Our lives and economies changed in 2020, and this includes an accelerating democratisation of
financial markets as governments ask higher-earning families to take more responsibility for their
own financial security. Multiple drivers include a reduction in defined benefit pension schemes,
falling job security, and taxation shifts, a secular socioeconomic shift which affords ongoing support
to the post-March-2020 bull market.
A second driver comes in the form of a redoubling of intense monetary action as central banks took
control of yield curves and credit spreads. Running out of room for manoeuvre, they increasingly
sought to influence our minds through harnessing behavioural tools, to in effect encourage
investors to set aside personal experiences in favour of the central banks’ presumed superiority,
organised dogmas, and near-limitless power.
There is nothing more attractive to investors than running with the Fed, which is exactly what most
are doing!
The third driver comes in the form of an unprecedented fiscal stimulus, set to intensify now that the
Democrats have won control of the U.S. Senate. The trouble is investment demand (capital to fund
new production) has not been able to keep pace with rising capital flows, something which classical
economics never envisaged.
As a consequence, by late-March 2020 it had become clear that a vast wave of excess capital would
be diverted into speculative assets.
It is hard to overemphasise the importance of this development. Stalled productivity forced G-8
natural rates of interest (r*) down to zero, a level where they remain trapped today. A rekindling of
trend productivity – and consequently trend GDP growth – is dependent upon new ideas turning
into hard investment in productive assets, and not being diverted into Gunfight at the O.K. Corral
type financial speculation.
A risk which is perversely magnified as the Fed and other central banks enter the psychological
sphere. Mary Daly, president of the Federal Reserve Bank of San Francisco recently commented:
“So, what could get in our [the Fed’s] way? History points to one important thing: doubts that our
tools are powerful enough to achieve our goals.”
Managing doubt is of course an important role in smoothing the path to a post-pandemic recovery
but destroy too much doubt and central banks risk disabling the scepticism which underpins
efficient and disciplined markets and a sober assessment amongst businesses and households of
the risks associated with additional debt.
Go too far down this road and a risk looms large: a central bank supported environment
where truth goes to die.
Which takes us to the fourth and arguably most potent driver of today’s bull market, human
behaviour, in which notions of greed, hope and redemption are deeply engrained. In 2020, such
behavioural phenomena contributed to many great narrative-driven investment opportunities
including FAANGs, IPOs, Travel, Aerospace, Gold, and US Treasuries amongst many others.
Which in turn set the scene for a profitable and yet deeply disturbing 2020.
At the dawn of 2021, the hope is that a powerful economic recovery will lay firm foundations for
future long-term growth as the Covid-19 pandemic recedes, and toxic politics and epidemiology are
swept away by recovery and regeneration.
Alas, while a powerful short-term economic bounce is assured, longer-term optimism may well be
dashed by the inherently capricious nature of human behaviour; by the many investment fads,
fashions, and manias which took root in 2020. Further long-term headwinds come in the form of
monetary congestion, and the fact that US and European productivity growth were stalling well in
advance of the pandemic.
We offer all of this not as a reason to be fearful as we head into 2021, rather as a reminder that left-
of-field market moves require left-of-field investment ideas to capture them. And just as
importantly, to avoid the latter-day Greek Sirens who lure the unsuspecting to shipwreck on their
rocky shores. Think of the dangerously outdated dogmas surrounding ‘value’, ‘recovery’, ‘cyclical’,
‘growth’, etc.
If there’s an underlying sense of tension in our words, foreboding even, then that’s a fair reflection
of our current thinking. Going forward, we foresee additional waves of rich opportunities tempered
by difficult to manage risks. We doubt that markets will remain one-way bets, but equally doubt that
cash will afford much protection.
We’ll explore these themes in detail as the year progresses, but for now a reminder that investors
should only climb aboard for journeys tailored to their specific needs and circumstances. To then
enjoy the ride at their own pace and within their own personal risk tolerances.
The ultimate goal remains unchanged: to capture the long-term benefits of a well-constructed
portfolio allowed to work its magic over time.
Best Wishes for a Happy and Prosperous 2021!
Team Eriswell