Thank you for this sweeping overview mid-week. Your conclusion that the next decade will be more about honing our trading instinct begs the question, what sectors would make the best tradeable core in this scenario? Would it continue to be technology where volatility provides outsized moves, or commodities where the underlying asset would be a store of value? As a follow-on question, would growth vs value become an obsolete paradigm, replaced perhaps by “cyclical sectors are king” paradigm? Thank you!

Eoin Treacy's view

Thank you for this question which may be of interest to the Collective. For anyone who missed the post on Tuesday, here is a link. 

There are several conflicting themes emerging for the remainder of the 2020s. Debt will be a big one because the secular trend of total return on bonds has been broken. The dalliance with modern monetary theory was the last hurrah for unbridled money printing. From here on out central bankers are likely to be a lot more cautious because an inflationary mindset is a very difficult psychological trend to break.

If I am correct that the Dollar could trend downwards for much of the rest of the decade. That should throw the focus of attention back onto emerging markets. We’re already seeing the beginning of a new trend of investment in ex-China markets. However, the Dollar is currently rebounding because demand for US debt is falling and the Fed needs to create a hospitable environment for bond investors. That implies higher rates from here, at least until growth rolls over and unemployment spikes.

A recession will be met with lower rates and abundant credit, but once the immediate risk passes that assistance will be taken back. That suggests shorter, sharper cycles. I expect a recession in the USA over the coming year. Bonds should unwind medium-term overextensions relative to the trend mean when that happens. That’s why I am willing to continue to hold a currently underwater long bond position.  However, I do not expect the decline in yields to be long lasting. I do expect central banks to be a lot quicker in removing assistance than we have been conditioned to expect over the last 25 years.

The pace of retirements will accelerate over the next decade and the population of older people will swell. That is inevitably going to put pressure on healthcare systems and the public purse. It’s a recipe for generation wars because younger generations will eventually have more voting power than older people. The absence of plans to deal with government deficits are being targeted by bond investors at present as yields rise.  

The end of the Chinese building boom could be a potent source of disinflation in the commodity markets, while the continued desire to achieve net zero emissions should boost demand. That’s a recipe for ranging markets in industrial resources but the peak to trough swings could be very large.

I don’t know about the impact of a less predictable climate, but feeding billions more people when farmers are aging out of the labour force, while the biggest food producing countries are on guilt trips, suggests agricultural commodities will experience some significant bull markets.

The march of technological innovation will proceed but funding for unprofitable ventures will be harder to source in a positive real rate environment. Many of the big promises of the last decade, such as small modular reactors, autonomous vehicles, or app-based customized medicine will likely be delivered in the next decade. Those trends should be persistent despite the wider macro environment being uncertain.

The winners from the evolution of 4G, cloud computing and low interest rates are less likely to be the big winners of the next decade and not least because it is difficult to double your number of customers when you already have billions. Antitrust is a potent remedy to concentration of power and influence in the hands of a small number of companies.