The Un-Investable Universe

The world has experienced 40 years of almost uninterrupted asset appreciation.  From stocks and bonds to real estate and commodities, the overall trend has been up and up in a rally that has no precedent in history.  Some asset classes fared better than others, but  in general you could have thrown a dart blindfolded and still made money. Or, have a monkey choose for you with the same result.

Sure, some asset managers did much better than others: it is hard to argue against the genius of Warren Buffett, for example.  Then again, how would he have done against a backdrop of a decades long bear market? As he likes to say, it is when the tide goes out that we see who’s swimming naked.  Another way to say it, a rising tide lifts all boat. Yet another, don’t confuse brains with a bull market.

Enough with the platitudes, on with facts. Let's look at all major investment categories:

• Inflation is at 8.50% and Treasury bills, notes and bonds yield far, far less (same is happening in the EU, to a much worse degree).  Even risky junk bonds yield less than inflation (approx. 8%). All credit markets are, thus, currently fundamentally un-investable.  This is crucial: bonds form the backbone of every major portfolio, particularly pension funds which depend on positive real yields to provide current and future pensions for hundreds of millions of people all over the world.

Inflation - Bond Yield Gap Largest Ever

• Equities benefited for decades from the collapse of the Soviet Union, China's boom, new technologies, emasculated labor unions and low inflation. Consumer spending kept rising, corporate profits soared, a host of neo-liberal/conservative governments slashed taxes and privatized everything.  All of these factors are now going in reverse, all at once.  Corporate profits, with the momentary exception of fossil fuel dinosaurs, are dropping fast, even for "new" technology companies.  Real earnings are the most negative ever. Equity markets are, on the whole, fundamentally un-investable.  

Inflation-Adjusted Earnings Plunge To Most Negative In History

• Real estate has soared, boosted by enormous liquidity and - until recently - record low interest rates.  These two factors are now also reversing, but prices have not adjusted yet.  Predictably, housing affordability has collapsed to the lowest level in over 15 years through a combination of higher prices and higher interest rates.  I get that “real assets protect from inflation", but if people can't afford to buy homes, who's going to buy them from the investors?  Housing/real estate is un-investable.

Case-Schiller House Price Index Rose At Record Pace - And Is Still Rising Very Fast

Housing Affordability Plunges The Most Since 2007

• Commodities have soared on the back of (a) huge amounts of liquidity, (b) a sudden resumption of strong demand after the pandemic and (c) the war in Ukraine. After rising 100% from pre-pandemic levels, the Dow Jones Commodity Index is now correcting somewhat, but it is still 65% higher.  Assuming that the Fed (and soon the ECB) wants to kill inflation via, most likely, a recession, demand is going to suffer and prices will correct further. Dry bulk carrier shipping rates - a gauge of current and future demand for dry raw materials like iron ore, coal, grains, etc - are now back to pre-pandemic levels.  Likewise, containership rates are coming back to Earth after shooting to the Moon (but are, interestingly, still quite high compared to 2019 - there is apparently a lag between shipping demand for raw material and finished goods).  Commodities are also un-investable.

Dow Jones Commodity Price Index Correcting But Still Very High 

Dry Bulk Shipping Rates Back To Pre-Pandemic Levels

Freightos Global Container Freight Rate Index Coming Back To Earth

• Last (and most certainly least, in my opinion) all things crypto: cryptocurrencies and all sorts of non-fungible tokens.  I must admit that I am not a crypto expert and, if anything, a committed adversary.  I strongly believe that they have no fundamental value whatsoever, are prone to fads, scams, criminal activity and immense volatility.  Maybe I'm just an old f@rt, so I will just say that cryptos are "by definition" un-investable and leave it at that.

Am I leaving an investment category out? Precious metals, perhaps? No, they are commodities.  Diamonds?  Surely, they are a girl's best friend but I can't really call them investments in the traditional sense.  Likewise for art and wine - unless you mean "investing in the finer things in life", in which case they are always investible!! 

After decades of ever higher returns for all asset classes, they have now all become un-investable when assessed against current economic reality.  And I haven’t even mentioned geopolitical risks, which are rising daily.  Our asset universe has become un-investable: no matter how carefully you throw your dart it is more likely than not that you will end up with losses and, as I projected in my previous post, those losses will persist for a long time.