spur on a reflationary backdrop. Shades of what’s to come in the US.

I agree. The US could turn Japanese. While I think we could see inflation in the short term (2 to 3 years) the debt overhang and growth of central bank reserves will lead us directly into the same problem Japan is facing: a deflationary economic cycle with no growth. All while new technology (especially biotechnology) makes our lives better. It will be a strange new world that will have no resemblance to the last decade’s “normal.”

We will stumble through and some of us will do extraordinarily well, because we position ourselves to take advantage of this cycle. Stay tuned…


This month Pfizer (PFE) said its coronavirus vaccine trial was 90% effective in preventing infections vs. the placebo control group, with no major side effects. That’s impressive and, if further data confirms it, will be just what the doctor ordered for both our health and the economy. Then Moderna released even more impressive data. We may have several vaccines by March/April. The problem will be actually getting them.

The sources I’ve consulted believe Pfizer could get FDA approval before year-end, and possibly others, too. Then we have to start thinking of logistics and timing. Pfizer says it will have 50 million doses available before January. Each patient receives two doses four weeks apart, so that means 25 million people. The drugs have to be frozen and shipped at super-cold temperatures, so distribution will be a challenge. They will figure it out, but not without some problems. Freezers malfunction, syringes break, records get mixed up. Stuff happens. Nonetheless, it will be a start. If all goes well, we could have most of the country immunized by mid-2021, and worst case by the end of Q3 2021.

But there are more questions. Will most people want the vaccine? That remains to be seen. Many Americans have trust issues, as the election just highlighted. And will the vaccine really be 90% effective in the real world? That’s unknown, too. By the way, a 90% effective vaccine is statistically at the far-right edge of the charts. Flu shots are in the 50% range. The measles vaccines we took as kids were 93% (and eliminated the measles crisis).

Economically, will everyone immediately resume their prior spending and movement, or will some stay cautious? For how long? As we’ve seen, even a few can make a big difference. Dave Rosenberg put a pencil to this and came up with these 2021 GDP estimates, based on vaccine timing and efficacy.
Source: Rosenberg Research

Those numbers are full-year 2021 GDP estimates. They suggest we can expect 3% or better growth next year if the vaccine is at least 55% effective and is widely distributed in the first half of the year. But as Dave notes, everything has to go right for that to happen. Realistically, the recession will continue at least through Q1 2021, even if the vaccine campaign goes well.

However, remember that GDP is down by 10% from where we were. We are not going to be back to “normal” by the end of 2021. Recoveries in GDP and employment typically take about 46 months. But Rosie is right, a vaccine is critical.

Let’s take a quick look at what we are facing. Some 20% of small businesses are closed. Most of those will never reopen. Chain stores have closed 47,000 locations and are aggressively renegotiating rents. Some are simply refusing to pay their rent because they don’t have the money. They are trying to hold on until the economy turns around. They can’t do that if they don’t hoard cash. The longer this goes on, especially if we see more closure orders, the more businesses we are going to lose. That means local tax revenue and jobs.

The Homebase data, which I’ve shared before, shows improvement has flatlined since July.

It’s even worse for industries. Overall, small business revenue was down 21%. Leisure and hospitality were down 47% as of October. The new restrictions we are seeing in many states are going to make it much worse.
Source: WEF

It gets worse from city to city, as you can see in the map and table below:
Source: WEF

I could literally bury you in data on business closures and government revenues. Back in June, Mike Roizen and I wrote a joint letter saying the first priority should be protecting the vulnerable, wearing masks and social distancing. We were not in favour of further lockdowns. The data continues to agree but states are again doing it. This is going to further hurt small businesses.

It is unrealistic to assume we will go back to some kind of “normal” in 2021. I think even 2022 will be a stretch. We have had a massive and severe blow to our economy. The chart below from the Centre on Budget and Policy Priorities shows how it took four years to recover from the 2001 recession in terms of jobs and over six years for the Great Recession. The current recession is much worse than either of those.

Source: CBPP

The recovery is going to be longer and slower and more costly in terms of stimulus and Federal Reserve involvement.

I am an optimist. I think our entrepreneurs will come back as quickly as they can, but they are going to need capital and resources. For those of you with resources, look around your neighborhood. There are businesses that had to close with experienced and proven successful management. It wasn’t their fault. You may have an opportunity to invest in “startups” with proven management.

Between vaccines and the positive reports I’m getting on the far-UVC technology (lights that kill bacteria and viruses on surfaces and in the air and don’t harm humans), the world is going to be a much more positive place in 3 to 4 years. Maybe even sooner.

We have a chance to return to the next new normal. Just don’t expect it to show up in 2021. We will see the green shoots, of course, but it will look more like the recovery of 2009-14. It helps that we can now rule out the possibility of higher tax rates. Raising taxes during a recession is never a good idea and would have created a double-dip.

The stock market is a different animal. All the stimulus and Federal Reserve largess, along with technological breakthroughs and vaccines, may be enough to keep the markets levitating. Stay tuned.

Book review: Scientific Freedom, the elixir of civilization

By José Luis Ricón,

In the science policy world a term often heard is “high-risk, high-reward” activities; funding initiatives, projects, or researchers that individually are likely to fail but that also hold potential for truly radical, breakthrough discoveries. But what about “low-risk, high-reward”, wouldn’t that be nice?

One more of Stripe Press’ beautifully edited tomes, Scientific Freedom: the elixir of civilization, is Donald Braben’s theoretical case for the existence of such scientific opportunities as well an account of his own experience running a funding program—Venture Research (VR)— that proves that the author is not merely cheap-talking us. I won’t go into the details of how VR came to be, focusing instead on the theory and discussing a few examples of projects they funded.

The book itself fits the adage that most books should be blogposts; while insightful, a lot of the content could have substantially compressed, with the exception of the final chapter that details individual Venture Researchers’ (VRs) projects. Hence if you have not read the book you can get an idea by reading this RAND report followed by these slides from Braben himself and you’ll get the gist of it .

So what does the book say?

  1. The number of researchers that are doing truly groundbreaking research is small, akin to a club.
    1. An historical example is the varied set of scientists the author dubs the Plank Club (Planck, Einstein, Brenner, Bohr, or McClintock to name some)
    2. Braben puts the number at around 300 truly innovative researchers in the 20th century, with everyone else doing just incremental work
  2. This groundbreaking research requires a specific environment to enable it, affording researchers freedom to research as they wish without any mandate, for a prolonged (multi-year) period of time, with little accountability
    1. For example Peter Higgs thinks he would be unhireable under the current system, Wilczek and Philip Ball consider that perhaps Einstein would be as well, and so does David Deutsch about himself.
    2. In the book itself a few more examples are given, Sydney Brenner, a pioneer in molecular biology remarked on his Nobel Prize address: Such longterm research could not be done today, when everybody is intent only on assured short term results and nobody is willing to gamble. Innovation comes only from the assault on the unknown.
  3. Such environment has been lost with the rise of the modern post-WWII research system (Or post 1970s?), characterized by the massification of the research enterprise, and the publish-or-perish culture
    1. Or, as the author would put it, the current system would fail the “Planck test”: it would reject Max Planck et al.
  4. That has led to a slowdown in scientific progress since the 1970s
  5. This scenario leaves literal trillion-dollar bills on the sidewalks of science, because with just an open-ended grant for a handful of handpicked members of a hypothetical Planck Club V2 one could restore the pre-1970s conditions and allow the stream of knowledge to gush forth once again
  6. The experience of Venture Research (VR) is a practical demonstration that this is indeed true: A private funder with a small amount of resources can achieve outsized knowledge returns; perhaps even financial returns as well.

Venture Research itself as a funding initiative was targeted at successful researchers, or researchers that were proposing research with the potential of altering the field they were working on, or even creating new fields altogether. Hence in Chapter 7 of the book we find that some of the VRs had Nobel prizes to begin with, or were widely praised professors like Edsger Dijkstra. Some of the questions that were asked to VRs when deciding whether to fund them:

  • If you had infinite resources and freedom what would you do that you are not doing now?
  • Might the proposed research radically change perceptions?
  • Might your research be recommended for a Nobel prize?

These are not quite the same questions that NIH R01 grantees get!

Braben doesn’t like peer review (And I’m of the same view), but given that there is a need for a mechanism to allocate funding among competing proposals, he had to choose something, and he chose Braben-review. Some formalities aside, he seems to have had ample discretion to allocate the grants, in a way similar to the role played by Tyler Cowen in the Emergent Ventures grants. The reason this might work could be that due to his lack of deep domain expertise (He knows in depth just about his own field, and that’s good to avoid consensus thinking) and lack of conflict of interest (He is not a potential recipient, nor he stands to lose relative status if the grantee is successful, unlike a peer who is also a competitor of the researcher under consideration). To be sure, this mechanism can introduce false positives as well; a potential case might be Stan Clough and Tony Horsewill’s 1989-1992 research project (p. 171) that Braben as of 2007 points to as a “significant milestone if not a revolution in the development of physics”. Suffice to say, their work remains relatively unknown over a decade after and I couldn’t find much about it other than this blog (With basic research one can always say that it will take time for it to be acknowledged, but it has been a few years already). Nonetheless it can be argued that the more stagnant a field is—and fundamental physics definitely is—the more interest there should be in finding wild weird works of science, in the hope of tilting the balance of the field away from exploiting arid research grounds and towards exploring alternatives; it is in this category where I also put Quantized Inertia and the various warp drive proposals as I mention in the link above; both are generally opposed by the physics community as clearly wrongheaded. They are the exception though, most of the proposals described in the final chapter of the book seem to have gone somewhere.

[1]. Braben says most of it was successful, but one’d need an impartial careful assessment to truly believe that

Whether VR is “low-risk, high-reward” research depends on what comparison group is, and what would count as success1 or fail. If you take, say, Y Combinator, how much risk are they taking? Eyeballing it, the failure rate of the earlier cohorts may be 50%. Is that high risk? Low risk? In any case, the VR model does show that funding proposals that everyone else had rejected (Braben explicitly acknowledges that playing the role of funder of last resort is something they explicitly aimed for) in general can lead in successful research.

Regarding the decline of science in general, the book is scant in quantitative evidence and rich in anecdote. The belief that science is in crisis comes and goes; Charles Babbage wrote back in 1830 on this same question thinking back then there was a decline.

Assessing whether Babbage was right and to what extent, or if Braben is right and to what extent (And if so, what exactly were the changes that led to science to go into decline, then revival, and then decline again) is a complex enterprise that personally interests me and I was hoping to learn something new here but I did not.

Throughout the book there are some interesting discussions of specific cases of substantial discoveries that took over two decades to accomplish, one of them Perutz’s determination of the structure of hemoglobin. Achievements that take that long makes one wonder why; was it just slow toil in one direction? Lots of false starts? If you take this particular case, it seems to have been lack of good tooling, which had to be built over time (for protein crystallography).

That would be an interesting thing to do in the future: Look at projects that took a long time and figure out why (And if they could have taken less time)

Where are the breakthroughs and great scientists?

As I was reading through the book, I noted that while I had heard of most of the members of the Planck Club (Sorry, Charles H Townes) I had heard of none of the VRs with the exception of Dijkstra (And even then, the award was not for the man himself, but for his friend and student Netty van Gasteren).

It would be unfair to say VR failed because it didn’t produce a name as recognizable as Einstein’s, but the fact that I couldn’t recognize any of the names prompted me think that a reason why that might be is the same reason you don’t know who most of the newer Nobel Prizewinners are, or why you can’t think of an immediate answer to “Who is the living successor of Darwin“.

The answer is that the great ideas and breakthroughs are here, it’s just that they are evenly distributed, to paraphrase William Gibson. What used to be large, easily recognizable steps a single researcher could take (As in Einstein’s relativity, with due credit to Poincaré, Lorentz, and others), now has been salami-sliced among an increasing number of researchers; even the Higgs Boson is, in some sense, a shorthand for the Englert–Brout–Higgs–Guralnik–Hagen–Kibble boson, not Peter Higgs’s sole theorising.

Why scientific freedom

Scientific freedom is necessary for the same reason economic rights (the right to start a business, organize it in arbitrary ways) are necessary: because what is going to be successful is not always obvious to the incumbents, and so the challengers have to be able to circumvent them. This is a matter of degree: The current landscape of scientific funding also has space for fringe science: Mike McCulloch got funding from DARPA, until recently Harold White was employed at NASA, Salvatore Cezar Pais is employed by the US Navy. Judgment of thoughts not our own often comes via heuristics, where if something sounds obviously false to us we don’t bother spending a lot of time trying to grapple with it, as we expect the time spent won’t make up for a tiny expected probability of it being right. Think of homeopathy.

On the other hand, the other end of the spectrum (mission-oriented research, industrial research, or FROs) is necessary as well. Science can’t just be making discoveries, those discoveries should also be put to good use and it can often be the case that the basic research has been done but no one has stepped in to collect bits of it and cobble together a new invention. Or it can also be that engineering work is required to enable that basic research to begin with.

In this context, Braben is to be understood as saying that we are doing too little of the former, so little that even marginal increases can still be impactful. I don’t know if he goes as far as saying that all science should be free.

The Planck Club

The book suggests that only a handful of the total number of scientists mattering for opening up new fields and challenging dogmas. How should they be identified? From the book, a clear way is considering someone part of the club if they have won a Nobel or some similar field-specific high prestige award. You could them give them a nice salary for life and free them from any explicit duties. It’s not fully clear what one will get out of this though, because yes in theory this can enable those Planck Club members that have already proven their genius to pursue then other projects without having to explain why, and at least one of the VRs follows this pattern, Nobelist Dudley Herschbach. But not every scientist post-Nobel Prize does interesting research, or research at all. Peter Higgs famously has not published anything after his 2013 Nobel. It could well be that he is slow-cooking some stunning results, or that it is unfair to demand that (more publications) of him (He’s 91 years old), but it could also be that Nobel status (Who would fire him?) and the associated reduced pressure to think and publish means reduced, or in this case null, output.

A general form of this argument would be the standard critique against scientific freedom: That scientists will grow lazy without someone keeping them accountable. Ultimately it is an empirical question, and one that I expect will yield results along the lines of: Yes, for many, perhaps most scientists this is true. But not for Planck Club members. A true genius is internally motivated and will continue to work as long as they have the resources and faculties to do so. Or so seems to be the case from my reading of Genius: The Natural History of Creativity.

But limiting funding to those already successful would fail the Planck test. How could we have spotted Einstein while he was at the patent office? Braben is also aware of this and VR awarded grants to younger researchers as well, going off their enthusiasm for the science and Braben’s own individual judgement. Some details of the process they used:

[2]. Though I don’t know to what extent this was true, or how practical it would be. I can imagine the application examiners being overwhelmed by cranks that really want to have their crackpottery funded and relentlessly try to engage them

[3]. Braben says they did had some peer review, but in a comically diminished way: “However, even Venture Research was not entirely free of peer review ’ s clutches. Such is its all – pervasive power that our BP board could not bring itself to forgo it, and we were obliged to find a form that would satisfy us all. The solution was to split the problem into two; we would first make up our own minds, but before we took our recommendation to the board we would approach a single peer selected by the researcher as being the most important person likely to be supportive. We then fully briefed that person, both verbally and in writing, and did what we could to persuade him or her to endorse our decision. However, even this farcical, vestigial form of peer review often failed to produce the support we requested. In every case, we were able to persuade the board to go ahead anyway.”

  • They strive to be “Nature’s Ambassadors” and “apply the same criteria that Nature herself might have imagined to use in today’s circumstances”, which means being as objective as possible or so I gather.
  • The applicant needs to require that long term freedom and must be aiming for truly new science, not mere incrementalism.
  • Applicants always get a response, they can keep insisting until they give up. 2
  • Once applicants have passed the first filter, they are invited for open ended discussions that “foster mutual trust”, “encourage a spirit of adventure” or “focus exclusively on concepts”. Braben and team may also tour the scientist’s lab.
  • It then goes to a panel of “VIP scientists” from various disciplines. Braben and his team and the experts meet to make the final decision. 3

This still looks kind of arbitrary, ultimately the core criterion is “Is Braben impressed?”. Who could or could not play that role? For example, you could come up with the following ideas for funding scientists:

  • Hire your reviewers (Your “Brabens”, not peer reviewers) among Nobelists. Maybe even have 3 of them and as long as one approves of the proposal, it goes forward, or
  • random retired professors, or
  • researchers that have published across field lines, or
  • researchers whose discoveries have only proven useful decades later, or
  • people that score in a certain way in some standardized tests, or
  • generally interesting individuals

And you could mix and match plausibly. Say you take a Nobel Prize in Chemistry winner, one particle physicist who is also a UFO conspiracy theorist, a PhD student doing research on distributed systems, and for good measure your favorite blogger. You have them all review each proposal, and you have some mechanism to decide what goes or not. Would this work better (As a team) or would it be better to have this group working separately, each having final authority?

Or we could also ask instead: Who should not be awarding these grants? Maybe someone who works in the same field (On the premise that they will be too steeped in the current paradigm), but they could be retained for advice. Someone who does not have at least a level of understanding of the relevant field and is not curious enough to learn more as needed would be excluded as well.

Make Science Great Again!

I’ve tweeted about the idea of efficient nepotism, this is when you can make decisions that affect people (hiring or funding say) without any formal process, using your personal tacit knowledge about the individual to make the decision, bypassing cumbersome red tape and the opinions of those who know less: The HR-person instead of the HR-department. Science used to be like this and Braben is proposing a return to this mode of allocating human and financial capital.

The book makes a good case for at least a second trial at a Venture Research-type of funding mechanism, and leaves us with a few interesting questions:

  1. How to pick the individual or team that will do the funding? Is it efficient nepotism all the way up the best way?
  2. Should there be a built-in bias towards certain fields that should or should not get funding?
  3. How do youth and prestige play together as predictors of future accomplishment?
  4. How should we think about funding individual’s vs funding teams?

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