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Dear family, friends, colleagues and associates,

The world is pretty dystopian in 2020. Record high unemployment yet record high equity markets in the US. Daily protests; some about starvation, some about the right to walk one’s dog. Fox News, CNN, SABC, E-TV, twitter or Facebook, which one is fake news? We’re up to our eyeballs in content that we’ve become uncertain of the truth. Reality TV stars and comedians leading political parties. The US, the world’s biggest economy, led by its oldest President, is set to appoint an even older President in November, while its youth are on the streets. Record high debt levels yet many of those governments have negatively yielding bonds. And whether you look at my home, South Africa, or my new home, America, egregious corruption is everywhere. The US government contract to Kodak to produce pharmaceutical supplies is the latest to catch my eye.

“Take me back to normal” I hear you say, whatever that is and whenever you experienced it.

Source: friggin-doo-a.org

The coronavirus has given people the solitude to contemplate the madness of it all, or perhaps merely provide a focal point. The virus is a seemingly logical cause for the deep anxiety and discontent itching under our skin but, in my opinion, very little of the current madness is caused directly by the coronavirus. The world is in challenging times and I don’t think they’re going away any time soon. This email is the start of a dialogue with you to elaborate on this point, deciphering the causes of the current predicament and our response.

I’m not foolhardy or grandiose enough to think that I have the answers. The future is uncertain, and I am as fallible as the next. Despite this unpredictability and ambiguity, I know I’ve got insights to share and value to add to your life through describing the path we’ve taken to reach this point. These trends inform our high-level decision-making in investments, business, family planning and relationships. They are critical factors to our human development, and I care deeply about your health in these matters. I want to challenge myself to describe these trends in a digestible manner, which isn’t always possible at a braai/barbeque, networking event, sports game or family dinner. For too long, I’ve kept this conversation to work, twitter and a few close friends. It’s time to commit to broader and clearer communication, an honest dialogue. I believe that this will bring the best out of me, and you, providing a framework to improve investment, business and personal decision-making.

“Tell me what I must do, son, I don’t have time to understand!” you say… “Can’t we just jump to the conclusion?” Perhaps, and I will offer conclusions, but I find that the conclusions without reasoning are hollow and difficult to digest. Changing one’s relationship to investments, money and debt is sensible when one appreciates the logical imperative, but immensely disconcerting, verging on ludicrous, without it. Some people think I’m a madman for my investment choices. I know why, so I’m going to take the time to walk you through my thought process.

Let me say at the outset, this information could be a little gloomy for those who don’t work with these subjects frequently. Please know that I don’t want to be the prophet of doom, and I don’t profit from gloom. I admit, I am more of a realist than a dreamer. And sometimes I’m a little dry and serious, rather than a flamboyant joker. But I’m also an optimist. I’m very optimistic about my future, your future, your family’s future, and our relationships. But we must dig deep, recognise the challenges and engage them. There are solutions to all our challenges. I’ll offer mine and I’ll listen to yours. Our problems are complex, so the solutions won’t be as simple flicking a switch and “getting rid of Trump” or finding a vaccine for the coronavirus. We won’t have all the answers, but through engagement, we’ll be one step closer to a solution, which is infinitely better than hiding under a rock.

I believe that we’re approaching a period of sustained economic, financial and social volatility. We need to understand why and face up to the reality. For years we’ve allowed the natural human default “head-in-the-sand” approach to dominate. Myself included. We’ve delayed and compounded our problems, rather than solved them. Perpetual short-termism has become the norm. History teaches us not to extrapolate these trends indefinitely. A reckoning is approaching, and preparation is required.

I commit to writing a monthly update minimum, perhaps more frequent. I’ll start high-level and conceptual, veering into investments and philosophy as I go. The material is pitched at those with reasonable financial interest, but the lens should offer value to investors and non-investors alike. Blessing or curse, most people, investors even, haven’t stared at long-term macro charts and pondered these relationships for years.

“Macro”, you scoff! “Charts are pseudo-science,” I hear you say! “The trend is your friend!” I hear your criticism, and I welcome it. I encourage you to interrogate my framework, conclusions and confidence at every turn.

“What is macro?” you may ask. Simply, high-level macroeconomic trends. We vaguely care about these trends but generally they’re a lower priority because they trend in one direction. Examples of rising trends are debt, inequality, consumption, equity markets, property prices, whereas economic growth, inflation, interest rates, etc are trending in the opposite direction. One-directional trends cause us to extrapolate them into the future, betting on continuation indefinitely and our focus shifts towards the micro; our business, projects, relationships, career, holiday, etc. The macro trends become boring and fade into the periphery or perhaps we’re just too focused on shifting from one micro crisis to the next to care.  That’s understandable. Our micro interactions tend to be more rewarding and engaging than the macro interactions. We also have greater influence over our micro than macro. You’ve got more chance lobbying your wife, than the government so “focus on your sphere of influence” as an old boss used to say.  

Despite this logical focus on the micro, I compel you to understand the macro picture and ensure your micro strategy aligns with the macro outlook. I am convinced that the extremes developing in our current macro trends imply that we’re approaching a macro regime change, where volatility increases, trends break, and the future starts to look significantly different to the past. I’m not saying that they’re breaking tomorrow or next year, nor that I know exactly when they’ll break, or what the future holds. But an economic, political, social and investment regime change isn’t an outcome to be taken lightly. We cannot forecast the exact future, and we’re very unlikely to be able to influence this trend, so why the hell are we worrying about, Rob? Eish! Good question!

Well, we can position for greater uncertainty in our decision-making, which should mitigate against severely negative outcomes. Even if the regime only changes in 10 years’ time, the path there will be tumultuous, and the ramifications of the eventual turning point cannot be overstated. Regime changes are periods of societal upheaval the likes of which occur every 80 to 100 years. Perhaps more important than positioning physically for uncertainty, we can prepare ourselves mentally. The more I dwell on it; mental health is our biggest challenge. Each day is a challenge to fight off my mental demons and become a better person in service of those around me. The mental health challenge is true in “normal” conditions but is acutely clear during the anxiety, frustration, anger and depression gripping households in 2020. I’m convinced that through a combination of strategic understanding of our conditions, simple but strategic planning and mental well-being, we can generate better outcomes for the people who matter to us most.

I look forward to you joining me on this journey where I will share a few macro insights to improve your investment, business and personal decision-making. I hope to generate a rich dialogue with you, learn from your interpretation of this information and deepen our relationships as we navigate this increasingly dystopian world. No matter my material goals in this world, which certainly exist, I know that my relationships with you and the depth of our conversations are the most meaningful outcomes each day.  Onwards and upwards my friends!

Debt, the macro trend to rule them all

In this edition, we’ll scratch the surface of the most important macroeconomic trend, debt; the overuse thereof and the implications for the economic growth outlook. 

Source: Blakemeade.com

Let’s start with the positive. Debt is a useful financial tool to smooth consumption through our lifetime. For example, I want a laptop when I’m 21 but I cannot afford it, so I promise to use my potential future income to pay for the laptop in the future years. In return, the bank provides me with the $2,000 financing today to purchase said laptop. In summary, I’ve taken future Rob’s income and consumed it at 21. Waiting for the laptop is an inefficiency, which debt allows me to overcome. It’s a fair assumption that I’ll earn more income when I’m older, a laptop loan isn’t onerous and the laptop should enhance my productivity, making repayment of the loan effortless. This example is low-risk and shows the useful tool debt can serve in society.

The logic of the debt arrangement declines, the larger the loan, the less productive the asset and if age becomes a constraint on future earning power. I’m not one to judge individual’s consumption patterns but obviously there’s a difference between the productivity generated, and the implications for loan repayment, between a computer vs. a pair of designer shoes.

Let’s say I violate logic and I make the terrible decision to take a $10mn loan, at 60 years of age, for a property development that offers hot-desk services. And I make this investment two months before a coronavirus, which forces people to work from home, rendering office hot-desks impractical.

Clearly this is a terrible personal decision which damages my wealth prospects. But at least I’m only one individual. As the business goes belly-up, I should be able to get support from family or friends. I’ll probably enter bankruptcy and my lending capacity will be restricted thereafter, but at least there aren’t systemic risks attached to my decisions. My employees will be out of work, but my failure won’t negatively impact society. In fact, there could be positive externalities from my failure. Maybe someone can purchase my office equipment and repurpose it into another profitable venture. Schumpeter’s creative destructive, the economic process of decay, repurposing and rebirth, can be powerful!

By contrast, if everyone in America is levered to the hilt with debt at the same time, systemic risks arise. Mistakes are less likely to be absorbed by successes elsewhere. Under these conditions, the whole of America has decided to take future income and consume it in the present. This could be a reasonable trade-off if we’re building something unequivocally productive for the coming years, perhaps a national transport network. But we’d expect to reap the returns from the investment in the coming 5 to 10 years and repay the debt, right? So, it should be a temporary increase in debt.

But what if debt levels continue to rise for an extended period, across all economies in the world? A similar principle applies, the whole world has taken future income and consumed it already. The continuation of the trends implies that wherever we invested, wasn’t as productive as planned. If the investment was productive, we’d have earned better returns and paid down the debt, rather than seen debt levels rise.

"the whole world has taken future income and consumed it already"

This is exactly where the world finds itself today. Debt levels are at or near record highs across the globe.

The ratio of advanced economy government debt to Gross Domestic Product (GDP) is above 100%, at its highest levels since WW2. There’s more government debt than the size of these economies.

It’s not just a public sector story. US corporate debt as a percentage of GDP is at record highs.

Emerging Markets aren’t immune either. South African government debt to GDP is also at record highs.

Bad investments and the zombie apocalypse

It’s clear that society has made bad investment decisions because the investments aren’t providing the returns to pay down debt. Another simple way to view the number of bad investment decisions is the number of companies that are failing to return profits. Non-profitable companies are bad business decisions. These companies should be liquidated, but they aren’t, and the capital should be reallocated elsewhere, but it’s not. The jargon we use to refer to these companies is Zombie companies, because they’re

walking dead

! The number of US small cap zombies rises to a new record high during each recession.

Source: FT

Imagine we were able to measure government departments by the same method… Maybe we ARE living in the zombie apocalypse!?! At the extreme's the inefficiencies are easy to identify but there are tones of businesses and individuals in the murky middle that aren't even sure if they're truly adding real value. Debt saturation hides the truth, even from us.

Source: Grand Forks Herald

Mortgaged future

Record highs debt levels across the globe imply we’ve mortgaged the future to consume in the present. We’ve reached the future and we’re realising that it’s been mortgaged already. Many assess our massive debt levels as a problem for future generations that we’ll have to contend with in the years to come. As depressing as that is, it’s only half of the truth. We haven’t started to SOLVE this problem yet, but we are dealing with the CONSEQUENCES already. It’s like turning 21 and you’re already saddled with a major business bankruptcy. You’re climbing up Everest, but you’re starting with a 30KG/70LB backpack. You’re shouldering this debt burden, which constrains your ability to function freely today. Millennials certainly feel this weight, and there are real reasons for the frustration!

Millennials feel the weight of a 30-year debt bubble

Macroeconomic growth expectations and social mobility prospects will remain weak until we reduce debt. Economic growth rates will almost certainly achieve a technical increase post the coronavirus shutdowns of Q2 2020. It’s not very difficult for real growth rates to increase from -30% to positive territory.  But the trend rate of economic growth continues to decline. This declining trend has been intact for the last few decades. The 2009-2019 was the weakest US business cycle in history and the cycle before that 2002-2008 was the second weakest. Debt is a major contributor towards this downward trend in real growth. Economists, business people and individuals who forecast a return to long-term average growth rates in the coming years are likely to be proven incorrect.

Building through adversity

Weak economic growth prospects imply challenging business conditions. This doesn’t imply that we must throw in the towel and stop trying because it’s going to be difficult. That’s like saying everyone should commit suicide because we’re all going to die one day. It’s senseless and defeatist. Opportunities exist in all economic environments. Successful people and businesses are made during tough conditions. General Motors was founded in 1908 during a 4-year recession, Hewlett Packard was founded in later years of the Great Depression, Burger King started during the 1950s Korean War recession, Microsoft was founded during the oil embargos of the 1970s, Electronic Arts during the energy crisis of the 1980s, Uber and AirBnb grew out of the 2008 Global Financial Crisis and Investec was founded during the tumultuous 1970s in South Africa. There will be sectors of strong economic performance despite broader weakness. There are constant changes in regulation, new technologies and government failure for entrepreneurs to solve. These opportunities exist and some smart entrepreneurs are adding value to their clients and reaping returns already. We need to emulate these courageous people,  myself included. 

If business conditions are going to be challenging, it implies that we must be judicious with our business strategy, rather than merely follow the tried and tested strategy of the last 10 to 20 years. It’s not prudent to expect broad economic growth rates to reach their 20-year norms and for consumers to recover pre-2019 levels. Unless your producing necessities, low margin and high-volume business will likely face challenges. Real value-add and close relationships with clients are treasured during these times. Strong relationships create the possibility of charging good margins, maintaining business despite setbacks and receiving credit relief. Lastly, I expect to make

errors

. I expect the market to force me into changing strategy over the coming years. I need to remain very open-minded regarding future possibilities and the fragility of my current strategies.  

This isn’t the space for a full investment report, and none of this serves as investment advice, but here are a couple of high-level thoughts related to the low long-term economic growth outlook. Simply investing in broad equity market exposure, often referred to as beta, isn’t the most prudent strategy.

Active management of the risks

within a market and selection of the companies that are best positioned given the risks is more appropriate. Flexibility, liquidity and agility to volatility are favoured rather than a blind “all boats will rise” strategy. Lastly, the challenge of finding sustained pockets of real economic growth, implies investors will turn towards

storing value

, rather than seeking yield and return. Property and equity have been the favoured stores of value by investors over the past 20 to 30 years and global authorities have lower interest rates, but we are starting to see increasing interest in historical stores of value, like gold, commodities and the new digital store of value, bitcoin. I expect this trend to continue and have written about this

here

,

here

and

here

. 

"success isn’t purely characterised by financial gain"

In closing, success isn’t purely characterised by financial gain. We all must and will put bread on the table despite record high debt levels and the negative impact on future economic conditions. Even in these challenging economic times

opportunities emerge

in non-monetary guises. Communities will grow, families will strengthen, relationships will persevere and meaning will be found despite challenges.

I’ll leave you with this picture I took on a trip to the Himalaya’s of the sun rising over the snow-capped mountains and a word I say everyday “shanti”, which is Sanskrit for “peace”, “shalom” in Hebrew and “salaam” in Arabic. Great that so many religions and cultures use peace as a greeting. I remember ritualistically saying “peace be with you” every Sunday at church as a boy. For years shanti/peace seemed incredibly trite and cheesy, but recently became meaningful when I started searching for peace within, rather than peace outside.

Peace, Rob Price

P.S. If you feel compelled, please share this with your family, friends, colleagues or associates.

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