Our previous publication, “The Equation of Willingness,” highlights a missing equation from the Modern Portfolio Theory driving economic performance. The equation balances economic freedom and market integration. The first term favors a Schumpeterian growth, while the second, a Ricardian growth.

In this letter, we experiment with the equation throughout the world to identify countries and economic zones that have found the optimal trade-off for value creation.

And the winner is… Northern Europe.

Behind the decomposition of assets’ returns in alphas and betas lies an equation of willingness, and a conceptual mistake. It hides the fact that economic growth per capita originates in innovation (Schumpeter) or optimization (Ricardo), with different outcomes. The mistake could misguide companies and economies to over-optimize their production systems, increase their fragility, and eventually, collapse.

One year ago, facing the largest bond bubble in history, Gavekal-IS published “Bonds. Which Bonds?” focusing on four investment alternatives to US fixed-rate treasury bonds to protect income portfolios:

The four positions generated more than 20% alpha against US bonds, on average, which now raises the question of a possible over-extension of their outperformance.

Keep? Sell? Who knows?!

Ten years ago, Nobel laureate Daniel Kahneman described two systems the brain uses to form thoughts in his best-selling book, Thinking, Fast and Slow.

System 1: Quick!… Think about a color, and tool… And the winner is: red hammer! Quick!… Think about a safe asset class…. And the loser is: bonds!
System 2: Here, we propose a method to enhance bonds’ expected returns, in any circumstances. Slow, logical, effortful.

This method is embedded into our TrackMacro App. If you have 90 seconds to spare in system 1, first watch the TrackMacro video!

As for any economic indicator, monetary polices can be viewed from two interdependent yet different angles:

A major “price” signal took place two years ago, announcing the debasement of major fiat currencies and the awakening of gold. Since then, gold has spiked 40%. A “volume” signal took place just one week ago, announcing a second wave of world liquidity in USD intimately correlated with the second wave of the COVID pandemic.

The consequences of the “volume” signal on asset allocation (if it lasts) could be as significant as the one on “price” some two years ago.

Gavekal-IS is excited to announce the launch of its new TrackMacro 3.0 application! The app is downloadable on the website with free access for one month. TrackMacro 3.0 is a major technical step concentrating years of financial research in portfolio construction.

So, how does it work?

Gavekal-IS proposes a 3-dimensional perspective on portfolio construction: macroeconomic, monetary, and behavioral. In each dimension, we straightforwardly consider which of two opposing economic theories is in the ascendancy:

Today, the world votes for Smith, Keynes, and Markowitz.

Roulette players place bets on a number, from 0 to 36. They are deemed winners when the ball lands on the said number. A fair gamble? Not really. Roulette has a trick.

In the Covid-19 crisis, Charles’s “Jeep” portfolio, introduced at the end of 2017 and expounded on in mid-2019, has amply demonstrated its worth, outperforming a pure equity portfolio, but with much lower volatility. In this paper, Charles reviews the Jeep portfolio once again, upgrading its components to navigate a post-Covid world.

Unconventional monetary policy has led to the largest bond bubble in history; some 15 trillion dollars’ worth of debt globally, now providing negative yields. Bond holders from developed economies may have reason to worry about the future of their savings. History tells us, however, that perhaps they should simply put their feet up, and take a look at less crowded bond markets for inspiration.

Science and philosophy have debated the significance (and even the existence) of ‘Time’ since ancient Greece. Finance, however, is the only discipline providing a market price for the uncertainty of the future, which means ‘Time’. Resultingly, it deserves a seat in the debating chamber. There are two ‘clocks’ in Finance, turning at different speeds. The first one synchronizes market trading and option values. It provides the tempo of the inherent random variability of asset prices. Only the second clock controls the directionality in ‘Space’, i.e. the expected drift of an asset. The Theory of Fragility provides the missing link between the two clocks, which reconciles most of the scientific interpretations of ‘Time’. Unlike ‘Traders’, ‘Investors’ should ignore the first clock and focus on the second

We cannot fill our car tanks with letters of credit, and we can’t have banknotes for dinner. This is because ‘Wealth’, and ‘Money’, are fundamentally different. This is an issue we have considered in many of our papers, defining asset value and wealth out of free energy, not money. Today, we argue that cash rates set at artificially low levels by major Central Banks for too long deeply affect developed economies’ wealth creation.

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