Why Macro’s finally worth talking about

These five factors will define the next era of investing. Here's what you can do today to prepare.

These five factors will define the next era of investing. Here’s what you can do today to prepare.

As most readers will know, I have a podcast with a view to provide some free education and entertainment to the Behind the Balance Sheet community. We started with a series of five podcasts and when they proved highly popular, I decided to continue, starting with a series of macro discussions.

My rationale for talking about macro – it’s too common a subject for podcasts, and usually of limited value – was that we are entering a new era:

·       A move from 40 years of falling rates would on its own be sufficient to drive considerable change in equity investment strategies. But it’s much more.

·       In the past 30 years, we have enjoyed falling energy prices, which have contributed to disinflation.

·       In the past 20 years, we have benefited from globalisation, a major factor in disinflation.

·       Meanwhile, tax rates have been steadily falling.

·       And financial capital was abundant, leading to increased financial engineering.

All these trends look set to reverse over the coming 20 years, which is a seismic shift in the way we need to think about our equity investments. In particular, although most people understand the concept of inflation, very few of today’s practitioners were investing in the inflationary period of the 1970s.

I was keen to interview Mario Gabelli for Real Vision last year for this reason, but I could get little from him on how he invested although he did produce this memorable quote:

“Inflation’s like toothpaste, once it’s out of the tube, it’s difficult to get it back in.”

This was not an original quote, but it’s a powerful one. Yet it still left open the issue of how to invest in an age of inflation, looking at the topic from first principles – and the purpose of the podcasts. Here are the brilliant macro brains you can hear from:

  • #6 Hugh Hendry, the founder of Eclectica Capital, now renting property on St Bart’s
  • #7 Dylan Grice and Rob Crenian of Calderwood Capital
  • #8 Chris Wood, the highly regarded Jefferies strategist

When I asked Russell Napier, the financial historian if he would be a guest in our macro mini-series, he suggested that we cover the Capital Cycle in an Age of Financial Repression, which was the subject of his last quarterly newsletter for institutional clients. He suggested that we invite Jeremy Hosking, the former partner of Marathon Asset Management and co-author of the book Capital Account, which introduced the concept of the capital cycle to the investment world. After some gentle persuasion, Jeremy agreed and we had a really interesting discussion.

But before you rush to start the podcast on your favourite host, some explanation may be helpful, as the subject is quite complicated.

The capital cycle concept is now well known – pay more attention to supply than traditional investors, who tend to focus on demand and buy into an industry when capacity is exiting. Yet as we explore here, the capital cycle can be viewed on multiple levels and in a more subtle fashion.

The changes outlined above have enormous implications for equity strategies and I believe that the capital cycle will have to be core, as will thinking with an inflation protection mindset. The de-globalisation trend will require more capital going to traditional industries at a time when capital is less abundant.

We cover a lot of ground in the podcast. These two giants of the investment world discuss the way forward, covering everything from banks to ESG, from Tobin’s Q to excessive liquidity, and from the tragic events in Ukraine to the sinking of the Titanic. One theme is constant, however –the capital cycle, and we discuss in detail its mechanics and the reasons why it’s such an effective investment tool.

Please make sure to listen to the very end. Russell and I have a postscript discussion, as we wanted to tie some of the loose ends together. We both met Greenlight Capital founder David Einhorn shortly after the podcast and I share some of his interesting perspectives on how to invest to protect capital from inflation.

This is, of course, a huge subject and one which I can only touch on in half a dozen or so hours of discussion, particularly as I easily get sidetracked talking to these smart people. Yet make no mistake, this is almost certainly the single most important issue for your portfolio performance over the next 10 years.

Please let me know what you think. I would love to hear your ideas for other guests and on how we should develop the discussion both on the podcast and here in the newsletter.

Podcast link: https://behindthebalancesheet.com/podcasts-singles/podcast-episode-9