The Investor March 2021

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

The State of Play

By Richard Cluver                                    March 2021

If you want an apt comment upon the strange economic times we are living in, the fact that Banks in Germany are telling their customers to take their deposits elsewhere because they don’t want them, is all you need to know!

In this new era since the ‘Sub-Prime’ crash of 2008, investors have got used to the fact that central banks have been creating so much money that Dollars, Pounds and Euros, together with a whole raft of other currencies, have become nearly worthless commodities. As a result, interest rates have been negative in most developed countries for years. But it took the flood of savings unleashed in the pandemic for banks finally to charge depositors in earnest.

Recently, Germany’s biggest lenders, Deutsche Bank and Commerzbank, have been telling new customers that they must pay a 0.5% annual rate to keep large sums of money with them. The banks say they can no longer absorb the negative interest rates the European Central Bank charges them. The more customer deposits banks have, the more they have to park with the central bank.

European financial publications are currently reporting that their banks initially resisted passing negative rates on to customers when the ECB first introduced them in 2014 because they feared a public backlash.

Some did it only with corporate depositors, who were less likely to complain and instead resorted to other means such as higher fees in order to pass on the costs of negative rates.

However, the pandemic has changed all that. Fears of job cuts and salaries being slashed have changed the psyche of the general public. Today they are rapidly turning into the same cautious savers that our grandparents became in the 1920s. Gran and Grandpa lived through The Great Flu pandemic of 1918 which, coupled with the end of the Great War, eventually led to a decade-long party as people everywhere tried to forget the horrors they had lived through!

It was a period indelibly etched into modern history as the free-spending years of the ‘Roaring 20s’ which ushered in the Charleston, Prohibition and the first Central Bank experiments with monetary expansionism which were to ultimately explode with such devastating finality with the 1929 Wall Street crash that ushered in The Great Depression. It is a scenario that many forecasters are envisioning as probable once enough people have been vaccinated everywhere to drive Covid-19 back into its own private Pandora’s Box; of people everywhere coming out of their dark shells and unleashing the money they have been currently savings in yet another global binge.

But the order of events might be a little different this time! Or might they? Fearing the loss of their jobs, people everywhere have become as thrifty as their grandparents. This, together with the fact that lock-downs have meant that people have not been spending the significant proportion of income that once went on holidays, entertainment and eating out has resulted in savings rates skyrocketing everywhere. Couple these savings with the huge relief programs that were initiated by most Western governments and the result has been that mountains of money have been stacking up and banks are being flooded with excess deposits.

A Bloomberg report notes that, “As the virus spread, central banks from Washington to Wellington flooded financial markets with liquidity. They backstopped companies. They helped to finance massive government stimulus. The blitz included 164 interest-rate cuts in 147 days, according to a tally by Bank of America Corp.; altogether, the banks pumped in $8.5 trillion in monetary support and governments an additional $11.4 trillion in fiscal stimulus—almost $20 trillion in total.”

But are the central banks listening? Of course not! New US president Joe Biden has just pushed through another $1.9-trillion stimulus package and that is only one of many worldwide. So it should be no surprise that ordinary people everywhere have been facing the extraordinary phenomenon of banks turning away depositors because their vaults are overflowing as dramatically as are Western Cape wine cellars after the liquor lock-downs.

And just like the wine farmers whose new harvests are being turned away, ordinary savers are struggling to find places to invest their money.

The unprecedented flood of investment money, together with the economic dislocation of the pandemic has obliged banks to make operational changes they have long resisted and their customers have meanwhile become obliged to begin re-thinking their approach to savings and investment.

Recently I have detailed one significant consequence of the new era has been the fact that traditional share market valuation systems based upon such investment criteria as free cash flow and long-term dividend growth have lately gone out of the window. The ShareFinder system was accordingly obliged to introducing a new ‘Portfolio Builder’ option which took this development into account and created ‘Risk Portfolios’ which ignore the normal safeguards. And the portfolios it created a year ago have dramatically outperformed conventional Blue Chip portfolios.

Illustrated below is a graph of a ShareFinder Nasdaq portfolio which, as far as we know, has outperformed every traditionally-created balanced hedge fund portfolio in the world during 2020. It rose in value from $873 697 on March 24 when the Wall Street bottomed last year to a recent peak in mid February of $1 973 700 representing a gain of 126 percent in a year.

During the same period, which has been marked by one of the most dramatic market recoveries in living memory, Wall Street’s broadest measure of share value, The Standard and Poors 500 Index (next graph) gained 87 percent. So our risk portfolio did half as much again.

And, of course, outside the realms of conventional wisdom has been the new phenomenon of the ‘Reddit Crowd’ whose crucifixion of at least one major hedge fund will one day become the stuff of Wall Street legend. Co-ordinated by internet blogger Keith Gill whose Roaring Kitty column led a small army of amateurs to take on the professional fund managers who had been shorting the shares of a failing music retailer named Game Stop, They drove it upwards from a low of $2.57 last April 3 to a peak of $483 on January 28 and then back down again to $40 on February 23.

Most market observers now firmly agree that global economies have entered an unprecedented bubble; a period of insanity which is unlikely to end well for everyone but the financially nimble-footed and the dilemma that faces ordinary folk everywhere is which expert should they listen to?

Economics textbooks tell us the cheap money gushing out of central banks should eventually get people spending again and businesses hiring, pushing up prices and wages and forcing interest rates higher.

That would then allow central banks to slow their intervention, halt their stimulus, and maybe even unwind it once the recovery is strong enough.

Handled responsibly with gradual interest rate increases, that should take the pressure out of the system. But recent economic history tells a different story.

After more than two decades of purchasing public debt, the Bank of Japan now has a balance sheet larger than the country’s economy, and yet inflation is “officially” back around zero. The US Federal Reserve and European Central Bank have not gone that far yet which might suggest that if their economies follow a Japanese trajectory, it could be many years—even decades—before they’d have to impose limits on their quantative easing programs.

If that view is correct then, as flood water always keeps on finding somewhere to go, money that is surplus to everyday needs – and rejected by banks – usually finds its way onto global stock exchanges which have an infinite capacity for rising….until they burst!

However, let’s assume for a moment that economies do begin recovering and that unemployment declines to reasonable levels. After all two million South Africans have in recent month found new jobs. In the US the unemployment rate peaked in April 2020 at an unprecedented 14.8 percent, a level not seen since data collection started in 1948. But by December it had fallen all the way back to 6.7%.

Globally, the International Labour Organisation calculates that 8.8 percent of global working hours were lost relative to the fourth quarter of 2019, equivalent to 255 million full-time jobs. However, by the fourth quarter of last year that figure had improved to the equivalent of 130- million full-time jobs.

So the recovery is proceeding faster than most analysts expected. Which begs the question, what happens if those who predict a new Roaring 20s and central banks respond by raising interest rates.

What happens to countries like Japan whose current debt to GDP ratio now exceeds 233 percent, Greece with 205 percent, Italy with 162 percent, the United States with 131 percent, Belgium with 118 percent, Spain with 123 percent and Britain with 108 percent?

They are servicing those debts now because interest rates have never been as low. But once they begin rising the big nations will have to face having to increase taxes and cut the welfare benefits they currently advance to their poorest citizens. Economists call that event the Great Reset, an event likely to be socially and politically more catastrophic than 1929 unleashed upon an unsuspecting…and partying…world!

Watch out for Inflation!

Reprinted from Richard Cluver Predicts

Many readers of this column read my 2019 book ‘The Crash or 2020’ and so you will be broadly familiar with my then thesis that a black swan event originating in China would trigger a global share market crash in response to which major governments would vastly increase their already gross indebtedness to try to ward off the next Great Depression.

If you care to turn back to the book you might read, “The likely trigger event for the next global share market correction could originate in China where, in its rush to grow it has built far too many buildings, produced far too much steel and other commodities and made far too many bad loans.” As China has begun re-building its economy since the lock-down, that fear is arguably now being exaggerated and poses a new threat!

But to continue my 2019 thesis, I was concerned then that the interest burden of the resulting debt of nations would bring leading governments ever closer to the day when the sum of their tax income would be insufficient to meet the cost of servicing that debt. Only two options would then remain, to either use their central banks to flood the system with so much money that interest rates would be driven downwards making debt-servicing more manageable or, alternatively, to create an explosion of monetary inflation which would erode the debt. But either way, so much new money would normally make inflation a high probability.

There is nothing new about this problem. Global debt has been growing steadily ever since the post-war Bretton Woods agreement freed national governments from the discipline of maintaining central bank reserves of bullion and hard currencies. Furthermore, since debt required less accountability than tax increases, it enabled governments to indulge in vote-grabbing social welfare programmes and as a result, as each global financial crisis and subsequent rescue attempt has ended with ever-greater global monetary supplies, sovereign bond interest rates have steadily fallen.

In my graph below, the purple trend line shows how the yield of US five-year bonds has fallen at compound 13.4 percent annually since the Asian crisis of 1997 which saw America intervening to support Thailand. That crisis began with the collapse of the Thai baht because the Thai government lacked sufficient foreign currency to support its currency peg to the US dollar. Capital flight ensued almost immediately beginning an international chain reaction which soon engulfed most of Southeast Asia and Japan. Slumping currencies devalued their stock markets and caused a precipitous rise in private debt. The effect of that Fed issuance was a massive 40 percent decline in the yield of US 5-year bonds from 6.76 percent to 4.05 percent as my first red trend line on the left highlights.

Over the next two years the US Federal Reserve was able to gradually recover the effects of that issuance bringing bond yields up to the same level at before as highlighted by the first green trend line on the left. But it was not to last. The ‘Dot Com’ bubble on Wall Street, caused in large measure by the excess of money printed by the US Federal Reserve to cope with the Asian Crisis subsequently finding its way into the hands of share market speculators, saw the Nasdaq Composite stock market index rise 400 percent.

Then the bubble burst and the Nasdaq fell 78 percent taking with it a slew of major online shopping companies, such as, Webvan, and, and communication companies, Worldcom, NorthPoint Communications, and Global Crossing. A few like Cisco, whose stock declined by 86 percent, and Qualcomm, lost a large portion of their market capitalization but survived.

Fearing another recession the Fed again intervened and the consequence was my second descending red line and this time the yield fell from 6.68 percent to 2.11 and this time it took four years to partially recover to a yield of 5.18 percent before the United States subprime mortgage crisis struck in 2007. It quickly became a global crisis which, but for Fed intervention, would have brought down a range of merchant banks which were judged “too big to fail.” It was triggered by a large decline in home prices after the collapse of a housing bubble and led to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities.

This time, note my third declining red trend line, the 5-year US bond fell from 5.18 percent to 0.58 over a five-year period and it took over six years for the rate to gradually claw back to only 2.94 percent leaving the Fed with little ammunition to intervene when a recessionary phase began in late 2018 and worsened when Covid-19 followed in 2020. This time the yield fell to 0.22 percent last August and it has had a catastrophic impact upon the pensions industry making it impossible for many Baby Boomers to retire which has in turn severely impacted youth unemployment.

Now the world economic crisis, which in my latest book I warned was pending, has moved immeasurably closer as a result of Covid. Governments, companies and households raised $24 trillion last year to offset the pandemic’s economic toll, bringing the global debt total to an all-time high of $281 trillion by the end of 2020, or more than 355% of global GDP, according to the Institute of International Finance. Worse, however, is the fact that central banks no longer have any ammunition to counter another crisis because of the obvious fact that it is impossible to lower bond rates below zero.

Once upon a time the universal government solution to debt was to raise taxes. But apart from the obvious fact that the world is in a severe recession as a consequence of the pandemic and increasing taxes in such circumstances might well push it into a full-blown depression, global tax levels are already at historic highs. Prior to the introduction of the Welfare State in the 1920s, few governments gathered in more than ten percent of the earnings of their citizens. That is why, economists tell us, the Industrial Revolution was able to happen. But after the Welfare State came about and the idea spread around the world, taxes rose steadily until they peaked around 30 percent in the United States, 40 percent in Britain and at 50 percent in most of Europe.

Indeed, as a percentage of GDP, government spending is already at an historic high and is the major reason for the global recession we are experiencing. So additional direct taxation is impossible. But without it how might debt be reduced?

Inspired by the fact that their abuse of the monetary system to engineer low interest rates has simultaneously allowed people like hedge fund managers to become overnight billionaires, many governments have recently toyed with the idea of a wealth tax to enable governments to settle their debts. However, the sobering fact is that in 1990, twelve countries in Europe had a wealth tax. Today, there are only three: Norway, Spain, and Switzerland. Most governments eliminated the tax because it was problematic in design and enforcement but mostly because they often hit people with plenty of assets but little cash on hand to pay the taxman. Worst of all, it has almost always cost more to collect than it effectively brought in.

Others, like the ANC recently, have been eyeing the accumulated savings of the Baby Boomers as a potential lifeline. Recent experience has shown politicians that idea also cannot fly. Having floated an alternative idea of a two percent wealth tax which initially seemed to strike a popular accord with a US public grown weary of billionaires as a result of the Donald Trump presidency, two recent contenders for the US presidential nomination, Senators Elizabeth Warren and Bernie Sanders arguably lost their chances once the voting public – a large percentage of whom were, as retirees, often asset rich but income poor – realised that the bulk of Americans would be caught up in that sweep.

Here in South Africa, an idea to make it compulsory for ALL pension money to be invested in government bonds similarly met with such outrage that it had to be abandoned. Public experience and memory of how apartheid era public service pensioners were impoverished by this measure also made it a non-starter.

Governments have accordingly been left with the belief that there is only one way left to deal with their debt and that is to use monetary inflation to drive down the face value of their currency-denominated sovereign bonds. That is why investors globally have been keeping a very sharp eye on US bond rates for fear that any increase might be a harbinger of the inevitable inflationary backlash. And just that has begun – note my enlargement of the recent period of my original graph which, in large measure explains why many fear a fresh share market collapse. That red trend line, moreover, is climbing at an annualised rate of 960 percent which provides good reason for investor alarm.

Now economic theory is that interest rates lie at the heart of all securities values and that bond yields and dividend yields are thus immutably linked. From that it is deduced that if bond yields increase, share prices will need to fall in order that, in the absence of increased corporate profits, dividend yields might also rise. But that view obviously stems from an earlier period in history before central banks started printing money and logically broke the link. In the following graph I have compared the same US 5-year bond yield with Wall Street’s widest measure of share price movements which makes it clear that the although theory still seemed to hold true in the late 1990s – before they began printing excess amounts of money – and that it was partially true between 2009 and 2012, but recently both markets have moved more or less simultaneously….presumably as a result of central bank stimulation. But remember that option no longer exists! So there is reason to be concerned about the rise in US bond rates.

Excess diversion of the wealth generated by the private sector to governments, whose employment of that money on social rather than infrastructure expenditure, has throttled economic growth and engendered global recession. Thus, when governments try to initiate GDP growth by, for example, channeling increased amounts of money to low-income consumers whose resultantly increased retail spending triggers apparent GDP growth, has in turn caused investors who fear the consequent onset of inflation, to accordingly rush to buy blue chip shares. Bond buyers, for the same reasons will only buy bonds when yields rise to match their inflationary expectations.

Meanwhile US inflation numbers came out this week at 0.4% which was in line with expectations though Core CPI, which excludes volatile food and energy prices, rose 0.1 percent below expectations. And that seems to have tamed the market for now. After sharp declines from mid-February until last Friday, the New York stock exchange is again on the way up and ShareFinder sees this continuing until late May when the next set of jitters seems on the cards:

The result has been to give the JSE a temporary new lease on life but ShareFinder expects it will be over after the close of trade today. Then it will be down-hill for a year with a temporary reprieve for six weeks at the end of August:

In closing I should add that in The Crash of 2020 I proposed an alternative means of paying off the national debt which was pioneered by the City of Durban in the 1980s which got buy-in from ratepayers for a debt-buster levy in return for a promise that rates would be steadily reduced. It worked. Durban became debt free and then began investing its surpluses which resulted in a series of subsequent rate reductions. However, since the city ceased honouring that promise once the ANC gained control and has been running up debt once more, Durban has since became South Africa’s most highly-rated city. Arguably then, it is probable that the South African public would not trust the government with a similar national project. But it was a good idea at a time when there was no politics in local councils and when citizens trusted their local councillors!

What if bond yields fell to -20%?

By Richard Cluver

Since late last year I have been warning readers of the approaching danger of a New York Stock Exchange major correction and, with last week’s sharp correction of the Nasdaq coupled with wild gyrations of the NYSE itself, that moment if obviously very close now.

There is, however, a caveat which I dealt with in last Friday’s ‘Predicts’ column which, if you did not have time to fully digest it, I suggest you spend some time to do so now in association with this column. In essence, what I was pointing out on Friday was that central bank financial engineering has broken the link between bond rates and equities for the past quarter century and, in the process, has staved off the deadly day of reckoning for indebted nations by forcing interest rates to unprecedented lows.

You obviously cannot reduce NOMINAL interest rates below zero. If, however, central banks continue holding rates close to zero in the face of rapidly rising inflation, the impossible does then become theoretically possible in the share of negative REAL rates which, if you take the South African post Rubicon experience as an example, could see negative REAL rates in excess of 20 percent. I do wonder, however, at the morality of such an approach because, by national legislation, many governments require pension funds to hold a significant portion of their capital in bonds. Under such circumstances the effect of such negative rates will be to destroy the capital value of pensioners’ assets at the same time as inflation is stripping their received pensions of effective buying power.

Bottom line, governments which permit their central banks to adhere to a negative REAL interest rate policy will be allowing a double-dip into the assets and incomes of the elderly. And, given that the US Federal Reserve has been driving the global process of effectively attempting to negate the consequences of rising national debt, it is also clear that the US administration is not paying attention to the fact that – consider the rising graph on the right – that one in five of its citizens is a pensioner. Since, furthermore, the process is a global one, one needs to ponder what the consequences will be for the already grossly overburdened Welfare State in most Western countries?

If I can return for a moment to the graph I published in my first piece above detailing how US five-year sovereign bonds have been driven steadily downwards over the past quarter of a century at a compound annual average rate of 13.4 percent, it must be obvious to everyone that it is IMPOSSIBLE to maintain the status quo for much longer. You cannot lower interest rates below zero so future stimulation becomes problematic.

I cannot imagine how the world’s monetary system will in such circumstances be able to in future maintain anything like a semblance of normality. The ONLY outcome I am able to foresee at this time is a catastrophic re-ignition of the soaring rates of inflation that beset the world in the late 1970s. It has already begun in the US and is raising analysts’ alarm!

And what might better trigger such events than a fresh economic crisis resulting from a serious Wall Street share price decline. Thus, as I have done repeatedly lately, let us consider the S&P500 Cape Ratio, which, lest you need reminding, is derived by dividing the S&P index by its market average inflation-adjusted earnings of the previous 10 years. Note how in the past month it has risen even further into the danger zone!

Now consider the Nasdaq which tracks the day-to-day values of Amazon, Tesla and dozens of other tech companies which have been making all the running in recent months. Note the 6.4 percent decline between February 12 and 26 and the more recent 2.13 percent decline between March 1 and March 9; unprecedented wild gyrations!

Opinion from Wall Street analysts is that the $1.9-trillion Biden stimulus package, which means that the average American will shortly receive a $1 400 cheque in the post, will achieve its objective of stimulating the country out of recession…. provided Covid-19 inoculations are able to end the business interruptions that have been a dominant feature of the past year. Meanwhile, house Democrats are already talking about another massive stimulus package…….

It’s like 1929 all over again once the Herbert Hoover presidency discovered how printing money created a cocaine-like economic boost.

But at least that time around they did not entirely understand the longer-term consequences. This time around history will surely judge such behavior as criminally irresponsible!

US analysts I speak to are cautiously confident but they all admit that the fabric of international commerce is extremely fragile at present and another Black Swan event could sweep ALL predictions off the table.

Sadly, there is not much optimism among local market-watchers who point to such things as the “glacial” level of activity in Gwede Mantache’s Department of Energy to bring about new electricity generation capacity which, along with the ANC’s preoccupation with political in-fighting rather than economic reform, all but guarantees that no growth will be possible in the future. Indeed, our economy is now so fragile that any external shock will at this stage inevitably dash any hopes of recovery. Meanwhile, soaring youth unemployment will continue to stoke demands for the kinds of unrealistically radical solutions that are being offered by people like Julius Malema who, judging by the proliferation of red berets in television clips covering recent campus unrest, appears to be gaining ground in youth leadership arenas.

Inflation Is Broken

By John Mauldin

John MauldinI have been writing for many years that the US in particular and the Western “developed” world in general were approaching a time where none of our choices would be good.

We have arrived. Any choice the government and central banks of the US and the rest of the world make will ultimately lead to a crisis. Just as the choices that Greenspan and Bernanke made about monetary policy created the Great Recession, Yellen and Powell’s choices will eventually lead us to the next crisis and ultimately to what I call The Great Reset.

I believe we have passed the point of no return. Changing policy now would create a recession as big as Paul Volcker’s in the early ‘80s. There is simply no appetite for that. Further, the national debt and continued yearly deficits force monetary policy to stay accommodative.

Today we will look at these problems through the lens of inflation. In general, consumers agree inflation is undesirable. They don’t want the prices of things they buy to go up.

But let’s talk about academics and central bankers. A little inflation makes sense from their viewpoint. They want to always have room to cut interest rates, should the economy falter. They would prefer to avoid negative interest rates. They need “normal” interest rates a comfortable distance above zero.

That’s hard to maintain unless the economy has some degree of inflation. So, they tolerate a little inflation and, when necessary, actually encourage it.

But this raises another question: How do central bankers, or anyone else, actually know how much inflation exists? They depend on data, and data can be twisted, misinterpreted, or just plain wrong. Sometimes all at once.

I touched on this problem last week in Everything Is Broken. So much of our broken economy is the result of broken monetary policy, resulting from broken data. This affects everything. If Federal Reserve officials think inflation is low when it’s actually high, or vice versa, they will set interest rates too high or low. Governments, businesses, and consumers will all make similarly bad decisions, all of which will eventually coalesce into a catastrophe like the Great Recession. And it will all trace back to a data problem.

Inflation is far from the only data problem but it is probably the most consequential. So today we’ll dive deeper into this subject. Our distorted inflation data has a lot to do with housing “prices.” I use quote marks there because price may not be the right word, as you will see.

Housing vs. Shelter We have to start with a definitional issue. For most people, housing is a major expense, and often the single largest one. Hence it is rightly a big part of the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).

The Federal Reserve favours the PCE measure, while for whatever reason, the business media seems to focus on CPI. Typically, the core CPI and PCE move more or less in tandem. But notice that both measures use housing as their biggest component. This table shows the weightings.

Source: Wikipedia

Notice that owner’s equivalent rent (OER) in the CPI is 23.4%, but total housing costs are weighted at 42.4%. The BLS tries to take into account how many people own their home, rent their home, and then what the other costs of housing are. Some people own their home outright and other people have large mortgages.

As you will see, there is a lot of guesswork involved.

First, do you actually “consume” housing? In one sense, no. The house is still there after you sleep in it, just slightly used. You didn’t consume the house itself. You consumed the shelter it provided you for that particular night. I know, a subtle distinction. But it matters to academics and the way we measure housing/shelter inflation.

Shelter is a service; a house is a capital good. When you buy one you aren’t consuming; you are investing. Since 1981, the inflation benchmarks haven’t measured housing prices directly. They measure something called “Owner’s Equivalent Rent” (OER).

So where do the benchmarks get that OER number? They do a monthly phone survey. Respondents are asked if they own or rent their home. Renters state how much they pay. Easy enough. Homeowners are asked what they “would” charge someone else to live in their same home, if it were empty and unfurnished.

See a problem? This is completely subjective. Have you done the market research to see what you would charge to rent your home? Have you actually tried to rent it at that price? Probably not. So OER is uninformed guesswork from the start. Nonetheless, the survey responses go into a giant formula that looks like this…
Source: BLS

… from which they derive the monthly change in OER for a given area. The “sixth root” of this relative number is the one-month change in OER. Simple, unless you have a swimming pool or other complications, in which case they make adjustments.

I believe the wonks who calculate all this are smart, dedicated public servants. They want to get it right. They have unfortunately been given a difficult and maybe impossible task. Adjusted subjective opinions of how much rent a given residence in a given place would fetch in a given month are a huge part of our inflation measures.

As an aside, the BLS typically sends out price checkers to verify prices for the various items they measure. But lately, due to COVID, they have not sent humans but instead relied on phone calls and estimates, as noted in their February release. How big a distortion is this? No one really knows.

There is no reason to think these inputs reflect reality, and many reasons to suspect they don’t. This has consequences.

Assumed Supply

Housing prices have no direct influence on our inflation measures. They do have indirect influence via the imputed, subjective “owner’s equivalent rent” methodology. Its accuracy is questionable at best.

What’s not questionable, though, is that home prices have a direct impact on the homeowner’s spending power. The mortgage payment is a function of the home’s purchase price and, if higher, reduces the amount the homeowner can spend on other goods and services. The impact varies, of course. Maybe you got a great deal on your house years ago, then prices rose even more in your area. You have a lot of equity which raises your net worth and probably makes you confident enough to raise other spending. But it can go the other way, too.

In any case, the size of your mortgage payment (even if it is zero because you don’t have one) certainly affects the amount you would want to rent your home to someone else. So do other factors: property taxes, expected maintenance costs, the tax impact of having rental income. Furthermore, your mortgage payment itself may be a moving target if you have a variable rate.

There’s more. If, hypothetically, you are going to move out of your home and rent it to someone else, where will you go? How much will it cost? Have you even thought about it? Maybe not. But you would have to consider all these things to properly estimate your OER.

Econ 101 also tells us cost doesn’t set prices. Supply and demand set prices. In this case, though, you are told to simply assume you would supply your home for rent, and estimate a price at which you would do so. That’s not how real life works. You can’t instruct people to imagine doing something that may be inconceivable to them and expect to get any kind of reliable answer.

Yet that’s how we arrive at a number that is the largest single input into (arguably) the single most important economic data point, which a committee at the Fed looks at when setting the single most important price in the world. See the problem?

Broken Inflation

Central banks all over the world, including the Federal Reserve, have an aspirational goal of 2% inflation. If you are age 30–40, that means every dollar you save today will lose half its value by the time you need it for retirement. And that’s what passes for planning by a committee. They literally plan on destroying the value of your dollar. The only real debate is over how fast to destroy it.

But forget that for a moment. The problem is we would already have 2% inflation, and probably more, if we correctly measured housing in the PCE and CPI with the actual cost of homeownership instead of imputing it via OER, as is done in both CPI and PCE.

Despite all the issues described above, housing prices and OER actually stayed fairly close for many years. I remember writing about OER in 2005 when it was much closer to being an acceptable measure of housing price inflation. Up until about 2000 or so, home prices and OER moved more or less in in tandem most of the time, though with OER far less volatile.

I argued back then it didn’t matter which measure you used as long as you were consistent. That is no longer the case because OER and housing prices are no longer consistent.

And they diverged because home prices took off higher when Greenspan kept rates artificially low, creating a housing bubble which led to a subprime bubble. Bernanke piled on (remember subprime is under control?) and then Yellen and now Powell.

Mish Shedlock has a great chart showing the disconnect between CPI, OER, and housing prices.
Source: MishTalk

Starting about 2000, and becoming increasingly severe, there was a huge divergence between housing prices and OER. The gap shrank as the Great Recession unfolded, but took off again as it became clear the Fed wouldn’t tighten policy. The 2013 “Taper Tantrum” looks like a turning point in that regard.

Source: MishTalk

And here we are. OER is the single biggest component in CPI at 24%. It rose 2% in the last year. The Case Shiller Home Price Index is up over 10% in the same period. Substituting the Case Shiller index for OER, as Mish did in this next chart, shows 3.5% total inflation, not the 1.4% that the CPI suggests, and which is even less in the PCE measure.

Painful Solution

Now, imagine an alternate universe in which, ahead of the Great Recession, the Fed had looked at inflation based on housing prices instead of implied OER. Instead of cutting rates to stimulate growth, they would have likely raised rates to fight the obvious inflation.

You can go back even further. If Greenspan had raised rates because of rising inflation starting about 2003–4, there would have been no housing bubble, no subprime crisis, no overheated stock market, and no stock market crash. We would not have had the worst unemployment numbers since the Great Depression. Retirees and everyone else would have been able to earn reasonable yields on fixed income instruments.

Wouldn’t higher rates have killed the stock market? I don’t think so. It might have risen less, but based on productivity and profits instead of irrational exuberance. I think most investors would prefer reasonable growth and no market crashes.

People hail Greenspan and Bernanke as some kind of maestros who orchestrated an economic symphony. I disagree. I think their actions were the root cause of the Great Recession, just as Yellen and now Powell and his successor will cause the next crisis. Artificially low inflation benchmarks, due in large part (though not exclusively) to the housing mismeasurement, give them the justification they need to give Wall Street (and increasingly Main Street) what it wants.

The data is very clear to anybody who wants to look, and especially to the Fed. They simply refuse to pay attention because it doesn’t fit the narrative they want everyone to believe.

You could argue that the Fed should normalize rates based on the above measurement. Paul Volcker in the 1970s was the last Fed chairman willing to do that. There is zero appetite at any central bank in the world to embrace such a philosophy.

Thanks to years of mistakes, Powell is locked into a policy trajectory that leads nowhere good but also can’t be changed without enormous pain.

What Will Inflation Be?

Inflation in February was benign. But starting with March, because of the COVID effect, the year-over-year comparisons will begin to show higher inflation. If you go back two years inflation will still look benign, but that is not what the BLS or the media will do. They will focus only on one-year change. And for March through June/July, the comparisons will probably show inflation rates well above 2%. Before the end of summer, combined with the recent stimulus package, it could actually approach 3%.

I believe this will be transitory, but the bond markets will see those numbers and want to push interest rates higher. The Fed will tolerate higher interest rates on the 10-year bond up to a point. They have said they would be willing to accept 3% inflation for a time, but they also want to keep interest rates down. Without actually implementing Yield Curve Control, per se, they can simply modify their bond buying to include longer maturities, and/or increase the volume of US government bonds they buy.

The previous administration was certainly willing to run up the deficit. The current administration is going to do so on steroids with infrastructure and other programs, on top of the just-passed COVID relief. The Federal Reserve’s balance sheet is around $7.5 trillion now, and rising some $120 billion per month.
Source: Federal Reserve

The fiscal 2021 US deficit will certainly be more than $4 trillion and approaching $5 trillion, and the Treasury has more debt that has to be rolled over. The US government simply can’t afford higher interest rates. Financing costs would overwhelm the budget. Further, we are beginning to see Treasury auctions coming in “weak,” meaning investors demand higher yields.

The Federal Reserve is going to become the buyer of last resort, exactly like the central banks in Japan, the ECB, and to some extent the UK are. I expect the consequences will be much the same: lower GDP growth.

I’m asked all the time, how long can this go on? Probably longer than we can imagine. It will continue until it doesn’t. The Federal Reserve will continue to hold rates down, punishing savers and retirees. Their policies will aggravate wealth and income differences but no one will deal with the actual causes.

In summary, nothing is really going to change in terms of Federal Reserve policy. It will keep using broken data to justify its loose monetary policies, the monster deficits will require them to purchase even more Treasury bonds and, given their presuppositions, they really have no choice.

They will continue on that course until there is a crisis, and then they will double down. There is absolutely no way to know when that will happen. Japan and Europe have gone on for a long time. There is no reason to think the US can’t. Powell and whoever succeeds him will echo Mario Draghi’s “Whatever it takes” line.

I don’t want you to fight the Fed, but at the same time you don’t have to play the game. You have alternatives. Think in terms of an absolute return strategy, combined with value-oriented companies and more active management. Friends don’t let friends buy passive index funds. Not in these times.

World War III

By Jared Dillian

Jared DillianDemocrats are advancing another spending proposal to Biden’s desk. The total: $3 trillion.

We just passed a $1.9 trillion spending bill a few weeks ago.

If this passes in its current form, that would be a total of $4.9 trillion in three months.

All of World War II spending, in today’s dollars, comes out to $4 trillion.

We are going to be spending more than we did for all of World War II—where we built planes, tanks, aircraft carriers, and military bases—in the span of a few months.

Are we at war or something?

Nope, we’re just handing out cheques.

I’ll restrain my cynicism for a minute. Infrastructure spending is supposed to be part of the new spending package. But we’re terrible about infrastructure in this country. The porkulus of 2009 (The Democrat-supported “Stimulus Package of 2009,” actually just a massive pork-filled spending bill. Can apply to any pork-barrel bill disguised as “economic stimulus.”) succeeded only in paving the same roads over and over again.

Even Japan, which enjoys a debt-to-GDP ratio of about 240%, got a bunch of bridges and tunnels out of it. All this money—all of it—will go to waste.

We are here to sort out the financial implications. And they are staggering.

The Bond Market Has Indigestion

The bond market is getting a bit of indigestion. You might remember that disastrous 7-year note auction from a few weeks ago. There was a big tail, but more importantly, the bid-to-cover was alarmingly low.

This was followed up by a 20-year bond auction that went off a little better, so concerns about the government’s ability to fund itself subsided in the short term.

We are dumping massive amounts of supply on the bond market. The Fed is buying some of it, but not enough. Foreign buyers have stepped back.

Who is going to buy all these bonds?

If this passes, I expect auctions to get very ugly in the coming months. A failed auction is not out of the realm of possibility.

To be perfectly transparent, I cried wolf about bond auctions back in 2009 and 2010. We were running deficits close to $2 trillion, and I wondered aloud how all the supply was going to be absorbed. But it was. We were in an almost-depression, and the stock market was such a mess that demand for Treasuries went through the roof.

This time is different… for a lot of reasons. Throw in the face that, unlike last time, real yields are negative, inflation is bubbling higher, and the least-attractive asset on the board is a US Treasury note.

Having said that, when yields get high enough, the attractiveness of bonds will increase, and there will be buyers at a price. Where that is, we don’t know. Rates might have to go much higher for that to happen.

And that’s why we have to talk about yield curve control now.


I really don’t want to talk about this. It is just disgusting.

The history of this is that the Fed did yield curve control for a long period of time in the ‘30s and ‘40s. That was not an especially happy period in history. So there is precedent for it.

In case you’re not up on this, YCC is when the Fed stands ready to buy an unlimited amount of bonds (with printed money) at a certain level of interest rates.

You can see where this is going. If the Fed is the marginal buyer of bonds, and it’s willing to buy unlimited quantities, then the government can spend an unlimited amount of money.

This is in our future.

I’m comfortable saying that the 40-year period of disinflation and lower yields is over. We are now headed the other direction.

Those who feared a deflationary black hole like what happened in Japan in the 1990s will have to contend with the opposite problem—inflation spiraling higher. The supercycle is over, and a new supercycle has begun.

What To Do

There are a few specific things you can do to benefit from higher inflation:

  1. Bet on higher rates, either directly or indirectly. Sophisticated investors can play in bond futures and options, less sophisticated players can mess around with TLT, and even less sophisticated players can invest in companies geared to higher rates, like insurance companies.
  2. Own hard assets. I fear that I don’t own enough. Metals, materials, energy, agriculture, it doesn’t matter. We’ve had a pretty big move already in commodities, but this is only the beginning. We have had an immediate and profound shift in inflationary psychology, and financial assets will underperform hard assets going forward.
  3. Look for value to work. One interesting thing about the stock market these days is that the broad indices are pretty quiet, but there is a lot of volatility underneath the surface, as the growth/value factors churn on a daily basis. This is reminiscent of what was happening at the top of the dot-com bubble in 2000—you had the “old economy” stocks and the “new economy” stocks. Last time we had this kind of factor dispersion, things didn’t work out so well.
  4. Wait for gold to work. It will, eventually.

The days when we were worried about the deficit were among the best days in our history. I have nostalgia for them.

We’ve gotten dumber over the years, which should be obvious. And with ridiculous—and potentially unlimited deficit spending—and YCC, there will be no turning back.

A reckoning is coming for stocks.

Is the 4% rule still relevant for retirement planning?

I am indebted to Discovery for a well discussed piece on what is the desirable draw-down on one’s pension capital.

Traditionally, financial advisers, savers and retirees have relied on the 4% rule when working out how much to save for retirement and what kind of annual income retirement savings would provide. The rule was first proposed by Californian financial planner William Bengen in the 1990s.

Simply put, the rule says that if retirees withdraw 4% of their savings annually (adjusting this amount for inflation every year thereafter), their nest egg will last at least 30 years. The rule also requires retirement savings to be split equally between shares and bonds. The method is also used to determine the lump sum investors need to provide an acceptable annual income when they retire.

For example, assume you are retiring today with a final salary of R480 000 a year. You need a replacement ratio of 90% of your final salary. Ninety percent of R480 000 is R432 000. To ensure you do not use all your saved retirement capital in 30 years, R432 000 should be 4% of your total savings. This means you would need R10.8 million saved to draw 4% or R432 000 annually. Put another way:

  1. You need R432 000 a year (90% of R480 000).
  2. R432 000 must be 4% of your total savings at retirement if you don’t want to deplete your nest egg.
  3. R432 000 is 4% of R10.8 million
  4. Therefore, you need R10.8 million saved at retirement to give you R432 000 a year.

Those who question the 4% rule’s relevance say it doesn’t take into account issues such as taxes or varying investment horizons, and also observe that financial conditions when the rule was formulated were very different to the reality in this century. For example, Bengen’s rule is based on the average long-term annual returns (since 1926!) of shares and bonds being 10% and 5.3%, respectively.

“The 4% rule started in the US in the 1990s when interest rates were a lot higher. With rates at an all-time low, the rule has broken down. In South Africa, rates and dividend yields are low, but still high enough to sustain the rule, but that could also change in time And a 2010 paper by Wade Pfau pointed out that the “US enjoyed a particularly favourable climate for asset returns in the twentieth century” and argued that “from an international perspective, a 4% real withdrawal rate is surprisingly risky.”

Tracy Jensen, Product Architect at 10X Investments, says although “the 4% rule still applies to retirement investing,” it needs to be applied differently in South Africa. “While the 4% rule still applies to retirement investing, South Africa is unique in the sense that regulations restrict the income drawn each year, between 2.5% to 17.5% of your investment balance. As a result, investors could have sufficient money to draw the income they desire but are restricted once they reach the 17.5% cap. Therefore, an adaptation of the rule is required in our context.”

While the basis of the 4% rule is sound, it still might not be relevant to many would-be retirees. The 4% rule is simple mathematics; the less you draw from your capital, the longer the capital will last. Given historical data, the 4% rule suggests that capital can last into perpetuity if the investor only withdraws 4% of capital as income. Mathematically, this is true. Practically, however, the majority of people have not saved sufficient capital to allow them to take advantage of the mathematics.”

A Bit of Bitcoin Basics

By Morning Brew

You could think of Bitcoin as magic internet money—and yes, we at Morning Brew are known for our technical economics vocabulary.

Bitcoin is a digital currency where transactions are verified and records of those transitions are maintained in a decentralized way, meaning not overseen by a government or institution. Its value is largely created by individuals hyping it up, and also by its scarcity.

What’s super cool is that, even if the hype fades, Bitcoin may actually more likely become ensconced in our society as a thing that stores value. 

Think Gold

The best case scenario for Bitcoin probably looks something like the consistent historical value of gold.

While gold was once traded as a physical currency, its value in the stock market is no longer tied to its industrial value. Normal people-speak: Gold’s stock price is not correlated to whether or not gold lockets are hot right now.

TL;DR: We now trade gold on perceived value—not tangible value.

*Dramatic pause.*

Bitcoin has the potential to become the digital version of gold. 

The Invisible Potential of Bitcoin

You can’t see Bitcoin. This sounds elementary, but it has a lot to do with how confusing the concept is. 

While it’s easy to imagine gold bars sitting in a vault accruing value, it’s hard to imagine the same thing with Bitcoin—mostly because Bitcoin lives either inside your laptop screen or inside your roommate’s boyfriend Dave’s mouth. (Stop talking about Bitcoin, Dave.)

But Bitcoin’s lack of intrinsic value means it actually has more potential than gold, because there’s nothing to pull it back down to earth.

Key takeaway: As the internet continues to alchemize Bitcoin, it may even surpass the market cap of gold—especially in our increasingly digital world. Of course, that growth isn’t guaranteed, and if it happens, it’ll take time to get there.

Its Place in Your Portfolio

Bitcoin has a way to go when it comes to being taken seriously by institutions and governments. It may likely never usurp government issued money, yet it’s still gaining momentum as a traded good, with big banks opening up cryptocurrency trading desks as we speak.

Plenty of smart people think it’s a good move to invest in Bitcoin. But here’s the kicker: If Bitcoin goes boom, then common stocks will likely benefit by proxy. So even if you’d rather stick with what you know, Bitcoin could still fatten up your wallet.

And that’s beautiful, baby.

Average take home pay rises

Re-printed from Business Tech

Take-home pay in South Africa was slightly higher than a year ago according to the latest BankservAfrica Take-home Pay Index. The index recorded nominal take-home pay over December at R15,415, up from R14,841 in November, and 5.4% higher than R14,625 in December 20219. In real terms, taking inflation into account, take-home pay is at R13,149.

The real average take-home pay increased by 2.1% year-on-year – but as BankservAfrica noted, the average salary rose as a result of the decline in the number of lower paid earners in the system, which led to the nominal increase.

The total take-home pay in the system, in real terms, actually declined by 2% year-on-year, the group said.

While the aggregate take-home pay decline proved to be not as excessive, chief economist at, Mike Schüssler, said this comes off a very low annual base.

“In December 2019, the number amounted to 4% less than December 2018,” he said.

The BTPI, which measures monthly salaries processed by BankservAfrica through the National Payment System, also takes into account the ongoing shifts in the Covid-19 UIF TERS payments. These movements – as seen in previous BTPIs – have led to the index’s salaries not at normal levels.

“Although TERS payments applications closed in September, it re-opened in November for October applications to assist industries feeling the brunt of the lockdown impact. These payments were still being paid in December,” Schüssler said.

The delay in payments has complicated the assessment of money going through the payments systems, as in some months employees were not paid via the normal payments system, and in other months this resumed when catch up payments were made.

“Therefore, along with tax relief and suspended pension fund contributions, the total take-home pay in the BTPI does not yet reflect the reality of the overall employment situation,” Schüssler said.

Early estimations point to around 5% – 10% of employees in the BankservAfrica payment universe affected by the lockdown.

“Still, this may not be the full picture as the BTPI salary data underrepresents smaller firms such as restaurant chains, smaller hotel groups and vehicle rental agencies,” the economist noted.

Schüssler said the BTPI will likely reflect a more normal situation in the next months for the average and median salaries in the formal sector that are paid via BankservAfrica.

get ready for the roaring 2020s cartoon showing people partying

By Patrick Lawlor

Patrick LawlorHistory doesn’t repeat itself, but it rhymes, goes the old saying. Whether it’s repeating or rhyming though, there’s a familiar look about life in the early part of this decade when compared with 100 years ago.

Like then, we are in the midst of a major global pandemic. While not as deadly as the Spanish Flu, it’s been at least as disruptive. Encouragingly, as the pandemic of 100 years ago and many others have shown, life does return to normal and we may even be able to look forward to the years ahead.

If this sounds like wishful thinking, there are some serious names out there who are buying into the concept. L’Oreal, the global cosmetics group, recently predicted a ‘Roaring 20s’ for its business once lockdowns are over and people are allowed to start going out again.
In a similar vein, social epidemiologist Nicholas Christakis, in his new book ‘Apollo’s Arrow: The Profound and Enduring Impact of the Coronavirus on the Way We Live’, expects to see mass rejoicing, an explosion of sexuality and a resurgence in the arts in the coming years.

Christakis says we have some way to go to achieving herd immunity against the SARS-CoV-2 virus, which will probably be achieved at some point next year if everything goes to plan. It will then, he argues, take some time to recover from the aftermath of the pandemic, namely for those who have lost their jobs, missed out on their studies and for those who have been physically affected by the disease.

From 2024 onwards, we should see the return of hedonism on a grand scale – bars, nightclubs, spectator sports and festivals should all benefit.

Cleaning up the post-pandemic mess could take another year, he argues, but from 2024 onwards, we should see the return of hedonism on a grand scale – bars, nightclubs, spectator sports and festivals should all benefit.

Music, art and other forms of creativity should all flourish, along with a new wave of entrepreneurship and technological innovation. The return of the jazz age, if you will, but with an electronic beat.

If Christakis’s vision seems overly optimistic, consider that many of the things he is predicting are already starting to play out. Stock markets around the world are hitting all-time highs, fueled by loose monetary policy and government stimulus measures. Businesses linked to a normal economy – from cruise companies to banks and energy companies – have all picked up of late.

Meanwhile those businesses and asset classes that are associated with innovation continue to be rewarded. Electric car manufacturer Tesla is up over 330% over 12 months at the time of writing, while digital currency bitcoin is up over 480%.

Innovation in other areas is likely to lead to improvements in our lives, just as they did in the 1920s. A hundred years ago, motor cars started to be manufactured on a mass scale, giving mobility to millions of people and allowing cities and suburbs to grow. Radio brought entertainment into people’s homes.

Other innovations that made people’s lives easier and which many of us take for granted today, first came out in the 1920s: the vacuum cleaner, the washing machine and food mixer, to name a few.

The work done in developing vaccines and treatments for Covid-19 will be applied to a range of other illnesses. Messenger RNA technologies will be applied to fighting cancer, for example.

Our lives are likely to be transformed in the coming years with new technologies to go along with the new blend of working from home and in the office. Artificial intelligence and the internet-of-things will hopefully bring a myriad of benefits to our lives. The work done in developing vaccines and treatments for Covid-19 will be applied to a range of other illnesses. Messenger RNA technologies will be applied to fighting cancer, for example.

What about the economy and markets? The 1920s were a great period to live in, if you were American. The US economy grew by 42% over the 1920s, while the Dow Jones Industrial Average had a compound annual growth rate of 23% between its lows in 1921 and its peak in 1929 (a little more on this later). The US accounted for about half of the world’s output in the 1920s, with Europe falling behind due the destruction of caused by the First World War.

Today, the US accounts for about 25% of the world economy, followed by China at 16% and several other countries between 2% and 5%. Some forecasts have China overtaking the US by the end of the decade. This doesn’t mean the US will become unimportant, but rather that the benefits of growth and innovation are likely to be felt by more people in different countries. New technologies will hopefully allow for less developed countries to leapfrog their way to become more advanced.

In the 1920s, only a handful of countries had stock markets. Today, most countries do, while it’s never been easier to invest abroad than it is today. This means that any wealth effect of rising global asset prices are likely to benefit a broader number of people.

Lessons from the past – and the future

History may rhyme like a poem, but it’s rhymes should also give us insights into our world. It’s worth remembering therefore that it wasn’t all jazz, flappers and Great Gatsby in the 1920s. As noted above, there was turmoil in other parts of the world. The Soviet Union entrenched itself, while Germany, faced with a post-war reparations bill, saw hyperinflation during the Weimar Republic years.

Italy became a fascist dictatorship in the 1920s, while in South Africa, the Rand Revolt of 1922 led to the introduction of racial labour policies that were only properly reversed with the demise of apartheid many decades later.

Even in the US, the 1920s were a period of widening inequality. While the post-war years did lead to improvements in women’s rights (women were given the vote in the 1920s), inequality in incomes rose: in 1922, the top 1% of the population earned 13.4% of total income, and by 1929, this had risen to 14.5%.

We all know how the decade ended too, with the onset of the Great Depression, which eventually led to the Second World War. Forecasting what might end the post-pandemic party is difficult, but we can certainly highlight some candidates:

Higher inflation and possible policy errors: Many economists are warning that the current fiscal and monetary policies could result in inflation in the coming years. If not managed properly by global central banks it could lead to either persistent higher inflation or a drastic tightening in policy to rein inflation in, possibly sinking the world into recession.

Increased geopolitical tensions: While the new US administration under President Joe Biden has promised a thaw in relations between the US and China, these could escalate in the coming years, especially over issues such as intellectual property rights or human rights. Much will depend on who will be the US president from 2025 onwards.

Populism and inequality: These were important themes over the last decade and, if not addressed in the coming years, could lead to the election of populist or extremist governments. Covid-19 has widened inequalities, with a digital divide between those able to adapt to remote work having an advantage over those who cannot.

Climate change: Traditionally, economic downturns have resulted in an increase in carbon emissions as countries have ramped up industrial production to get the economy going again. While this appears to be happening this time around, the good news is that governments and the private sector have increased their commitment to new forms of clean energy. 110 countries last year committed to carbon neutrality by 2050 (China by 2060), but even with this commitment, climate change will continue to have an impact in our lives, in the form of extreme weather such as droughts, floods and other natural disasters. This could affect the world’s poorer nations more than richer countries, feeding into discontent over inequality and geopolitical tensions.

There’s much to be excited over in the coming years, but governments, policymakers and other leaders will need to heed the lessons of the past – and the challenges of the present and future – to ensure a viable future beyond this decade.
Apollo’s Arrow: The Profound and Enduring Impact of the Coronavirus on the Way We Live’, book by Nicholas Christakis
‘Roaring 20s will follow Covid-19 pandemic, says L’Oréal’, The Guardian, 12 February 2021,

‘Will the 2020s Really Become the Next Roaring Twenties?’,, 17 January 2021,

‘1920s Economy – What Made the Twenties Roar’, The Balance, April 2020,

‘The World Economy in One Chart: GDP by Country’,

Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine – an online publication for Investec’s Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.

The Messenger that Saved the World & Revitalized a Hated Industry

“What if 2020 went down in history as the year synthetic biology dealt a mortal blow to future viruses and illnesses in general, rather than the year a virus ruined our health, wellbeing and livelihoods? “

—Matt Ridley, British Author and Businessman

Dear Reader,

In a fall 2019 Gallup poll, the pharmaceutical industry earned the distinction as the most despised industry in America.

This was the lowest that pharma had scored in the survey’s 19-year history. Only the federal government, oil & gas, and the auto industry had ever scored lower. At the time, there was no shortage of pharma scandals…

  • Johnson & Johnson (JNJ) and Purdue Pharma were in the middle of lawsuits for their role in the US opioid epidemic.
  • “Pharma Bro” Martin Shkreli was put behind bars for defrauding investors and became the “most hated man in America” for his role in jacking up prices of a lifesaving AIDS drug.
  • And Theranos founder Elizabeth Holmes was facing trial for massive fraud committed as the company attempted to revolutionize blood testing.

No wonder Americans loathed the pharma industry.

But its social pariah status would soon take a dramatic turn as some members of its class started to become…

Vaccine Heroes

Just one year later, we started seeing magazine covers like this one. Drugmakers became heroes almost overnight, and for good reason.That’s because they developed some of the world’s most effective vaccines at record-shattering speeds.

And governments around the world can’t get their hands on them fast enough.

The quest for a vaccine started in January 2020… long before the deadly virus was on the radar of most Americans or Europeans.

Researchers in China quickly mapped the genetic code of the virus in January. Then companies like US-based Moderna (MRNA) were able to design a vaccine within just a few days. (PFE) and its Germany-based partner BioNTech SE (BNTX) got to work on developing a vaccine around the same time.

Both of these COVID-19 vaccines were put through three phases of clinical trials and received emergency-use approval from the FDA in December 2020.

It took less than a year to develop what appear to be some of the most effective vaccines ever created.

Both vaccines use the same basic technology based on a discovery made in the 1960s. Researchers figured out that our genes send short-lived RNA copies of themselves to little machines called ribosomes, where they are then translated into proteins. These short-lived copies are known as messenger RNA (mRNA).

The COVID-19 vaccines represent the first time mRNA technology has been effectively put to use. Essentially, the vaccines send a message that teaches our cells how to make a protein that triggers an immune response.

It was an incredible breakthrough. One that will not only help put an end to this once-in-a-century pandemic, but the technology could also effectively prevent pandemics from ever occurring again. Now that we have proven the tech works, adapting the vaccines to variations of this coronavirus—or any other virus—simply requires rewriting the message.

The message is clear: bigger breakthroughs are on their way.There may not be a need to go through the same long and expensive clinical trial processes every time, either.The FDA is already looking into ways to shorten the timeline for approving vaccine alterations that are more effective against mutations of the coronavirus.

Eventually, we may be able to deploy new vaccines for any virus within a matter of weeks or possibly even days. We now have a much faster, cheaper, safer, and simpler way to make vaccines, and that is very likely just the start.

This could mark the beginning of a revolutionary new approach to medicine.

COVID-19 has tragically killed millions of people, and wreaked havoc on the global economy and society in general. But if there are any silver linings that emerged from the pandemic, the miraculous breakthrough of mRNA technology should top the list.Thanks to decades’ worth of research and the hard work of thousands of scientists, doctors, clinical researchers, and many other frontline workers, the rollout of vaccines will help the world recover from this pandemic.

And with this new tech at its disposal, the biotech industry may very well make pandemics a topic left for the history books. And, one day, it won’t just be pandemics that are left to the history books. These synthetic messengers that are capable of reprogramming our cells could potentially be used to mount an immune response to almost any invader.

MRNA could one day be used to tackle diseases such as cancer or Alzheimer’s. And we could hear about it sooner than any of us would think. That’s because there are already companies using this technology right now to diagnose, treat, cure, and even prevent some of today’s deadliest diseases.

GlaxoSmithKline (GSK), Novartis (NVS), the National Institutes of Health, and Yale University are using the coronavirus vaccine as a blueprint to immunize against malaria. The US Patent & Trademark Office published their filing on February 4 for this novel vaccine. If approved, this is a coronavirus-sized opportunity, as there were 409,000 malaria deaths and some 229 million cases in 2019 alone.

If you think pharma is exciting now, just wait till you hear what’s coming next!

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