La société dite ‘Disciplinaire’, selon le philosophe Gilles Deleuze, s’efforce d’enfermer sa population dans des lieux clos, tels des usines, des écoles, des hôpitaux ou des prisons. Cette société a prévalu en occident de la période post-napoléonienne jusqu’au début de ce siècle.

Depuis quelques années, le monde découvre la ‘Société de Contrôle’ qui simultanément libère ses membres des entraves murées et les contrôle au plus près du quotidien par l’entremise de sociétés privées qui gèrent l’information, telles Google, Apple, Facebook, Amazon et Microsof (les ‘GAFAM’). Les GAFAM, de ce fait, ne peuvent échapper au regard des autorités politiques.

Les deux premières lettres à ce sujet ont été publiées il y a plus d’un an, en juillet 2020. La partie III s’intéresse aujourd’hui à l’excroissance mondiale des GAFAM, à contre-tendance des efforts de démondialisation des activités plus traditionnelles. Un effet qui n’est pas sans conséquence dans la gestion de portefeuille.

The “Disciplinary Society” according to the philosopher Gilles Deleuze, strives to lock up its population in enclosed places, such as factories, schools, hospitals, or prisons. This type of society prevailed in the West from the post-Napoleonic period until the beginning of this century.

In more recent years, the world has discovered the “Society of Control,” which simultaneously frees its members from the walled shackles and controls them as close as possible to everyday life through private companies that process information, including Facebook, Amazon, Apple, Microsoft, and Google (aka the ‘FAAMG’). The FAAMG, therefore, cannot escape the gaze of the political authorities.

The first two letters on this subject were published more than a year ago in July 2020. Part III now focuses on the global outgrowth of the FAAMG, which is at odds with efforts to deglobalize more traditional activities – a situation that is not without consequences in portfolio management.

Sometimes the stock market suffers from a divergent strabismus. Its left eye observes economic activity in the present moment, and its right eye the value of likely cash flows in the next ten years. Today the right eye is pointing to the ground as the resurgence of global inflation weighs heavily on stocks’ multiples. However, and since the end of last month, the left eye has been staring into the sky: our leading indicator of international trade announces a strong rebound in the next two months.

Which is the guiding eye for the global vision?

«Yes, is like credit, no is like cash,» said Cornelius Jacobus Langenhoven a century ago, the writer who composed the South African national anthem.

On one hand, inflation is back this year, globally. That is a fact. Whether it’s temporary or not, no one can say. On the other hand, global liquidity in USD for the first time in eight months is tightening. This is a major macroeconomic event of the month.

A contraction in liquidity in an inflationary context is a harmful configuration for equities, but also for bonds, be they long-term ones with a fixed coupon, or short-term ones with an inflation-indexed coupon.

It is no longer unreasonable to say “no.” And no, is like cash.

Investing in Chinese stocks inexorably provokes a contrasting feeling, a mixture of fascination and anxiety. This is reminiscent of the tempting flowers one wishes to pick at the edge of a cliff, “The Flowers of Evil,” by Charles Baudelaire who revolutionized French poetry at the end of the nineteenth century.

Among the various investment strategies, the one proposed by Gavekal-IS mitigates anxiety. Evergrande does not change the case. The conclusion remains the same on the Shanghai Stock Exchange Composite Index: risk on!

Two weeks ago, a friend of mine lost his tennis racket on the highway. The racket fell right out of his bag attached to the back of his motorcycle. He quickly took the first exit, returned to the spot, pulled his motorbike into the emergency lane, and spotted his racket lying there on the highway. Did he end up crossing the road to retrieve it?

Managing risk does not mean forecasting.

Will the financial market crash?

This is anyone’s guess; the future is unpredictable. But what about the risk?

Given the inflationary shock on oil developing month after month, the odds of a 50% drawdown on the S&P 500 have been multiplied by a factor of 100.

For seven months in a row, Gavekal-IS macro, monetary, and behavioral models remained very equity-friendly, serene as a Tibetan monk. In the meantime, Gavekal-IS publications displayed a series of macroeconomic warning signals building up for a potential climax around August or September. See for instance February’s “Inflation: The Equity Nightmare,” and “US PE Expansion: Game Over!” publications, and May’s “Economic Boom and Financial Bust.”

Today, Gavekal-IS models crossed the Rubicon: criticality is ahead, risk-off!

Countries that have found the optimal balance between freedom and equality benefit today from the highest revenue per capita, as shown in our last publication, “Equality vs. Freedom.” They are all located in Northern Europe, slighting extending to Switzerland, the Netherlands, and Luxembourg as well.

What is their secret?

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?!

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