During the period yields on the 10 year US Treasury increased to 1.76% from 0.67% a year ago, but 1 year bill yields fell to 0.07% from 0.15%, whilst the US Federal Reserve projected inflation for 2021 of 2.4% falling back to 2% next year. With negative real yields across the curve, capital markets remained relaxed about the emergence of inflation, allowing an interpretation of the steepening of the curve, as a better risk/reward environment. However the suspension of commercial bank emergency reserve exemption measures did see ripples in equity markets. With low coupons, government borrowings have ballooned out to levels that remain difficult for future generations to return the principal through taxation, contrasting with the post-WWII beneficial demographics. Increased US long yields contributed to a recovery in the US dollar and pressured gold.
Whilst proposals to lift the US corporate tax rate to 28% from 21% do little to encourage entrepreneurialism, they do indicate a level of fiscal responsibility missing from the last 20 years as the present administration fulfill campaign infrastructure promises.
Indication of over 300% total debt to GDP in China give the PBOC little opportunity to raise interest rates that would severely reduce profits of the highly leveraged property sector. However domestic demographic and technology impact on inflation continue to depress that need.
In the first quarter the dollar portfolio returned 6.2% with a 1.5 Sharp, whilst the S&P500 returned 5.8% and the ACWI 4.9%. At the end of the period the portfolio held 27% cash and, had a 41% net long position in basic materials, 18% in consumer cyclicals and 15% in financials. Best positions were Nippon Yusen KK (Japanese shipping) contributing 2.6% to total performance, Short JPY 1.8%, Danieli & Co (Italian metals) 1.5%, Tronox Holdings (US titanium) 0.9% and Komatsu (Japan construction machinery) 0.9%.
The firm maintained it’s Californian financial licence allowing it’s global client base to be protected under Californian (USA) laws and regulations.
Uncertainties in 2020 (Brexit, Covid, US elections, elongation of the economic cycle) have now dissipated. Unemployment remains elevated and inflation absent, permitting central bankers to continue their folly of creating massive wealth inequality through near to zero interest rates, as apposed to increasing the volocity of money. Interestingly governments across the world are now reviewing their policy of encouraging corporate monopolies eg Ant (China) & Facebook (USA), which should assist somewhat in reducing inequality caused by central banks.
For the year the dollar portfolio returned 12% with a 1.32 Sharp, equivalent to 75% of the S&P 500 or ACWI gains with an incredible 25% of the volatility. Longs contributed 8.13% and shorts 3.92%. Biggest contribution to gains where positions in Sunrise Communications Group, Sumitomo Metal Mining, GBP, Everaz PLC and Sasol Ltd, whilst we lost on Air Canada, Kawasaki Kisen Kaisha, USD, EQT Corp and Voya Financial Inc.
Intra & daily trading artificial intelligence was successfully developed. However optimal leverage in trading positions amplify operational risks too great for third parties.
For the firm, the biggest challenge of the year was several vendors unexpectedly modifying software (API). This was overcome in a timely manner though multiple additional techniques to benefit future data access.
The firm’s administrative offices return to London from Zurich at the end of January 2021. The firm relinquished its Swiss financial licence and will seek to continue to operate under its Californian financial licence.
US equity markets moved to new all-time highs and the fastest ever recovery from a bear market as, Central Bank liquidity moved to assets whilst avoiding the huge economic capacity. In a well flagged move the US Federal Reserve Bank now target (excess) average inflation as a policy goal, that had led to sharp declines in the US dollar. In the previous ten years the Reserve Bank already failed the lower bar of MEETING its annual inflation target.
Politicians continue to target headline GDP that increase their power, a different policy goal than increasing their citizens income (or GDP/head and its statistical distribution). Further newborn US citizens are now responsible for $90,000 in government debt as the Treasury borrows from their future.
Productivity of the digital economy is being realised. In service sectors the acceptance of work from home allows, reduced property costs for employers and reduced travel fees and times for employees. For consumption sectors purchasing on-line boost distribution players and robots reduce the need for humans in production process’. However most human animals require social contact and experience that is not acceptable digitally even in the best virtual environments, this will maintain a proportion of the pre-pandemic order.
In the first three quarters of the year the Kings portfolio returned 6.04% (sharp 1.29) whist the S&P 500 returned 4.09% (0.33) and the ACWI 1.69% (0.21). Winning positions for the third quarter were longs: Freshpet (US fresh dog food) gaining 36%, Sunrise Communications (Swiss telecom subject to takeover) 32%, Penn National Gaming (US casinos) 30%, Avon Rubber (UK personal protection products) 28% and JD.com (Chinese online retail) 26%; and shorts: Husky Energy (Canadian oil and gas) falling 33%.
Artificial Intelligent Deep Learning utilising hardware purchased two years ago is progressing ahead of schedule and providing very promising results.
Companies in nascent industries under the guise of lowering cost to the consumer are being allowed insurmountable economies of scale, by buying out their vertical and horizontal competitors. In the end, only these monopoly company owners and employees benefit from industry profits. New competitors now cannot enter to share the industry wealth on a more equitable bases. Whilst in general these monopoly companies have lowered the cost to consumers they have also reduced growth in consumer income compared to monopoly owners and employees.
Lower costs have helped reduce inflation. In Switzerland inflation is not necessary for a successful society and economy. But in an attempt to generate inflation central bank interest rates have been lowered; reducing income of the most venerable who cannot rebuild savings due to their age, if exposed to a downturn in asset prices. Further the availability of central bank credit is restricted to financial institutions, who have passed it on to in general to their large clients benefiting the owners and employees, at the expense of those deserving but not able to access credit.
Potential Solutions (subject to political fine tuning):
The five largest companies in growing industries should not be able to purchase other companies that are in the top twenty companies of any industry.
Central bank real interest rates should be set to a minimum of 2%, except whilst the stock market is less than 15% of it previous all-time high.
Through today’s technology central banks, either directly or though proxy, provide the increased monetary base to all credit-worthy members of society.
Whist increasing interest rates punish marginal borrows it releases and lowers the price of resources for use in more productive methods.
Chart showing growing inequality in NY County, 2010-1018.
The US Federal Reserve expects to hold short term interest rates at 0.1% for the next three years. At present the ECB’s short term rate is 0%, the BoJ’s -0.1%, the SNB’s -0.75% and PBC’s 3.85%; punishing cautious savers, pensions and those who should not undertake risk, to benefit limited liability structures and those with capital buffers. Although smoothing the business cycles allows certainty in planning, it hinders the adoption of latest productive techniques by maintaining companies with sub-”normal profits”. Further the failure to apply anti-monopoly/trust law has created huge economies of scale for incumbents that crush new entrants. All of which leads to increasing inequality of income. Combined with the relaxation of temporary martial law measures, changing educational standards and susceptibility to social media, a spring of social unrest ensued.
Diminishing global fertility rates combined with communication and IT advances hold inflation in check while the further suppression of pricing pressure from adoption of AI awaits.
The UK left the EU in January 2020 but remains subject to EU law until the final agreement signalled for 31st December 2020 is negotiated. The UK’s persistent net deficit on goods and services trade with the EU reached £66bn in 2018 with additional net contributions to the EU budget of £7.8bn, over time we expect this to moderate. Inflation in the UK may rise as internal supply chains are developed and property price growth may slow from the reduction of immigration. Whilst in the EU we believe that GDP growth will further slow.
A US presidential election is scheduled for November 3rd with candidates appearing in 3 live broadcast debates from September 29th. As in the previous election, polls favour the Democrat candidate. Apart from style the policy differences are: the DNC’s preference for tax, regulation and global elitism whilst; Trump attempts a fair and equal playing field. Neither address better application of existing government/central bank programs for low wealth citizens and small enterprise. Negotiating the 2nd phase of China trade deal awaits the victor.
EU political administration’s similarity to the CCP makes them natural allies.
The Kings portfolio returned 3% in the first half, with a low in the period of negative 6%. Including realised profits in i) longs: of 112% for Alibaba Health Information and 58% for ZTO Express Cayman, and ii) shorts: Banco Marco falling 56%, Micro Focus International falling 66% and Sasol falling 94%. In the same period the S&P finished the period down 4% falling 32% at its low. The MSCI ACWI, that better represents the universe of our potential positions, finished the period down 8% falling 33% at its low.
12 minute introduction to understanding consensus earnings estimates. Their use in valuation models. How they represent a generalisation of the underlying economy. Why the stockmarket may not represent the consensus earnings view. Effect of COVID-19 (coronavirus) on earnings expectations. How they can provide a guide for managing operating business’.