Saturday, September 3, 2022

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.


  1. hmmm.... real talent is super cheap these days...

    for example, the music industry is flooded with trash pop, while the real musicians are starving... I suspect that if you know what you are looking for, you could pick up the next Mozart for a salary of $10k a month... sounds like a deal?...

    think it is similar in research... if you have an eye for the truly talented, they can be had for a song... while we are about it, why not hire good old chicken... I think we can give google a run for its money at 1/ 100th of its research cost... =)

    1. Actually, in my many years in the business, real talent combined with sound business sense, hard work and ambition is super hard to find. It only looks easy and cheap in retrospect, and even then the ultimate success ratio is 1 in 10 at best.

      As for music... absolutely agree. The digital media have cheapened art all the way to the gutter.

  2. "Actually, in my many years in the business, real talent combined with sound business sense, hard work and ambition is super hard to find. It only looks easy and cheap in retrospect, and even then the ultimate success ratio is 1 in 10 at best."

    Yes, I think you have hit the nail on the head... The truth is that true talent, actual business acumen, and money, seldom coincide... And that is why we have institutions that bring these things together...
    The stock market lets those with money provide money, the record companies let those with talent provide talent, ditto with universities, and those with business acumen can run the institutions to the benefit of all...

    The problem is our institutions are failing... and that is why the investors feel they have nothing to invest in, while the researchers / musicians feel there is no way to make money... In theory, this situation should never occur... in practice, it is our lives...

    And just as you say,... we need to invest in building new institutions.. that means the investors need to look beyond just providing money... and the researchers / musicians need to look beyond just perfecting their art... But I think the payout from building new institutions can be enormous... anyway... I don't think we have a choice...

  3. Where does one to go invest in an un-investable world? Gold? Or do just sit and wait it out?

    1. Since this post has lots of platitudes..."When in doubt, wait it out" :) Honestly, I think only baseball has more corny sayings than Wall Street hahahahaha

    2. Seriously, though: A legendary investor/speculator from the past - one of the most successful ever, starting from very humble beginnings - had said the same thing, essentially. "There is a time to go long, a time to go short and a time to go fishing." In other words, there is no rule that you should always be invested in something. In fact, if you can't find anything to invest in it is best to stay out. The "you" part is very important, it includes the assessment of your own needs, risk parameters, etc.

  4. when I read Krugman, I hear on and on again about falling gas prices and how he always knew they would fall... but if you look closer, you see constant selling from the US strategic reserves to hold down oil prices...

    anyway, think oil prices will skyrocket after the November midterm?


    selling of strategic oil reserves

    1. Re SPR: you are right the SPR has dropped by almost 30%, to the lowest level in 40 years. If it takes that much extra oil to bring the price down.... yeah, all things equal prices should rise after October when the SPR drawdown is scheduled to end. Elections early November... yeah, it makes sense because NOTHING enrages Americans more than expensive gasoline at the pump. Stupid, really, but NOTHING...