Capital Flows and Asset Markets

Even though I have been pushing GLD/TLT as a good idea, and I am actually long gold, I am not a “gold bug”. Until I was asked by a friend, I had completely ignored the other precious metals. As you should be aware, gold has surged to new all time highs.

Platinum, on the other hand, is sitting at around half of its highs set all the way back in 2007.

If you look at the gold/platinum ratio until 2014, platinum was usually more expensive that gold. But since 2014, gold has completely dominated platinum, and is now 2.5 times more expensive.

This is truly a very large historical aberration. Consulting my trusty Advanced Dungeon and Dragons Player’s Handbook (published in 1978) that I happened to have at hand (don’t judge - D&D is cool again), platinum should be worth 5 times gold. The other exchange rates are below (electrum is a gold/silver alloy, so ignore for our purposes). If D&D exchange rates were to asset themselves again, either gold is about to fall 90%, or platinum is going to USD 10,000.

Looking at this, I suddenly understand why fellow substacker Trader Ferg, had included this particular raunchy illustration in a recent post.

The problem with the excitement for other precious metals, as any grey haired, battle scarred investor (like myself), will tell you, if you cannot explain to me why platinum has been so poor recently, why would I expect it to change. The trend is your friend, and has been for awhile now. I think it would also be remiss of me to point out that the relative gold move has not only smoked commodity investors and D&D enthusiasts, but also the macro community. For years, the copper/gold ratio and the US 10 year Treasury yield were highly correlated. Not anymore.

Now I have a THEORY (please note this is purely a theory - but one I quite like - but could be proved wrong) about why gold is golden, and every other commodity has been a waste of time. As this is a THEORY please feel to tell me how wrong it is in the comments - in fact I welcome it! So here it goes. When Russia invaded Ukraine, and the West put sanctions on Russia, I assumed that Russian supply of all commodities would be forever banished from global supply. On this basis, I wanted commodities where Russian and Ukraine were large producers. For me, oil, natural gas, fertilisers and nickel supply were all potentially at risk. It is true that Russia is a large gold supplier, but gold is relatively easy to move, so I did not think Russian supply would leave global markets.

And sure enough, commodity prices did spike, but then they have collapsed. What we have seen is that financial sanctions on Russia have been largely ignored by emerging markets, and even more surprisingly, Ukraine has been able to reopen the Black Sea export route. That is commodity markets where meant to be supply constrained have proven not to be. We all turned into Mortimer.

So why has gold not been given the frozen orange juice treatment? Well, why I (we?) focused on the potential supply disruption from the Russia/Ukraine war, we have not focused on the gold demand creating aspects of sanctions. The West basically froze Russian central bank holdings. What is the point of having US treasuries as foreign reserves if you don’t know you can use them when you really need them. This is particularly true for China, but will be equally true for any nation in the world that does not 100% agree with US policy (Australia and the UK don’t have foreign reserves- so for our purposes, every foreign reserve holder). What is true for Treasuries, is equally true for Bunds, Gilts and JGBs. So buying fixed income for foreign reserves is now a dead policy. That is sanctions on Russia did not disrupt Russian gold supply, but it did create huge new demand for gold. China has been buying more gold.

It seems obvious, but as the US moves away from free trade, the world will move away from Treasuries as a reserve asset. GLD/TLT captures that trade.

Now the question is, when do other commodity prices catch up? Well if reserve management is the big driver of markets, then the most likely metal to do well is silver. And to be fair its beginning to move. Using D&D monetary system, it should be closer to USD 100, given where gold is.

The biggest problem for other commodities is that Chinese interest rates have continued to point to a growth slowdown in China.

For me, gold and silver, look okay. I am not sure about any other commodity as it does not have the foreign reserve demand that seems to be a driver or markets today. But then again, I am only a level 20 Paladin, and not a commodity expert.

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In macro world, there seems to some existential angst as to why gold is performing so well in a rising real rate environment. Generally speaking, positive real rates, and in particular moving from negative to positive real rates has been negative for gold.

This mystery is compounded by the strength of the dollar. Rising real rates in the US should drive a strong dollar, but also a weak gold price according to theory. In this case gold seems to be acting odd.

Compounding the pain of macro strategists, gold miners have massively underperformed the price of gold.

No doubt the same strategist are now pounding the table on these dislocations, either saying gold is the wrong price, or the US dollar is wrong, or Fed is about to cut rates or some other combination of “market is wrong”. But as I have said before, and will say again, the market price is truth, the question is whether you are willing to accept that truth. The truth that markets are telling you is that the cost of mining is rising. Last year, I have an ex-client tell me that cost of hiring a gold miner in Australia was AUD 1mn a year. I was incredulous, until he explained that you needed two employees at an Australian mine to make the equivalent of a one full time employee. You then needed to add in accommodation, food, health, and insurance for these two workers, on top of AUD 250,000 salary, and you got to AUD 1m a year. Taking current gold price, and Australian dollar exchange rate, this one worker equivalent needs to mine 300 ounces of gold (3/4 of a gold bar). This is 8500 grams of gold. A high quality mine will have 10 grams of gold per tonne of ore, which basically mean 850 tonnes of ore will need to be mined, or bit more than 2 tonnes a day, to find 20 grams of gold (I am not a gold mining specialist, but these numbers seem about right to me - please contact me if I am wrong).

What the all time highs in gold, and the weakness in gold miners tells me is that mining costs are rising as quickly as the gold price. You would think the strong dollar would be putting downward pressure on mining costs, but the strong dollar is really a reflection of a weak Yen the pressure its putting on other exporting nations. Mexico, a large gold and silver mining nation has seen extraordinary currency strength.

Pro-labour polices are inflationary, and this cost pressure is driving gold higher and bonds lower. GLD/TLT has broken to new highs.

Its a pro-labour world - and no-one really cares if gold miners make profits or not, as long as workers see REAL wage increases.

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I have just turned 50, so decided to hand myself into the Louvre as a museum piece. They told me to “Get Stuffed”, so a taxidermist has been booked.

With the end close than the beginning I thought I would reflect on a few learnings from my life so far, and how that reflects on my decision to start a new fund.

* Financial markets and politics love extremes - the ACTUAL truth is always somewhere in between.

Financial markets and politics are often binary systems - buy or sell, yes or no, and lend themselves to extreme outcomes. In current markets the “Truth” is tech is everything, and the US will dominate China forever. Maybe this is true, but I suspect the real truth will be somewhat less extreme.

* It is better to give early rather than forcing people to take later.

Generosity tends to pay off, particularly when things are going well. The vast majority of people are not offended by success, but greediness is very off putting. A good example is the current attitude of US tech to paying taxes, and cartel pricing. By forcing governments to “take”, they will end up in a far worse position that if they had been more generous in their attitudes.

* Work is for respect, not love, and family is for love, not respect.

Everyone needs to feel some pride in what they do, but should never forget that work is results focused, and as soon as your results are poor, you are done. Conversely, family is for love, and will always be there for you. But don’t expect respect. Family will always be the ones to tell you how it is.

* Be trustworthy, but vicious.

In a workplace, you should be seen as trustworthy and team player. You should do what is expected of you, and treat people well. But the moment someone tries to take advantage of you, you need to break them. To make this work, you need to be clear in your communication on why you feel that you have been taken advantage off.

* If you are relying on a contract for someone to behave well, then you should not be dealing with them

If you cannot rely on someone to do the right thing, you should never go into business with them. As soon as you need contracts and lawyers to enforce good behaviour you have lost.

* Working out what you really want in life will not solve your problems, but will make decision making easy.

I will use an extreme example to prove a point. I often meet people who say they wished they had children. What I think they mean to say, is they wished they had met someone up to their standards to have children with. In the modern world, if children is what you want, then there is nothing to stop you from having them, either by adopting, using a surrogate or a myriad of other methods. That might sound harsh, but without identifying the real issue, you can never really make progress.

* There is a thing as too much money

I have met a lot of very successful, but miserable people. Most of their misery comes from money, and typically is derived by trying to buy short cuts in life. Perhaps the most egregious is parents trying to buy their children success, rather than teaching them how to be successful. For most successful people, the cut and thrust and the striving for success is the most rewarding part of their lives, and yet they choose to deny their children the same chance to strive. Many go out of their way to deny them the same experience. Often this is driven by seeing their children as extension of their own existence, rather that a unique individual. Let your children fail, so they can learn what is truly meant to be their path.

Finally, why am I thinking of starting a new fund? Its not for money, although if I am successful, the money will come. What made me happy with my old fund was identifying the areas where market were reliably wrong - namely currencies and bond yields. And I was able to build a successful fund that took aim exactly as these areas. Then the world changed, or to be more accurate politics changed.

I think in the new political world we live in means that investors will get bond yields, interest rates, currencies and inflation consistently wrong. I am excited by these ideas, and the one way to prove you are really right is in the financial markets is with a fund. Why? Because in fund management you have to be right before the fact, not after. Which makes it a greater challenge than being an economist, journalist or market commentator. And if I get it right, maybe then I can enough money to actually buy a place for my stuffed body in the Louvre. You can only dream!

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The new Dune movie is beautiful - but some how I love the batshit craziness of 1984 Dune movie - starring Kyle MacLachlan as Paul Atreides. This was the first time I heard the term “The Sleeper Has Awakened” and somehow it hit home for me.

For much of my life I have been alternatively criticised and/or praised for operating at very low levels of effort. Criticism was along the lines of “wake up”, praise was along the lines of “how the hell do you get all this done with so little effort”. As I aged, I realised that I like to conserve my energy for when things really matter. Or as my mother told me once, “Only the mediocre are always at their best”.

For the last few years, I have had only had a passing interest in markets. That might seem odd to you, dear subscriber, as I seem to publish notes far in excess of other financial analysts/commentators, but I assure you, that is me operating at 50%. Back when I was running a fund, I would be reading endless company presentations, economic releases, financial histories, researching manufacturing processes, dissecting pan-national banking statistics, and relentless looking at markets for unusual correlations to use to my advantage. On top of that would be the endless calls with investors and prospects, and the brutal two day trips to New York to raise money. In 2022, after 15 years of doing this, and realising that Western governments were determined to protect markets at all costs, I decided I needed a break. I needed to become a “sleeper”.

“Sleeping” for me, meant pursuing other interests for a while, until I found markets interesting again. Other interests included playing basketball and tennis, running an Australian Literature Book Club (recommendations are: Boy Swallows Universe, Picnic At Hanging Rock, Too Much Lip, Dirt Music, Scrublands and the Long Narrow Road To The North), helping my son in this motorsport career (www.jarrettclarkracing.com), helping my other son in his sporting career (blakeyc_6 on instagram), and learning how to bake a great lamington (I am distantly related to Lord Lamington after which this cake is named - and I think have a passing resemblance to).

But suddenly, I am interested in market again. I have found myself updating spreadsheets untouched for 4 years. I am reading company presentations, and wondering why one set of numbers do not match with another. I am curious in how people are positioned. And probably most importantly, I am beginning to have a vision of the future. But before we get to the future, we need to bury the past. It has been common for fund managers, journalists, and commentators to say that short selling has been impossible for the last few years. This is b******t. Short selling has been totally possible, as long as you have been willing to stay short China. From 2011, I was long US and short China and it made loads of sense, and I assumed that this trade would be done with some sort of Asian Financial Crisis style currency or financial blow up. Sadly I took this trade off in 2016. What has happened is China staved off the crisis, but the underperformance of Chinese equities has been ongoing.

In my defence in 2016, China stocks did rally, but over the last few years they have been dreadful again. The truth is that I gave up on a great trade too early. But this is how markets often work - trades have a tendency to work for much longer than you think is possible, so much so that you never think they are going to end.

So why am I interested in markets again? Why has the sleeper awakened? Three different trends are coming together. Firstly, markets have learnt that government policy (including the Federal Reserve) is all about saving the markets. One of the reasons a trade like HYG/TLT has worked so well is that the US government has effectively extended a government guarantee to corporate credit. If you think back to the pre-GFC days, investors assumed Greek debt and Fannie Mae were backstopped by governments, and markets acted accordingly. Today is a similar position, but with corporate credit. And this is the driver of the share buyback, private equitization of the S&P 500 we have seen over the last decade.

You don’t need to be Kissinger to understand that government guaranteeing corporate debt is a disastrously stupid policy, that will be punished at the ballot box. And this is happening. But for central banks, the shale boom, which has kept commodity prices low, has allowed them to pursue these policies with little fear of commodity price spikes. But the shale boom is running out of steam. The inventory of wells has been steadily falling since 2020.

The extension of government guarantees to corporate America, combined with a failure to tax them has been noticed by markets. Gold had broken out of its downtrend against treasuries.

Why is this important? Well markets are assuming that governments will support markets at every turn. The break out of gold versus treasuries is the market way of saying we need you to break this guarantee, and allow failure. In 1980 at the end of the pro-labour period, the government needed to show tolerance of rising unemployment and falling real wages to regain confidence in treasuries. So I see a world, where treasuries sell off, and at some point the government has to raise taxes on corporates, and/or break up the cartels in the US. When I look at high yield spreads, I see markets completely mispricing the politics of the world we live in.

But how do I know now is the right time? Well most encouragingly, the US government is beginning to go after Apple. In my view, Apple is probably the “cleanest” of the big tech companies. Amazon, Alphabet, Microsoft and Meta all have a history of nobbling rivals or stealing data. If Apple is fair game, they all are.

The politics and commodity markets all point towards inflation (tell me, is Biden or Trump the inflationary candidate? Trick question - they both are!). And yet investors have poured money in to TLT US, desperately looking to lock in a 4% yield for the next 30 years!

So what next? Well I need to broaden and deepen my short portfolio. I think some old favourites might be worth a look again. I have a few other bucket list things I want to tick off first before being 100% markets, but its getting pretty close. I have also banished my fear of failure - which is most important thing. Fear is the mind-killer. The little-death than brings total obliteration.

May thy knife chip and shatter.

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The key trade of GLD/TLT returned to its highs seen in September last year, when I decided to launch a model portfolio.

However, unlike in September when TLT weakness was the driver, this month it has been GLD taking out new highs.

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Yen is cheap. In every possible way I look at currencies - Yen comes up as cheap. Using BIS data on real effective terms it is back at 1970s levels.

I also know two very successful fund managers who are openly long Yen. And they get very little push back on this view. The problem with this view is that it reminds me so much of the bearish JGB views I heard back in the 1990s. It made logical sense but was totally wrong. Yields on JGBs fell from 4% to 0% eventually.

What could cause a long Yen view to be wrong?

Why are large cap US stocks doing so well? I have been thinking about this a lot, as THE question for fund managers is whether this will continue to forever, or change in coming. I had thought that a trend change in bond yields would lead to a change in market leadership, but this view has been wrong. Leading stocks, and particularly tech, continue to dominate.

The more I think about how the US works, the more I realise that you need to square the political circle of being popular with voters, AND being able to raise the funds from corporates to fund a punishingly expensive political system. You end up with an economic system that focuses on keeping prices to consumer cheap, while allowing businesses that face other businesses to build huge cartels. It is best explained by Lina Khan's Amazon’s Antitrust Paradox. Generally speaking, if you are corporate, you are pretty much left to yourself. The government will not protrct you against other dominant corporates.

In practice, if you wanted to advertise on Facebook, or Google, you were likely to pay cartel prices, that is not a competitive price but the price the market could bear. Healthcare in the US is typically paid for by corporates, and so a system developed where list prices are extraordinarily high, making sure that corporates deal with a consolidated PBM sector. Cloud computing is going the same way, with three or so providers, but with limited ability to shift between providers, allowing pricing power. The leading companies in the US combine a free or low cost consumer facing business, with a heavily consolidated and powerful business facing business. Meta, Google, Apple, Visa, Mastercard, Walmart all have these two sided businesses.

The question here is when does dominant corporate power towards other corporates becomes a political problem? When do small businesses start to complain that social media cartel makes advertising too expensive? When do small businesses find that providing healthcare is too expensive? When do small businesses find the unavoidable expenses of payment systems unbearable? When do small businesses find the cost of cloud computing unappealing (which is what a surging Nvidia share price suggests)?

What is interesting has been collapsing small business optimism, at the same time as the stock market is surging. Old school macro fund managers would see this as a turn in credit cycle. This explains the continues enthusiasm for deflationary trades like long yen, and long treasuries. But I suspect that small business optimism is falling because corporate price increase by American cartels are extreme. In this case collapsing business optimism is not deflationary, but inflationary.

Just as there was a roadmap to power for Trump in 2016 by focusing on disgruntled union workers, I see a roadmap to power by focusing on small business owners, and reducing the power of American cartels. The problem of course is that taking on the US cartels would be taking on some extremely powerful business interests, and would likely tank the market, just as China taking on Tencent and Alibaba has tanked its market.

Perhaps the better trade will be to be long US small caps relative to its large caps? Certainly the Russell 2000 has lagged the S&P 500 in recent years.

The obvious conclusion of this would be that the current obsession with Chinese corporates is a dead end for US politicians. Banning TikTok only entrenches Meta and Google. Chinese corporates were the only potential competition for high end semiconductors, another area of increasing cartel pricing. China payment systems are small business friendly, but poison to Visa and Mastercard. Allowing Medicare to negotiate drug prices rather than privately owned PBMs would be disastrous for drug and insurance companies. For US small business, the enemy is within, not without.

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1992 film “A Few Good Men” is a classic. Jack Nicholson, Tom Cruise, Demi Moore, Kevin Bacon and Kevin Pollak are all fantastic. And the scene we all remember - Tom Cruise demanding the truth, and Jack Nicholson telling him “You can’t handle the truth”. The irony of this statement, where Colonel Jessup tells him the truth - that you don’t want “nice” guys to be soldiers on the front line, makes him the perfect bad guy - as you can understand why he does what he does even if you don’t accept it. The irony of this scene is that Daniel Kaffee then gives Jessup a truth that he could not handle either - that no one is above the law.

One great things about markets is that there is always a price - and that price in the truth. Fund managers only get into trouble when they don’t believe the price - when they can’t handle the truth. The long bull market in the US has had many underpinnings. Share buybacks, a very forgiving Federal Reserve, supportive tax policy, deficit spending, nobbling of Chinese competitors, but the truth, which I chose to ignore was that US political system is set up to be very supportive of large corporates. Even when I read Lina Khan’s papers on the Amazon Antitrust Paradox, I took from it that US regulators will tolerate almost any business activity as long as prices to consumers do not rise. The corollary of this policy, is that businesses that serve other businesses are able to build cartels with relatively little regulatory scrutiny. App stores make money from other businesses, as does Google and Meta. Same with Visa and Mastercard. Thinking of tech as cartels makes understanding these charts make more sense. In 2000, the US moved against Microsoft, and perhaps recent moves against Apple will be a new watershed moment. But the price today is that the end of cartel systems is not the “truth” - not yet at least.

Thinking of a cartel boom, rather than a tech boom helps us square tech performance against the recent performance of the ARK Innovation ETF. The truth is that large cap stocks have dominant positions, pricing power, while also buying back shares. ARKK Innovation ETF is not invested in established cartels, and so the truth is plain to see.

For many years bonds were telling the truth of deflationary government policies. I did well when I embraced the deflationary message of JGBs. For years investors and traders had called the JGB markets a bubble, or irrationally priced, but in this case I could handle the truth, I embraced its message and prospered.

The problem for middle age managers is that truth changes. A very good example of this is Italy. In the early 1990s, Italy needed to pay a big premium of German bonds. Obviously, Italy was not Germany, and was far riskier investment. And then the Euro was introduced and Italy came to be seen as risky as Germany - and this was the truth at the time. Now what is interesting, is that from 2006 onwards the market was saying that Italy was not as safe as Germany, but I remember clearly that middle aged managers kept buying Italian debt, as they spread “was a bargain”. They could not handle the truth - which is that Germany was not offering unlimited backstops to Italy. If I was asked what the truth of current pricing was, it would be that the market reckons Italy is too important to be cut loose by the EU, but there is always a risk that spreads may be allowed to widen to teach them a lesson.

Having been around awhile, I often think that the best opportunities come from trying to find a truth that investors cannot come to accept. I have found old managers and young managers far more accepting of price action. Mid career managers often make their names by avoiding collapses, like the GFC or the dot com bust, or China or commodities in recent years, and typically don’t want the world to change. Older managers that have survived know that things can and do change, so have learnt to embrace it. What truth can people not handle? Almost certainly that interest rates and yields are going much higher. US 30 year treasuries yield 4.4%, which is high by recent standards, but look likely they are going higher to me.

Despite yields not being that high investors hare poured money into TLT - a long dated treasury ETF.

So why can’t investors handle the truth? Having talked to a lot of people in recent months, the truth is that most people have built their financial plans around yields staying low, or even worse have large mortgages that they cannot finance at higher levels. Of course young people, who are often renting, probably have no fear of higher interest rates, particularly if causes house prices to fall. Older managers will likely have paid off a mortgage. But it is easy to see how middle aged manager might reject the idea of higher interest rates if it would mean they need to change their mortgage plan or even worse, investment plans. Better to stay with what has worked for the last 15 years, right? 10% interest rates, you’re joking right? You can’t handle the truth.

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1997 movie Gattaca has always been one of my favourite films, and I have rewatched it many times. Unlike my other favourite films, I seem to be the only one I know that loves this film. Films like Casablanca, Groundhog Day, Aliens, Little Miss Sunshine, Dark Knight, Sound of Music, I find other people love too, but my love of Gattaca seems to be a lonely affair.

(SPOILERS BELOW)

For those who have not seen it, the core story of Gattaca revolves around two brothers in a future where your DNA is the sole determinant of your success. The older brother is conceived naturally, and told that his DNA has condemned him to a second rate and ultimately short life. Despite that he dreams of being an astronaut, a role that is confined to only those with perfect genes. Ultimately, he prevails, overcoming those with better DNA. The message being that all the ability in the world is pointless without the drive and will to succeed.

When I watched this in my 20s, I felt a connection with this film. Growing up in a very middle class family in Australia, when I started to travel and work overseas, I became aware of the limitations of an Australian upbringing. I felt poor when I first went to Japan, and was made very aware of my inferior education. I still remember being told my maths was pretty good for a white guy. Discussion on my Japanese ability and pronunciation were also similarly brutal. In Australia, I had been a top student, in Japan I was as close to a dunce as you can get. But these trials and tribulations were all fuel for the fire in the belly, and I devoted myself to improving my Japanese.

In my mid 20s, when I started working in finance, I again became acutely aware of my limitations. Most of my peers had been focused on joining an investment bank for years, and had worked on the connections and the qualifications well before I had even realised this was a career option for me. Starting as a graduate at 25 years old, I could tell some thought I was already a “has been”, particularly as I only had a bachelors degree. But like the hero of Gattaca, I was playing the long game, and I was willing to do what it takes.

And when I was younger, there was one scene that really struck home to me. The two brothers play a game of chicken when they swim out to sea as far as they dare, and the older genetically inferior brother keeps winning. "Vincent, How are you doing this?” asks the younger brother. To which he replies, “Do you want to know how I did it? I never saved anything for the swim back” And for me, I have tried to live my life that way, always and everywhere. If you really want it, you never save anything for the swim back.

When I used to look at other people, I would ask the same question. Are they saving for the swim back? Are they committed? And so often people would say that they wanted to be this or that, but when words did not translate into actions, then I knew that was not what they really wanted. Are you willing to do what is necessary to achieve your dreams? For me that was the message of Gattaca, and the message I took from watching it in my 20s and 30s.

But as I watched it again, knocking on 50, I realise that I missed so much of the message of Gattaca. The drama in Gattaca comes from the main character trying to avoid detection before his departure for Titan. Vincent used blood, skin and urine samples from the genetically superior Jerome to pass DNA tests. A murder has led the police to investigate his workplace, and finding an errant eyelash from Vincent they begin to look for the obvious killer, a genetically inferior member of society impersonating a superior member. The tension is heightened as we discover that the lead detective is his younger brother.

As the circle tightens, his willingness to do whatever it takes is no longer enough. You become aware that more and more of the characters in the film are aware that Vincent has inferior DNA, but are willingly overlooking this to help him evade detection. The implication is that they recognise a system that focuses purely on potential, and not on drive and determination is a failed system. Or perhaps it is just that most natural of human emotions, rooting for the underdog. Either way, it is clear that the system is not universally supported or loved.

While the message from Gattaca remains one of chasing your dreams, and never saving anything for the swim back, it also has a message that the trial of chasing a shared dream can bind people together. Those around Vincent can no longer just passively support him, but to actively support him. They need to take risks themselves. Ultimately, Vincent requires those around him to give up love, freedom, life and duty for him to achieve his dreams, and they give willingly. As Jerome, the man that Vincent pretends to be, says at the end, “I got the better end of the deal. I only lent you my body. You lent me your dream.”

And the lesson I now learn from Gattaca, is not just never saving anything for the swim back, but that when you are chasing a dream, you are never really alone. Seeing someone pursue and achieve their dreams is something that we all want a part of - and everyone around you is helping you achieve. Chase your dreams, but remember everyone around you is helping you chase your dream too.

You may be wondering why a substack that is largely about economics and finance is talking about the lessons to be learnt from 1990s sci-fi film. Well the changes in my views on Gattaca, match up with my changes on my views on what it takes to have a successful hedge fund.

In my 20s and 30s, I would have taken the view that you need to be the best. You never saved anything for the swim back. Or in more financial terms, in a bull market the most bullish wins, and in a bear market the most bearish wins (and by wins I mean has the best hedge fund). That was certainly the mindset I lived by. I remember being very deflationary and bullish on bonds, and at some point, the numbers said to me to buy long dated JGBs. They were only yielding 2%, but the spread between 30 years and 10 years seemed very wide to me, and I did not think the 10 years would sell off, so I bought them. It was a great trade, but buying it felt like crossing a Rubicon, completely committing to the deflationary trade that I saw. Buying 30 year JGBs was committing to an investment theme, with no way back.

Coming up on 50, I still have the same attitude. You need to commit to succeed, but I also realise my success was coming from the explicit and implicit support of others. Colleagues, investors, supportive websites (hello Zerohedge!) and many many others. And I find myself dreaming of shorting again, I wonder if I can find others to share that dream. Will others follow, or at least will me on into the great dark unknown, offering at least tacit support. I think they will, but I don’t know for sure. So now, all that is left to answer is when do I strip off, and start swimming out to sea, saving nothing for the swim back?

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When I started to add political analysis into my market analysis, I was given some very good advice by someone who shall remain nameless. Politicians are simple - they will do whatever they need to do to be elected. The corollary of this is that in true democratic nations, like the UK, US or Australia, there are never really “populists or extremists” - they are just politicians that are just responding to what voters want. However, I think you can take this analysis one step further, and politicians will do their best to ensure their political success going forward. Thinking about this allows for a deeper and better analysis of markets and politics since World War II, and perhaps give a better method to understand where we are going.

I am going to use the UK as politics here is very clear cut - the party in power tends to have almost unlimited power to enact policies, without the countervailing influence of state government or a supreme court. One of the defining features of the post World War II era was the surge in union membership. The Labour government that came to power after World War II probably noticed that union members tended to voter Labour, so encouraging unions AND the nationalisation of major industries would put an overwhelming number of voters as natural Labour voters.

With the staglfationary 1970s, voters were fed up with these “pro-labour” polices, and opted for Thatchernomics. As can be seen above, a combination of anti-union laws, AND privatisations greatly reduced the number of union members, and natural Labour voters. The Conservatives no doubt noticed that shareholders, homeowners and business people tend to Conservative voters. So many Thatcher era policies where aimed at creating exactly these type of voters. One of the key policies of Thatcher was the transfer of state owned housing to private ownership. The Thatcher government gave the right of tenants in social housing to right to buy the properties they were living in.

Other policies pursued in the Thatcher agenda was the privatisation of key businesses. This served the dual benefit of moving move workers from public to private sector, which reduced the chances of them being unionised, while also encouraging the public to become shareholders, both greatly increasing their chances of voting Conservative in the future. British Telecom was one of the most successful nationalisation, and was directly marketed to the public, greatly increasing participation in the stock market.

Finally, a policy of reducing corporate tax rate to encourage business growth and investment was the final policy. Corporate tax rate in the UK fell form 51% in 1981 to 19% in 2023, but in the most recent budget rose to 25%.

From 1980 to 2007, these policy measures would have been seen as both economically sensible and politically popular. That is they almost worked as a poltical “flywheel”. The more voters liked these policies, the more voters that were likely to like these policies were created. So much so, that Tony Blair, Labours most successful politician, is seen as an heir to Margaret Thatcher by many political commentators. The problem is that many of the core Thatcher policies now alienate more voters rather than create new supporters. Housing is probably the most key one. The housing associations were key builders of homes in the UK. Together with the right to buy, which saw the transfer of homes from the state to private hands, also saw the state reduce its role in building homes. Home completions were around 300,000 homes a year in 1970s, have been running at 200,000 homes a year since the 1980s.

This has led to the obvious problem of house prices in the UK becoming expensive. This is dual aspects of a policy that weaken unions, keeping wages low, and policies that limited supply of housing, both core policies of the Conservatives. Voting intentions of the young to Conservatives are at the lowest levels ever.

While this benefits older voters that own homes, it has completely alienated younger voters.

Finally, privatisation was combined with rising share ownership, and increase competition. This allowed the public to participate and gain in the improved efficiency gains of better private sector management. IPOs and share offerings were a way to bind the public to the ideals of free market capitalism. But in the current world of private equity, venture capital, unicorns and share buybacks, the capitalist system tends to favour the few rather than the many.

The falling allure of right wing economic policies means that there is an increasing focus on cultural issues, rather than economic issues. It explains why Boris Johnson was and remains a far more popular politician than Rishi Sunak. The obvious response to the above trends is to raise taxation on corporates, which has begun. Build more homes, which Labour is proposing, raise wages, which is also happening, and to raise interest rates. Another policy, which would make sense in a Labour policy dominated world would be to raise the birth rate. An aging population tends to be more conservative, so I expect to see numerous policies to promote increasing fertility. The most important one will be to get housing costs down, but I suspect other policies will also be implemented.

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