Crumbs

The sheer volume of posts saying “inflation is coming, bonds are dead” is becoming overwhelming. The latest is Ray Dalio, here. I don’t suppose he’s saying anything amazingly insightful, but he controls a lot of money, and has made a lot. Others will listen. Of course, many people buy bonds for reasons other than expecting a return. Central banks, certainly, but also many pension funds which are compelled to hold a large part of their investment in “safe” assets. Given that their liabilities are largely nominal, this just might work. But if the blow up is big enough, they will be bailed out, which is what my money would be on, if I could think of a way of betting on this outcome.

Ray is worried about Elizabeth Warren going after his wealth:

Based both on how things have worked historically and what is happening now, I am confident that tax changes will also play an important role in driving capital flows to different investment assets and different locations, and those movements will influence market movements. If history and logic are to be a guide, policy makers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected. For example, Elizabeth Warren’s proposed wealth tax is of an unprecedented size that, based on my study of wealth taxes in other countries at other times, will most likely lead to more capital outflows and other moves to evade these taxes. The United States could become perceived as a place that is inhospitable to capitalism and capitalists. Though this specific wealth tax bill is unlikely to pass this year the chances of a sizable wealth tax bill passing over the next few years are significant. Conflicts can increase in such difficult times when accompanied by large wealth, values, and political gaps, and the environment can become inhospitable to capitalists leading them to run from less hospitable places to more hospitable places.

**I think this is the new paradigm. **

** For these reasons I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets. I also believe that one should be mindful of tax changes and the possibility of capital controls. **

He’s also bullish about Chinese assets, like Gavekal.

Marxist interpretation of Europe

Louis Gave has a great take on which country might be the first country to exit what is left of the EU. He argues that countries make political decisions that advantage the dominant elites in those countries, so:

• it won’t be Germany, because their industry (the Mittelstand) has benefited so much from the currency union, which protects them against the headwind of an appreciating currency when it is selling to the rest of Europe,
• it won’t be France, because their ENAchs benefit so much from going to Brussels to do EU policy making in an easily accessed and friendly setting, (with the benefit of not having to pay any of France’s high taxes)
• it won’t be Spain, because it’s elite is the coalition of large landowners who receive such generous subsidies via the Common Agricultural Policy,
• but it might be Italy, because their industry has been destroyed by an expensive currency, imposed on them by the Germans, and these are people who have owned factories and employed local families for generations and they are thoroughly fed up of it. The establishment have played their Joker, Draghi, to give them time, but even he may not be able to hold the country together and inside of the EU.

I am increasingly drawn to Marxist interpretations of economics and history, although I’ve been a fan of Chris Dillow for many years. He’s always worth a read! Gave thinks that Japanese equities are the ones to watch. That guy knows a thing or two.

Wrap

Not sure what’s happening today. Energy commodities and companies have been hit hard, nothing else has moved very much. The FOMC is meeting tomorrow. Everyone is nervous, I guess, and is taking profits on assets which have had a good run. Retail sales in the US fell by quite a lot more than expected. Crude inventories fell sharply (which I would have thought was bullish, but obviously I’ve missed something). EU equities, and UK ones, have had a good day.