Freedom Calls – “Back to reality…” August 2nd, 2021

From the desk of CIO, Simon Fentham-Fletcher


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Is the holiday season over? It feels like it, now that I am back in London.

Yes, things are slower and the streets are not quite full of tourists, but it does feel more vibrant than before.  If I contrast this to Barcelona, where I was shocked at the death of retail in “El Borne”, where it seemed every other shop had closed, and the streets were noticeably empty.  CoVid hurt Barcelona and I think it will be a long time in the healing.  Perhaps that is why the ECB shouts as loudly as it can, “no easing of the sugar for the bond markets”.

US near its bottom? – Part II

Good news is not always taken as good, especially living in my world of expectations of data, and how far up or down they are from “consensus”.  Take the recent US 2Q GDP at an annualized 6.5%.  This is seriously strong and yet disappointed the consensus which wanted or had expected 8%.  Yet the shortfall should not have been greatly surprising as the US’s economic data has been consistently disappointing expectations since early May – and that disappointment continued right to the end of July. 

There were three notable shortfalls in these US GDP results.  In the end, the most significant is that private gross fixed investment rose only an annualized 3%, with non-residential investment at 8% (vs 13% in 1Q) and residential investment falling.  It is this shortfall in investment spending which could prove most damaging for US profits in the coming year. 

Lacklustre investment, a fall in inventories and a widening trade deficit were enough to offset an c12% annualized rise in personal consumption. That increase is obviously affected by base effect and, just as I say with inflation, the base effect will wane so too the massive surge in relative spending will wane.

In nominal terms, the result was less disappointing, with GDP rising a nominal +11% annualized (6% in 1Q), and with GDP ex-inventory (called “final sales of domestic product”) up +14%.  Those are some numbers and though I understand how we always want more, sometimes we should be happy with an in-field run and not always expect a home run.

This data gives yet more power to Biden’s stimulus measures, which promote investment and infrastructure over the recent CoVid relief packages that were all consumption focused.  Though let us be honest here, so much of that consumption relief went into savings and into Robinhood and other brokerage accounts that it became an “equity” relief package.

I almost (perish the thought) sound like a democrat here, and not the social conscience republican that probably best fits.

Chinese bubble bursting or being blown up from inside?

As you will read below, we had a lacklustre month on the portfolios principally because we are overweight Asia.  I am not doubting my call here, but I have been wondering with all that China has been doing recently whether it cared about equity prices at all, instead intent on destroying equity value to show that the CCP was still the boss.

It really does seem that China is quite determinedly and deliberately damaging itself unnecessarily.  Taken together, Hong Kong and Shenzhen are quite plausibly the crucible of the next phase of the global economy’s growth, as they combine Hong Kong’s global financial reach with Shenzhen’s commercial élan and technological ambition.  Together, in 2020 these economies had a combined GDP of almost US$750bn. Between 2005 and 2018 this combination had managed a CAGR of 8.7% in US dollar terms.