Practical analysis for investment professionals
05 November 2015

Weekend Reads for Investors: The “What about the Economy?” Edition

Posted In: Weekend Reads

I have been on the road quite a lot lately attending conferences and speaking at several of them, too. I thought I would share with you several insights before getting into my normal Weekend Reads mode.

At the 2015 CFA Institute Fixed Income Management Conference in Boston, I learned that almost every speaker is concerned about the liquidity of corporate bonds. Many pointed the finger at Dodd-Frank and Basel III, which require greater amounts of high-quality capital. This means that investment banks, long-time facilitators of corporate bond-market making, are doing very little of it as they are reluctant to hold the inventory. This flies in the face of evidence that the bid-ask spread is narrowing. Speakers pointed out that much of the liquidity is being provided by hedge funds running algorithms designed to make money based on mispricing. But what happens when the conditions in which algos normally trade are violated? Most of the speakers think there would be no liquidity. Ouch!

Next, I spoke at the 2015 Fund Forum USA event. For those of you not familiar, the forum is more for executives in the fund management industry rather than analysis pros. What struck me is that almost all of the conversations were about new product development and how to grow assets under management (AUM) by marketing to very big customers. I did not hear much talk about actual end-client investors. Or about how to improve the performance of the analysts and portfolio managers. While I understand that this may be realistic, I also find it very disappointing. I was trying to think of another industry where top-line revenue growth can be so far divorced from benefiting the actual end customer. In fact, in what other industry can you basically ignore them altogether?

Does this bother anyone else out there?

China

There are many economic discussions afoot in the Land of the Dragon. Biggest among them is the rollback of the one-child policy. This promises to help China undo one of the worst demographic stories in the world. It also promises to ensure economic growth of the “more mouths to feed” variety. But just what effect will it have on sustainability in the long run with this many more Chinese? Perhaps this question helps explain why green finance is exploding in China. But maybe the Chinese economy is already much larger than anyone anticipated. If true, this raises many interesting questions, such as: Why would China downplay its growth? Does poor data collection there go both ways, under- and overestimation? And so on. (Japan Times, China Daily, South China Morning Post)

Economic Developments

I mentioned the shrinking liquidity in US and European corporate debt markets, but investors have another reason to be concerned. With interest rates so low, many CFOs have issued debt to lower their overall financing costs. As we know, these monies are spent to acquire competitors — even though the consequences of mergers may be very bad for the economy in the long run — as well as to fund share buybacks, and who knows what else. But the actual $119 billion of new debt issuance is a staggering figure. What happens when, in the future, central banks inevitably raise interest rates and that debt needs to be rolled over at higher rates? What about interest coverage ratios? Hmmm. Or maybe central banks have painted themselves into a corner and zero interest rate policies (ZIRPs) are here to stay? Last, does anyone think that the German policy on refugees from the Middle East is going to make it easier to manage the country? I didn’t think so. (The New York Times , Bloomberg, MarketWatch, Der Spiegel)

Innovation

As always there are interesting developments in technology to watch. [Interlude] Have you ever thought about the actual definition of “interesting”? To me it means the acknowledgment of something new whose comprehension required a bit of growth on my part. These are the sorts of things that occupy my time on the train here in New York City. [Now back to your regular Weekend Reads for Investors.] Doctors are beginning to rethink their approach to fighting “superbugs.” Turns out that much of the approach hinged on the use of a traditional test for efficacy that was divorced from reality. I’d argue that in finance we have the same problem. Next up are two excellent articles discussing technologies that promise to reduce the use of resources, thus ensuring future economic growth. First is a story about how smarter electrical grid technology will make electricity usage more efficient. Second is news of the development of lithium air batteries that massively increase electricity storage capacity. (Bloomberg, R&D, Japan Times)

Now for Something Completely Different

Forgive me for injecting a bit of my personal philosophy into your Weekend Reads. I believe that nature works best when it is in balance. One manifestation of this is my belief that feminine-masculine, night-day, breadth-depth, good-bad, and so on are all necessary for life to be robust. Several years back, I was interviewed about how to turn revenge into a powerful force for career development by Marketplace Morning Report, our top business program on the radio here in the United States. To that end, I recommend this piece about the importance of the “office villain” for getting things done. It is my opinion that too much of modern business culture is drenched in saccharine treacle. I think we all could stand a bit more directness now and then. So all hail those of us unafraid to occasionally serve as the “office villain”! Enjoy your weekend! (Wall Street Journal)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/Photoevent

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason@jasonapollovoss.com

5 thoughts on “Weekend Reads for Investors: The “What about the Economy?” Edition”

  1. Thank you, Jason, as always! Here is one you might have missed that deals with both China and corporate bonds from a different, but interesting perspective.

    http://seekingalpha.com/article/3634536-the-risk-in-china-that-no-one-is-looking-at?ifp=0

    As for China’s growth, I do recall the IMF proclaiming that China had passed the U.S. as of last December, as measured by Purchasing Power Parity (PPP) to reconcile forex issues. The IMF also noted that China changed the way they counted GDP to be in line with international standards and raise the figure, accordingly (I suspect they also wanted to boost GDP to meet their new goal to double GDP from 2010 to 2020, a primary objective in their new five-year “guidelines”.)

    1. Hello Tom,

      Appreciate the additional details about China, and I will take a look at the piece to which you linked.

      Enjoy the weekend!

      Jason

  2. Rob Wilson says:

    Jason,

    Great reading your stuff as always and I especially like the last paragraph. I value honesty over comfort all day long so I try to live by that even though it can be a difficult behavior to practice.

    Rob

    1. Hello Rob,

      Thanks for weighing in. Yes, that office villain piece is one of my favorites this year. I get very tired of the overweight given to the “always be nice at work” tilt. I think this results in a passive aggressive and phony culture. If people are honest in most communications – good or bad – then few relationships get to the point where such extreme measures must be taken that result in “villainhood.”

      I hope that you are well!

      Jason

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