The Anti Bubbles

Book Title: The Anti-Bubbles – Opportunities heading into Lehman Squared and Gold’s Perfect Storm

ISBN: 1631579827

How strongly I recommend it: 3/5 Stars

An easy read which I was able to read in one sitting. This book is basically a structured critique on modern monetary theory with practical applications on how to trade an eventual market correction.

The central premise in this book is that we are going to (eventually) see somewhat of a doomsday scenario because Central Banks have taken monetary policy to extreme levels and they are not infallible. Fortunately, there are ways in which investors can trade the ‘anti-bubbles’ that will show up.

I liked the application of economic theory to real world investment ideas but this book did feel a little poorly written with a lot of repeating and quotations from notable investors without enough explanation.

Amazon Page Link: Click Here

How I discovered it? The Ultimate Masterclass for Macro Investing (Youtube Link)

Who should read it? Aspiring Macro Investors


Starting with Ben Bernanke’s decision to cut interest rates to zero in response to the 2008 financial crises, Central Banks across the globe have become addicted to low rates, Quantitative Easing (buying Government Bonds) and direct monetary injections (buying high yield credit). Parrilla argues that these tools are extreme applications of monetary policy which have created bubbles in the economy that will need to eventually correct.

As a result of these extreme policy responses, Parrilla argues that; 1) Currencies have become over-valued due too much money printing, 2) Volatility is underpriced as Central Banks continue to prop up markets and 3) Due to the widespread impact of monetary expansion, assets are going to be increasingly correlated to one another.

So how do you trade this? Parrilla offers three trading strategies to respond to the above. 1) To be long Gold (preferably through ETF’s), 2) To be long implied volatility through long biased options and 3) To be long tail risk by betting on contrarian outcomes (e.g. being long Gold and short non-USD currencies).


  • Currency Wars

It is not possible to look at monetary policy in a single country, in isolation. The reality is that when countries devalue currencies, this basically exports deflation to other countries. In turn, other economies need to either lower their own currencies (via reducing interest rates) or become uncompetitive. This incentivizes currency wars and even more extreme policy action which creates a destructive cycle.

  • The Search for yield

‘Risk-Free interest’ has been turned into ‘Interest Free, Risk’ in a zero interest rate environment. In other words, in the search for yield, money managers have lended to worse borrowers, for longer maturities. This search for yield in an extremely low yield environment, has benefited the weakest borrowers the most and has encouraged speculative bubbles.

  • False Diversification

Money managers have incorrectly assumed they are diversified because they own different asset (e.g. equities, property, credit). However, when Central Banks are effectively propping up asset prices (through the ‘Central Bank Put’), this is not diversification – everything will go up and down together.

  • Low Implied Volatility

‘Central Bank Put’ puts a floor under prices and insures the market that the Central Bank will step in as soon as things go wrong. This then artificially lowers implied volatility in the market. As most VAR models use implied volatility to calculate risk, it then encourages more leverage and risk taking.

  • Ways out of this financial predicament

There are three ways out of this monetary mess we have got ourselves in. First option is for Central Banks to reverse policy as the economy begins to improve and we see inflationary pressures. However, the problem with this is that the sequence and extent of reversal will be harder the most unconventional policy becomes.

The second option is for Central Banks to hold Government Bonds till expiry and then decide what to do i.e. basically just buys the Central Bank more time to make a decision.

The third and most likely option is that eventually, all this debt will need to be monetized and therefore, there will be a massive devaluation of currencies and a rebasing that will need to happen. This will prop up real assets such as Gold.


‘Paper currencies eventually converge to their intrinsic value: paper’ – Voltaire

The official Gold Reserves of the Bank of Japan would buy less than 5% of Apple’s Market Cap

Currency Experiments

Currency experiments have tended to give bias towards monetary expansion and Central Bank excessiveness.

In 1933, the US decided to go off the Gold Standard and gold was no longer accepted as legal tender. By 1934, most private possession of Gold was outlawed, forcing individuals to sell it to the treasury.

In 1944, the Bretton Woods system fixed currencies to the USD which was effectively, tied to Gold but once again, in 1971, due to worsening balance of payments, depleting Gold reserves and the financial burden of the Vietnam war, Nixon put an end to the coverability of the USD to Gold, which basically ended the Bretton Woods system of fixed financial exchange.

Reflexivity Theory – George Soros

Fundamentals dictate prices but prices also dictate fundamentals – it goes both ways.

In contrast to rational expectation theory that only real world fundamentals drive real world supply/demand, reflexivity theory argues that it is actually expectations that drive real world behaviors which then lead to new expectations. This explains financial bubbles and excessive speculation.

Gold Equities as an ‘up and out call’ on Gold

People normally think that buying Gold Equities = being long Gold. They are not one and the same. A good way to think about Gold equities is that they are an up and out call option on Gold – if the price rises too high, then Gold equities are likely to underperform e.g. they face extreme political risks especially in politically sensitive countries or companies with Gold hedges may actually end up distressed due to margin calls. So Gold equities basically cap your upside on Gold and it’s much better to buy ETF’s or calls.

Beware of the Reverse Repo

I’ve been seeing a lot of headlines about the Federal Reserve’s ‘Reverse Repos’ and the impact they are having on the broader financial markets. This all sounds complicated so here’s a quick explainer on what they are, what’s happening now and why I think it’s important.

The Fed sets the Federal Funds Rate

People normally assume the Fed sets interest rates. What it actually does is set the ‘Fed Funds Rate’, which is the rate that inter-bank lending occurs. This then has a secondary impact on the interest rates that normal consumers are charged (on things like car and business loans).

The Federal Funds Rate is determined by the demand for cash reserves (by banks). The Fed controls that through two key operations:

(1) Overnight Repo’s

(2) Interests on reserve balances (IORB)

Overnight Repo agreements are the way the Fed injects money into cash balances that banks hold. Banks can sell assets to the Fed overnight, with an agreement to repurchase those securities the following day. This temporarily increases the supply of money in the economy.

The Fed also holds reserves for major financial institutions. It can directly set the interest rate on those reserves balances (IORB). The net impact of this is to increase/decrease available money supply in the economy.

What is the Reverse Repo Program (RRP)?

The Reverse Repo Program is the opposite of the Overnight Repo (mentioned above). Instead of injecting money into the system, it takes money out. The Fed would sell Treasuries to eligible firms (banks, money market funds) and then agree to buy them back at a later date for a fixed return.

Why does the RRP exist?

The RRP is a short-term solution to their being too much money in circulation and resultingly, prevents the Fed Funds Rate from falling below the Fed’s target (Remember: if there’s too much money in circulation, then the supply of reserves overwhelms demand and banks end up lending to each other at even lower rates).

What is happening?

RRP Volumes

The volume in the RRP has gone up considerably and is hitting near record highs, despite the effective interest rate on these transactions being 0%. The volume in the RRP on Tuesday of this week, was at a staggering $433bn. That’s more than the entire GDP of Ireland. This is the highest transaction volume we have seen since 2019 and the third highest on record.

The irony is that the Fed is pumping $120bn/mth into the US economy and is effectively taking out three month’s worth of this in these overnight RRPs.

What does this indicate?

In short, that there is simply too much cash circulating in the banking system. For context, the Fed has spent $2.5tn since the pandemic (buying US Treasuries amongst other assets). The issue is that whilst this has added liquidity to the financial system (as sellers of Treasuries now get cash to sell their assets to the Fed), they then need somewhere to put that cash, other than effectively giving it back to the Fed.

The worrying thing about this cash going into RRP’s is that it means that (1) banks are simply not finding enough attractive places to park this cash (outside of the Fed) and/or (2) they are stepping down purchases of the US Treasuries (which is leaving them longer cash balances).

Bank Reserves held by the Fed

Why am I concerned?

What is concerning is that this is simply not sustainable. If there is too much cash going back to the Fed (even at 0% interest rates), the Fed is going to be forced to taper it’s purchases of securities and/or look to increase interest on reserves it holds.

The second issue is that with so much cash, there’s less money flowing into US Treasuries. Whilst this isn’t necessarily bad, the impact of banks buying less US Treasuries is that the yields/interest rates on those Treasuries go up.

At this point, it is almost certain that the Fed will need to take some sort of action. They will either raise the IORB or increase the overnight rate on the RRP (to keep it in line with their targets). Unfortunately, those efforts will likely attract more money back to the Fed = take more money out of the financial system. It therefore makes it impossible for the Fed to continue pumping more money into the system (if that is basically being returned back to it).

Rising rates and tapering will undoubtedly have a direct impact on the US financial system and the prices of assets that are particularly rate sensitive, such as houses, cash flow negative stocks and bonds.

What is next?

Whilst I don’t think we’re due for a large scale market sell off on the back of Fed tapering (mostly because the idea of tapering has been frequently discussed), it does make me more wary that short term corrections and pull backs are going to be more frequent, particularly in large cap tech (which has, so far, been shielded from a major correction).

As a result, I will be looking to expand future posts to cover some larger names that I will be looking to add positions to, particularly if those companies come under pressure in the run up to the next Fed meeting on June 15th.

China’s Robinhood

The rise of Retail Investing

Retail Trading has gone ballistic. In the US equities market, Retail Trading accounts for almost as much volume as Mutual Funds and Hedge Fund Trading volumes, combined. The ease (and gamification) of stock investing has opened up a new asset class to many ordinary people and has democratized the process of buying and selling stocks.

Retail Trading accounts for Approx. 25% of total traded volumes

Retail Investing as a Secular Growth Trend

The post-Covid Retail Investor is a new breed of investor that is here to stay. She/He is younger (Median Age 35 years versus 48 for Typical Investor), more optimistic (72% are bullish) and has increasing disposable income to put to work (43% plan to invest more in the stock market). Whilst speculative euphoria may have burnt some new investors, more of these new investors (+70%) are now looking at buy and hold strategies (versus only 56% a year ago). Companies like Robinhood have pioneered this change and with ‘Zero Comission’Trading, the barriers to entry are as low as they have ever been.

Robinhood Trading App – User Growth

Chinese Retail Investing Market

This has got me thinking about where else this sort of rapid disruption in investing could take place. Boasting the second largest aggregate household wealth in the world (after the US), I was surprised to find that Chinese Retail investing pales in comparison to the US. Only 13% of China’s Households invest in equities, compared to over 55% in US.

Burgeoning Middle Class

From 2015-2030, the share of the Chinese Population with ‘High Incomes’ (>$35k/pa) is expected to grow by 5x (from 3% to 15%). Those with incomes greater than ($11k/pa), the ‘Upper-Middle Class’, are expected to grow to 35% of China’s population compared to only 10% in 2015 (all numbers normalized for 2021 Prices).

This rapid rise in income per capita as people move into the middle class, is expected to open up Total Addressable (Retail) Wealth of ~$30tn by 2030, with over 500m Chinese Clients falling into this ‘Upper Middle Class’ Income bracket with money to invest.

China’s burgeoning Middle Class

One further catalyst is that Chinese households have a disproportionate amount of wealth tied up in Physical Property. As per capita wealth increases, this should start to favor Financial Investments as households diversify their holdings (to be more in line with other developed countries).

Chinese Household Wealth Distribution

China’s Demographic Problem

Unfortunately, alongside greater wealth has come a greater willingness to buy unproductive assets (e.g. Louis Vuitton handbags, Tech gadgets and International Travel). Ten years ago, the average Chinese worker saved 39c on every dollar of income. Today, it is 33c and many young Chinese save nothing at all.

Chinese Savings Rate experiencing decline

This depletion in savings is coming at the same time that China is heading towards a demographic nightmare. By 2050, China will have one of the highest ratio of elderly citizens (as a proportion of it’s working population) in the world and a massive pensions deficit to accompany that. Reports estimate that the Chinese Government Run ‘Basic Pensions System’ will deplete all of it’s assets by 2035. The more Chinese wealth that gets squandered away in unproductive assets, the more of a (social and economic) problem this is going to become.

China on track to have record high Old-Age Dependency Ratio

Chinese Retail Investing: Ripe for disruption

In this regard, Chinese Investing Platforms are not just in the business of democratizing finance like their US counterparts, but they are solving an underlying macroeconomic problem; they are creating the right incentives for households to invest.

To put things into perspective, the Shenzen and Shanghai Composite indices contain just 10% of the world’s equity by value (even though China contributes about 16% of Global GDP). Meanwhile in the US, the Nasdaq & NYSE have about 50% of the worlds equity value. Unlike in the US, Retail Holdings (as a % of market cap) inside of China have steadily been decreasing, speaking to a lack of incentives to invest in domestic markets. As a result, it is common for top tier Chinese companies to completely neglect domestic IPO’s in favor of Hong Kong or US listings.

Chinese Domestic Markets do not appeal to the Chinese Retail Investor

Given the scale of the problem, I think the market is not just prone to disruption but if executed well, Chinese investment platforms can ride the tailwinds of (1) have the backing of the Chinese Government to solve a deepening macroeconomic crisis (2) exposure to a rapidly expanding middle class and (3) ride the broader growth trend in Retail Investing taking place in other countries.

China’s Robinhood’s: Futu & Tigr

The top two brokerage firms in China are ‘Tiger Brokers’ (Ticker: Tigr) and ‘Futu Holdings’ (Ticker: Futu). They surpass their competition by a wide margin due to their online only presence, reduced fees and established technology platforms. Both of these companies boast retention rates of approx. 98% and can be seen as the ‘Robinhood’s of China’.

Their three key revenue drivers are:

(1) Brokerage Commissions

(2) Interest Incomes from Margin Lending/Cash Sweeps

(3) IPO’s and Share plan services

Both companies generate over 60% of their revenues through (1) but this has been steadily decreasing this share through diversification into (2) and (3).


  • Futu has two main investment apps; Futubull and MooMoo.
  • Revenues from Brokerage Fees: Approx. 64%
  • 1.4m Registered Clients, 516k Paying clients
  • Paying Clients Growth: 60%, 84%, 137%, 160%
  • Total Trading Volume: $150bn
  • User median age is 34, mostly affluent Chinese (40% work in technology)
  • To attract clients, Futu has a social networking element, ‘NiuNiu’ community. This allows investors to find new investment ideas (think Wallstreetbets but without the hype). The average user spends 38minutes per day on this in 2020 (versus 25mins in 2019)
  • Founded by an ex Tencent employee. Tencent owns a 30% stake in the company


  • Revenues from Brokerage Fees: Approx. 60%
  • 975k Registered Clients, 215k Paying Clients
  • Paying Clients Growth: 29%, 53%, 76%, 110%
  • Total Trading Volume: $63bn
  • Initial focus is on US equities with international presence
  • 72% of Tigr’s users are under 35 years old.
  • Acquired US baked broker in 2020 to build out in-house clearing functions
  • Interactive Brokers has 8% stake in the business (with Xiamo having 12% stake in the business)


Both Tigr and Futu deserve to be considered explosive high growth stocks, growing revenues at an average of 130-150% over the last few years (alongside paying clients – see above). Importantly, they are both also profitable and have sizeable Free Cash Flows.

On paper, Futu does look like the better business given that it has grown faster and has shown that it can monetize this growth better; with 76% Gross Profit Margins and Net Income Margins at 38% (in 2020). Tigr has Gross Profit margins in the 40% and Net Margins around 12%.

Using analyst expectations for 2021 Revenues, both businesses should grow revenues by over 120% y/y. Assuming a conservative growth rate assumption (Futu 40-55%) and (Tigr 25-40%) over the next five years, adjusting for a 15-20x P/E multiple in 2025 and assuming they can hold Profit Margins in line with where they are now (also conservative given that as businesses see more user growth, they should experience higher margins due to scale), I think both of these stocks are trading at very attractive entry points for new investors with over 100% upside in five years in the most optimistic scenario.

Ticker: FUTU, TIGR
Stock Price (when post published): Futu – $118.89, Tigr – $16.79
Verdict: Moderately Bullish
Timeframe: 5 Years

Why I’m (still) bullish US Equities

I’m a big fan of Ark Invest and the work of Cathie Wood and Brett Winton. I regularly trawl through their research pieces to formulate my view on the markets and to guide my investment ideas.

This is a brief summary of my learnings and general conclusions from Ark’s most recent, ‘In the Know’ series. These views are my own and whilst I reference Ark’s research, I am not associated with Ark Invest in any way. If you found this helpful, please subscribe as I continue to build out this blog as a forum to share my learnings, thoughts and market ideas.

Headline Inflation numbers are skewed

There’s no doubt about it, money supply in the economy is rallying sharply and is on an upward trajectory. This is being fueled by Central Bank Easing (Fed purchases of securities) and Government Stimulus measures. Normally, this leads to higher inflation (increased supply of money means higher prices of goods and services). This is a popular narrative, especially as we start to see strong economic data feed into reports

US Money Supply is at record highs

Nonetheless, inflation reports this year are going to be skewed towards being more frightful, than accurate. This is because inflation is typically reported as a year/year comparison (to account for seasonality). Last year, we saw major deflationary effects in the economy (people couldn’t spend money, so prices fell and the economy sank into a severe recession). This leads to a ‘basing’ effect where now that we start to see this process reverse, the year/year reports start to look abnormally high (especially compared to the Fed’s 2% Target Inflation Rate).

Inflation data on a monthly basis avoids the same basing effects, and as of yet, we are not seeing any major inflationary pressures creep up in the economy (more on why that’s the case, below).

US CPI Inflation (Monthly)

Higher Corporate Income Taxes are not going to tip this market over

Government spending is beyond anything we’ve ever seen before. Federal Debt as a % of total GDP is ballooning. This should be a cause for concern because at some point, all this money needs to be paid back, through higher taxes and/or reduced spending.

Federal Debt is Approx. 130% of GDP

What is harder to know however is when it needs to be paid back. This is a function of political incentives, where we are in the economic cycle and how hard it starts to get for the Fed to start servicing this debt load. My view is that for the next 6 months at least, the market continues to ride the gravy train. This is because the new administration is still setting out their political agenda, forward GDP forecasts are being revised higher and debt service payments remain at historically low levels – so there is not an immediate need to balance the books.

With that being said, there is a lot of talk about Corporate Income Taxes (‘Corp Tax’) having to increase to fund this debt, eventually. The current administration has proposed increasing Corp Tax by 7% (from 21% to 28%, at a Federal Level). Firstly, I don’t think a tax hike of this scale ends up happening. Secondly, even if we did see some increase in Corp Tax (at a Federal Level), I think the effective change for most corporations would be muted because of relocation incentives between states. More on this below.

Corporate Taxes only make up for about 7% of total Government Revenues (Incomes Taxes are around 50% of revenues, on the other hand). Therefore, even if you assume a 33% hike in the tax rate (28% vs 21% and assuming zero elasticity in revenues, this only increases government revenues by around 2%, at most). So this is hardly making a dent on the overall fiscal balance.

Corporate Income Tax only accounts for 7% of Govt Revenues

More importantly, compared to other Advanced Economies (OECD), the US already has above average (Effective) Corp Income Taxes (26% vs 23%). A 7% increase would certainly put it in the running for the highest Corp Tax Rate out of the bunch, higher than France (32%), Germany (29%), Italy (29%). Optically, I struggle to see this happening as it’s not a position any major economy wants to have (let alone a broadly fiscally conservative, free market oriented, USA).

Even if we were to see some increases in Corp Tax at a Federal Level, there is a huge disparity in state level Corp Income Taxes which will mute the net impact on Corporations.

For example, a relocation from California to Florida, reduces the top rate of Corp Income Tax by 4.4%. Move from New York to Texas and you cut this by 6.50%. This explains why intra-US company relocation is at all-time highs (compounded by pandemic related shifts to working from home). Companies like Goldman, Telsa and HP are leading this charge and won’t be the last. Ark Invest are also considering the same.

Sizeable difference in State Level Corp Income Tax

*Texas does not have a Corp Income Tax. Instead, it has a Gross Receipts Tax (applied to revenues before cost deductions) which is not a direct comparison.

So long story short, Corporation Income Tax hikes are a red herring. The tax hike proposals are overly aggressive/ambitious and the reality is that this probably doesn’t mean much for what businesses end up paying. This likely mutes any resulting impact on stock prices (though it does make real estate investments in Texas/Florida look very compelling).

Significant (deflationary) economic tailwinds

The savings rate in the US remains at historically elevated levels (above 13%). This speaks to the amount of overall pent-up demand in the economy as people have been stuck at home for so long (and for many, receiving stimulus checks they haven’t been able to spend).

US Savings Rate at historical highs

Over the next couple months, we are likely to see the savings rate trend progressively lower; especially as more restrictions are lifted across the US and people have more places to spend their money. This will continue to drive GDP higher (70% of US GDP is made up of consumption).

However, to off-set the inflationary impact of this higher spending, we are seeing very encouraging signs in the labour market of deflationary forces playing out. Whilst we’ve seen employment rebound, we’ve also seen working hours increase at the same time, as firms extract more labour (productivity) from their existing workforce.

We are likely only at the cusp of these productivity gains in the workforce. Ark identifies five key platforms of technological innovation which are likely to drive further productivity gains and resultingly deflationary forces in the economy. These are: Robotics, Blockchain, Artificial Intelligence, DNA Gene Editing and Energy Storage. The breakthroughs in these areas are already at key inflection points and should spur a period of rapid economic growth with (positive) productivity led deflation in the economy.

US Treasury Yield Saga is likely over (for now)

One final thought is how quickly and efficiently the market has managed to shrug off fears of rising 10 Year US Treasury yields.

The 10-Year Treasury Yield nearly doubled in three months, which is a huge move in a relatively tame bond market. The narrative was that inflationary pressures seeping into the economy were being reflected by the bond market (as investors sold 10 Year Treasuries), and as a result, growth stocks in particular were being sold off (due to future cash flows now being discounted by a greater amount). FWIW, I don’t agree with this view and I explain why in my previous post.

Nonetheless, over the last couple weeks, we’ve seen a large reversal in equities with no news in the bond markets. Most growth stocks are up ~20% off their lows and the Nasdaq has rallied 7% from March lows, and is now at all-time highs. This is despite the 10 Year Treasury yield stabilizing around 1.6% (which is still 3x higher than the Aug 2020 low).

One interesting theory Ark posits here for this is that many investors overlooked the SLR requirements the Fed was planning to change for banks at the end of Q1 2021. From April 1st, the Fed removed the temporary relief on capital requirements for Banks, which had allowed them to exclude their holdings of US Treasuries, from their reserve requirements. (The theory is that by allowing banks to exclude Treasuries from their reserve requirements, they would have more cash to lend out and thereby kickstart the US economy). As this waiver was coming to an end, banks were forced to sell their Treasury holdings to meet the stricter reserve requirements. Since this has come into effect, we’ve seen a pull-back in bond market volatility (and a stabilization in yields). Given the Central Bank has a vested interest in keeping yields low/stable (which such a high debt load), I’d assume this stability is going to be enforced one way or another and therefore, I think we’ve likely seen the end of the yield saga for now.


In sum, I have a lot to be bullish about in this market. I expect to see some scary headline inflation numbers which surpass the Fed’s 2% Target but the reality is that the US economy is heading for a sharp rebound from a terrible 2020. So long as we continuee to see real productivity gains driving economic growth, I’ll ignore the noise and continue to be (levered) long equities.

Reflections on the stock market sell-off

Calling the markets turbulent over the last couple weeks is an understatement. Many new investors have not experienced drawdowns this large and based on the numerous emails/DM’s I have received, this seems to be leaving many bewildered, angry and scared. Instead of writing a specific stock recommendation, this week I’ve taken a step back to think about my high-level views of the market and the lessons I have learned as an investor.

Below are six guiding principles which I have found to be true and below each, how I intend to reflect these in my investment decisions.

Quick Recap: Current Market

The stock market is forward looking. We made new all-time highs during the peak of COVID-19 and now, as the economy shows signs of improvement, the stock market is showing signs of weakness.

The reason for this is because coming out of the pandemic is going to put upward pressure on prices (inflation). The bond markets are reflecting this through higher long-term yields on treasuries (as long-term bonds are sold in anticipation of more inflation). As cash flows and rates start to creep higher, this is resulting in (1) a rotation away from companies that don’t make money into companies that do and (2) is leading to a sell-off in equities, as markets expect an end to the accommodative policies of central banks.

Unfortunately for policy makers, you’re caught between a rock and a hard place. As markets price higher inflation in the future, it makes the cost of current (government) debt more expensive. But if policy makers increase interest rates now (to off-set fears of inflation in the future), it increases the chances that we end up risking the economic recovery we’ve only just started to see signs off.

#1 Productive assets yield the highest returns.

Stocks should form largest % of my invested asset base

Over the long run, productive assets yield the highest returns. Stocks are by their very nature, productive assets, as they are literally pieces of a business. Examples of non-productive assets would be Housing, Bonds and Gold. Over time, stocks have outperformed all these other asset classes. Arguably, some stocks are more productive than others (due to the underlying nature of their business), but short of having your own company, stocks are the easiest entry point to a highly productive asset base for the new investor. Resultingly, I believe stocks are the most efficient means of making long term returns.

Real Returns by Asset Class (ref. Puru Saxena)

#2 Revenue Growth is the biggest driver of Stock Performance

Invest in companies with pricing power

What the single most important driver of the price of a stock? You might think it’s metrics like P/E ratios, Profits or even Cash Flows. In fact, the biggest driver of long run stock performance (1990-2009) is Revenue Growth. Intuitively, if a business cannot sustainably sell its product, then everything else goes out the door.

The companies that have a natural advantage will have pricing power and large Total Addressable Markets (TAM). This is what is considered a “business moat”. Margins and Profits are not important in the short term, as if a business can sell its product (at scale), then there will undoubtedly be ways in which it will be able to monetize this in the future. Meanwhile, multiple compression is just the markets way of reflecting herd behaviors as we swing from optimism to pessimism and should not be a consideration for investment decisions (more on this below).

Sources of Stock Price Performance

#3 The long-term market P/E ratio is ~20x which implies a 5% yield

Assume 20x P/E in long term forecasts/price targets

Despite the media headlines around rising long term rates, the market has actually been positively correlated with rising rates over the last decade. This makes sense if you consider that long term yields rising generally reflect a more optimistic view of the future, and therefore, businesses should be doing better (all else being equal).

10 Year Treasury Yields vs Nasdaq since 2016

But there is something more interesting about this relationship. Even in periods where rates have been declining (such as in late 2019), we have not seen widespread multiple expansion. Or in other words, the market has consistently priced between a 10 to 25x earnings multiple on stocks (periods where it rallied above this such as in 2008 and 2020 were skewed as earnings were based on trailing 12 month averages). Another way to look at P/E ratios is as an earnings yield. A 20x P/E ratio reflects a 1/20 Earnings/Price Yield or in other words, a 5% return. So in other words, investors in the stock market already have an implied earnings yield/discount rate which is factored into investments despite what treasury yields are doing, and it’s around 5% (or a 20x multiple). This is the level I will use to model stock price targets in future blog posts.

S&P TTM P/E Ratio

#4 When inflation becomes a problem, you’ll have time to trade it

Don’t rush into inflation/deflation based trades

I was duped into the inflation trade during the on-set of the pandemic, as Central Banks everywhere, started printing massive amounts of money. My analysis was too simple (even though I was able to make a bit of money on my Gold hedges) and since then, Gold has underperformed the rest of the market.

Gold Spot Price

The reason for this is because a critical part of inflation is the Velocity of Money (that’s a measure of how quickly money is circulating in the economy). This is often neglected and hardest to predict. During the onset of the pandemic, we saw the opposite of inflation (deflation). Why? Because people were not able to spend the money they received from governments. Today, even though much of the US is open, we’re yet to see increasing inflation. Why? Because a large proportion of the money being printed doesn’t end up flowing through to ordinary people (it sits with banks who then recycle this money into treasuries). It is this velocity of money that guides inflation expectations and thats extremely difficult to predict.

M2 Velocity vs Inflation Expectations

The second aspect of inflation is its impact on the stock market. Again, this is a more nuanced relationship, as valuations have actually been pretty supported around a 0-4% inflation range. It’s when inflation starts to break outside of these bounds that valuations start to be negatively impacted. This leaves a wide range for inflation before it starts to creep into stock market performance and make a material impact to your portfolio.

US Inflation Rate vs P/E Ratios

My learning here is that inflation is a bit like the monster under the bed. It’s scary and dramatized but frequently misunderstood. When inflation truly becomes a problem, there will be time to trade it and it will be obvious. Until then, better to ignore the media frenzy around it.

#5 The traditional business has a debt problem

Technological disrupters will prevail in most industries. Old fashioned businesses are value traps

When looking at the inflationary/deflationary effects circulating in the economy, I came across an interesting video by Cathie Wood from Ark Invest. She makes some great points about the worrying levels of corporate debt in the economy. Debt to Equity values continue to remain elevated as many companies have taken the last decade to spend money wastefully (through share buy-backs and dividends). Ultimately, they are in for a hard reckoning here as traditional business models in many industries are due to be challenged by technological breakthroughs.

Some of these breakthroughs that I’m looking at are 3D Printing in Manufacturing, Robotics in Logistics, AI in Insurance and E-commerce. The only solution here is that these incumbants will need to re-structure their balance sheets and reduce prices to manage their debt loads but at the same time, will have their business models disrupted by new entrants who are smarter and more tech savvy.

S&P Large Cap Debt

#6 Don’t fight the Fed

Never take the other side of the Fed in any investment class

This is a common saying in the market. The Federal Reserve is the single biggest buyer of assets in the US economy and has an unlimited amount of resource to solve problems (literally, they can just print more money). If at any point in time in modern US economic history you had bet against the Fed, you would have lost.

Historically, the Fed has been able to respond to liquidity crises with ease. In the past, when yields have increased at a rate which has threatened the Government’s ability to maintain its debt load, the Fed has been able to artificially bring yields lower with remarkable efficiency.

Real Yields vs Federal Debt

The Fed is facing an issue right now with regards to long term treasury yields rising. In fact, the Budget Office estimates that a 1% point increase in yields would cost more than 10x the US annual Defense Budget in interest payments over the next 9 years. I don’t know ultimately how this plays out but with such high stakes and given the historical effectiveness of the Fed in getting what it wants, I expect this to be swiftly dealt with as soon as it becomes a meaningful problem. Indeed the Fed is already sitting on $1.5tn in 1-5 year Treasuries (which could be sold for 10yr + Treasuries to bring long term rates lower).

Federal Debt % GDP
Fed Balance Sheet March 2021


Markets can be extremely volatile and I have found it easy to get caught up in the minutae without taking the time to think about the overall objectives and view that I am trying to reflect. I hope by reading these principles you are encouraged to think through your own view of the markets and the lessons you have learnt so as to have a better game plan to handle swings during the trading day.