Takeaways from our investment outlook: Legacy of the lockdowns
In our outlook, we seek to help investors navigate the next phases of the pandemic, its legacy, and the ensuing economic recovery. We also consider how solutions to the climate crisis can be found at the same time as the world tackles the social and econo
In our outlook, we seek to help investors navigate the next phases of the pandemic, its legacy, and the ensuing economic recovery. We also consider how solutions to the climate crisis can be found at the same time as the world tackles the social and economic problems laid bare by the pandemic.
Here we summarise the big picture for investors at the end
of 2020. This constitutes the starting point for our 2021 investment outlook.
Since the 2008 global financial crisis, the global economy has been mired in anaemic growth and weak demand, tempered by consistently rising asset prices.
In 2020 the global economy faced a crisis of unprecedented magnitude (see Exhibit 1 below) after the pandemic lockdowns. After a contraction of 4.4% in 2020 the IMF forecasts global growth of 5.4% in 2021. Overall, this would leave 2021 GDP some 6.5% lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperilling the significant progress made in reducing extreme poverty over the last 30 years. Countering inequality is a key challenge to be met in 2021 and beyond.
Exhibit 1: Largest decline since WWII – graph shows change in world gross domestic product (inflation-adjusted, in %)
Source: BNP Paribas Asset Management, as of 26/11/2020
Under the best-case scenario, one or more vaccines for COVID-19 become widely available by the second half of 2021. Otherwise, the disease remains a longer-term threat requiring us to ‘live with’ the virus – repeated lockdowns will not be a sustainable long-term strategy.
In 2020, advanced economies loosened the monetary and fiscal reins most spectacularly. Debt-to-GDP ratios soared, rising for many countries by more than they did in the years after the Global Financial Crisis (GFC). Major central banks have largely financed the increase in budget deficits, monetising an expanding national debt, much as Japan has done.
One way to understand the weakness in aggregate economic demand is to study real interest rates (the ‘price’ of money in the economy). In 2006, the real yield of the 10-year inflation-protected US Treasury bond was between 2% and 3%. Since 2010, its yield has mostly been below 1%, including a spell in negative territory both in 2012 and again in 2020. Negative real yields are now common to the G3 economies (see Exhibit 2 below) and beyond. In 60% of the global economy — including 97% of advanced economies — central banks have pushed policy interest rates to below 1%. In one-fifth of the world, policy rates are negative.
Exhibit 2: Real yields are now negative for G3 sovereign debt – graph shows changes in real yields for US, Japanese and eurozone government debt between 1997 and 16/11/2020.
Source: BNP Paribas Asset Management, as of 26/11/2020
In 2020, these meagre interest rates, along with
cheap, low-risk liquidity from central banks, led asset prices higher. Risk
premia for risky assets shrank. Companies whose revenues have plummeted —
cruise lines, airlines, cinemas — were able to borrow money in 2020 to survive.
Investors had few higher-yield options. Will central banks continue to supply
such liquidity in 2021?
And how is all this debt to be paid for? The
appropriate historical parallel is perhaps the post-World War II period, when
central banks capped bond yields at levels well below the trend GDP growth rate
to gradually reduce the national debt as a proportion of GDP.
Alternatively, instead of financial repression
and inflation (as post WW2), the extraordinarily low real interest rates we
have seen over the past decade could help achieve fiscal sustainability. It
would, however, be imprudent to count on it. No policymaker should expect real
interest rates to remain persistently below the growth rate of real GDP.
Indeed, forecast imbalances in planned global savings and investment could
drive real interest rates higher (ageing societies save a lot, but old
societies do not).
Another risk is that improved real trend growth
does not come to the rescue. Lower global growth after the pandemic accompanied
by inadequate fiscal stimulus would leave marginal sections of the economy
vulnerable to collapse. Such an outcome would test the paradigm of modest
growth, low inflation and supportive central bank policy that has supported
asset prices since 2008.
Today we face three interconnected crises – health, economic
and climate. The instability provoked by the pandemic presents a window of
opportunity to pivot in a new direction. Long-term environmental viability,
equality and inclusive growth are essential pre-conditions to a sustainable
economy. By taking a holistic, systemic, long-term view, we are less likely to
be surprised by crises and better able to manage them.
For in-depth insights into what’s next for the global economy and markets, read our 2021 investment outlook, ‘Legacy of the lockdowns’
Any views expressed
here are those of the author as of the date of publication, are based on
available information, and are subject to change without notice. Individual
portfolio management teams may hold different views and may take different
investment decisions for different clients. The views expressed in this podcast
do not in any way constitute investment advice.
The value of
investments and the income they generate may go down as well as up and it is
possible that investors will not recover their initial outlay. Past performance
is no guarantee for future returns.
emerging markets, or specialised or restricted sectors is likely to be subject
to a higher-than-average volatility due to a high degree of concentration,
greater uncertainty because less information is available, there is less
liquidity or due to greater sensitivity to changes in market conditions
(social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
“Remember that you must behave as at a banquet. Is anything brought round to you? Put out your hand and take a moderate share. Does it pass by you? Do not stop it. Is it not yet come? Do not yearn in desire toward it, but wait till it reaches you. So with regard to children, wife, office, riches; and you will some time or other be worthy to feast with the gods. And if you do not so much as take the things which are set before you, but are able even to forego them, then you will not only be worthy to feast with the gods, but to rule with them also. For, by thus doing, Diogenes and Heraclitus, and others like them, deservedly became divine, and were so recognized.”
Fortune cookies are entertaining because they come with a vague statement that can often be interpreted positively. But they are usually not to be taken seriously. This is why I find myself annoyed when I read “fortune cookies” on Twitter that provide vapid advice claiming to make inherently difficult things easy to accomplish.
Since we are approaching the end of the year when many people start thinking about New Year’s resolutions, I thought that I would provide eight (hopefully) higher quality “fortune cookies” of my own that took many years to figure out.
Almost nothing worthwhile can be achieved without considerable effort. If you want something, be prepared to work very hard to get it.
If you hate your job, find a different one or switch to a different career. If you are still young, “retirement” is almost certainly a mistake. Find something that you are good at and enjoy doing and then commit to it wholeheartedly.
Commit to reading 25 pages per day. That is over 9,000 pages per year and will put you at the very top in terms of attainment of wisdom, provided that you read with purpose. While difficult at first, it will get easier in time. Eventually, it will be very difficult to not read on a daily basis. Such days will feel incomplete.
Avoid hatred at all costs. Hatred leads to disaster and harms the person doing the hating more than the target of hatred. Instead of falling into hatred, disassociate from toxic people, especially in cases of lies and deception.
Be kind to others, especially those who through no fault of their own have been dealt a bad hand. But never allow someone to take advantage of your kindness. Provide a helping hand, not a handout, and never facilitate dysfunctional behavior. Cut people out of your life who are only interested in money.
Avoid envy. The people you see on social media who appear to have “perfect lives” almost certainly do not. Many are secretly miserable and hide behind beautiful fictions posted on social media to fool themselves as well as others.
Do not confuse frugality with cheapness. Default to generosity when it makes sense. Being cheap when it comes to health and well-being is stupid, and the same is true for intellectual pursuits. Books distill thousands of hours of the author’s time for the cost of a restaurant meal or less. Never budget for books.
These might be “fortune cookies”, but they could actually make a positive impact even though none are necessarily easy to implement. I can say that all of these concepts have helped me despite taking years or, in some cases decades, to really figure out.
Consoles and Competitionby Ben Thompson, December 12, 2022. This article provides over forty years of history of the video game industry before analyzing the FTC’s attempt to block Microsoft’s acquisition of Activision. As someone who is not familiar with the intricacies of this case, I found the lengthy discussion of the industry’s history very valuable since it provides necessary context. “For the record, I do believe this acquisition demands careful overview, and it’s completely appropriate to insist that Microsoft continue to deliver Activision titles to other platforms, even if it wouldn’t make economic sense to do anything but. It’s increasingly difficult, though, to grasp any sort of coherent theory to the FTC’s antitrust decisions beyond ‘big tech bad’.”(Stratechery)
Sea Change by Howard Marks, December 13, 2022. In this memo, Howard Marks points out that forty years of declining interest rates represented a major tailwind for investors. He likens falling interest rates to a moving walkway in an airport. Just as moving walkways make life easier for weary travelers, falling interest rates act as an assist for investors. However, this secular decline in interest rates appears to be at an end which represents a sea change in the investment landscape. Investors need to be aware that the strategies that worked well over the past forty years may not lead to outperformance in the future. (Oaktree Capital)
The California Effect by Mr. Money Mustache, December 10, 2022. The cost of living is famously high in the San Francisco Bay Area where Mr. Money Mustache recently spent a few days observing the attitudes of people with very different approaches to spending money. The reality is that even in the most expensive regions, spending excessively is always a choice, not an inevitable mandate. “San Francisco professionals live in a place where 25-year-old tech workers enjoy $200,000 starting salaries, yet still have credit card debt and car loans, and they think that is normal.” (Mr. Money Mustache)
The College Essay Is Dead by Stephen Marche, December 6, 2022. Will artificial intelligence kill the college essay? Anyone who has played with ChatGPT, a new AI tool that recently opened to the public, might be asking the question which this article explores. I admit to being a little baffled about the handwringing. After all, when I was in college three decades ago, we took exams using technology no more advanced than blue books and a pen or pencil. AI might help students cheat on work done outside the classroom, but you cannot fake your way through an exam where there is no technology other than paper and a writing implement. (The Atlantic)
Ideas That Changed My Life by Morgan Housel, December 7, 2022. Among other topics, Morgan Housel makes an excellent case for reading. Otherwise, your personal experiences will excessively influence your perception of how the world works. “Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works. People believe what they’ve seen happen exponentially more than what they read about has happened to other people, if they read about other people at all. We’re all biased to our own personal history.”(Collaborative Fund)
Thankfully, Life Is Full of Problems by Lawrence Yeo, December 7, 2022. I was reminded of Viktor Frankl when I read this article. Frankl held that people gain a sense of purpose not through a tensionless state but by struggling and striving toward a personally meaningful goal. Lawrence Yeo makes a similar case. What we must do is to “upgrade” from dealing with meaningless problems to a focus on addressing “heavyweight” problems. (More to That)
The Gift of Timeby Nick Maggiulli, December 13, 2022. Almost everyone thinks about money in terms of goods or services it can buy. But money is really the gift of time: “Because everything I write isn’t really about money, it’s about time. Time with your loved ones. Time to enjoy yourself. Time to live the life you want. In the end, all of your money will be converted back to time anyways. If not now, then later. And if not by you, then by someone else. Possibly after you’re gone.”(Of Dollars and Data)
Be Wary of Imitating High-Status People Who Can Afford to Countersignal by Rob Henderson, December 11, 2022. This article argues that we should avoid emulating people who have achieved status far above ours, and instead look to those who are just somewhat ahead of us. People with very high status can afford to exhibit unusual behavior. For example, a famous author doesn’t need to use Twitter personally to surface his writing because his fans will do this for him. That’s not the case for most authors seeking wider distribution of their work. (Rob Henderson’s Newsletter)
How Neuroscience Confirms the Most Ancient Myths About Music by Ted Gioia, December 12, 2022. Music has a tremendous capacity to influence our lives as listeners, often putting us into flow states conducive to productivity. For example, I often listen to The Dave Brubeck Quartet’s performance at Carnegie Hall in 1963 when I want to get serious work done. For musicians, performing can induce an even deeper flow state, as Ted Gioia describes: “In the midst of an intense performance, the music seemed to be playing itself.” This article on music and neuroscience is part of a book being published in installments on Substack. (The Honest Broker)
Tom Gayner Discusses the Evolution of Markel, December 14, 2022. 56 minutes. This is a wide-ranging interview covering topics including Berkshire Hathaway’s recent investment in Markel, the growth of Markel Ventures in the context of the company’s overall capital allocation strategy, the use of leverage, and how investing during the pandemic was more challenging than the financial crisis. (Boyar Value Group)
The Essays of Warren Buffett, January 20, 2022. 1 hour, 58 minutes. According to Lawrence Cunningham’s newsletter, which you can sign up for here, the sixth edition of his compilation of Warren Buffett’s shareholder letters will be released early next year. I have the first and second editions and highly recommend the book. While all of the letters are available on Berkshire’s website, the compilation is organized by topic and adds significant value. In this podcast, David Senra provides his enthusiastic commentary about what he took away from this book. (Founder’s Podcast)
Master of Precision: Henry Leland Founder of Cadillac, May 31, 2020. 1 hour, 10 minutes. I think Steve Jobs and Henry Leland had much in common in terms of insisting on high quality and viewing their role as craftsmen, paying obsessive attention to details. “There always was and there always will be conflict between Good and Good Enough. In opening up a new business one can count on meeting resistance to a high standard of workmanship. It is easy to get cooperation for mediocre work, but one must sweat blood for a chance to produce a superior product. —Henry Leland”(Founders Podcast)
DoorDash: Looking for Profitable Routes, December 14, 2022. “DoorDash was founded in 2013 by four Stanford students, who saw an opportunity to make it easier for people to get the food they love delivered to them. Today, DoorDash’s three-sided marketplace serves as one of the largest local delivery companies in the world, serving millions of customers and partnering with hundreds of thousands of restaurants across 27 countries, run rating at over $50 billion of gross merchandise value.” (Business Breakdowns)
This is a brief thread on the importance of reading. It isbased on The Use of Letters, a journal entry I wrote early last year. Why would anyone voluntarily limit their understanding of the world to just their own direct experiences?
Checking quotes frequently is counterproductive. There is too much noise in quotes when checked on a daily basis and doing so is likely to make most investors miserable.
Frederick Ferdinand Schafer (August 16, 1839 – July 18, 1927) was a German-born American painter. He was born in Braunschweig, Germany and he emigrated to the United States in 1876, at age 37.
Schafer’s paintings, which mostly depict landscape scenes in California and other western states, are dated between 1873 and 1911. There are many scenes of Yosemite National Park included in a catalog of his paintings. As the weather turns colder, I thought that this scene of an unknown location captures the season quite well.
Here is a description of this painting by Jerome H. Saltzer, Professor of Computer Science Emeritus at the Massachusetts Institute of Technology:
“This painting might be described as luminist in style. Paintings such as this one may be the basis for the suggestion that Schafer’s later work was lighter, but the shortage of dated paintings makes it difficult to confirm that suggestion.”
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The U.S. Food and Drug Administration’s key science advisory panel, the Vaccines and Related Biological Products Advisory Committee, met on Jan. 26, 2023, to chart a path forward for COVID-19 vaccine policy. During the all-day meeting, the 21-member committee discussed an array of weighty issues including the efficacy of existing vaccines, the composition of future vaccine strains and the need to match them to the circulating variants of SARS-CoV-2, the possibility of moving to an annual-shot model, the potential seasonality of the virus and much more.
But the key question at hand, and the only formal question that was voted on, following a proposal from the FDA earlier in the week, had to do with how to simplify the path to getting people vaccinated.
The question put before the committee for a vote was whether to move to one COVID-19 vaccine consisting of a single composition for all people – whether currently vaccinated or not – and away from the current model that includes one formulation given as a primary series and a separate formulation administered as a booster. Importantly, approved formulations could come from any number of vaccine manufacturers, not just those that have currently authorized vaccines.
The U.S. Centers for Disease Control and Prevention currently requires that the primary series of shots, or the first two doses of the vaccine that a patient receives, consist of the first generation of vaccine against the original strain of SARS-CoV-2, known as the “Wuhan” strain of the virus. These shots are given weeks apart, followed months later by a booster shot that was updated in August 2022 to contain a bivalent formulation of vaccine that targets both the original viral strain and newer subvariants of omicron.
The committee’s endorsement simplifies those recommendations. In a 21-to-0 vote, the advisory board recommended fully replacing, or “harmonizing,” the original formulation of the vaccine with a single shot that would consist of – at least for now – the current bivalent vaccine.
In doing so, it has signaled its belief that these new second-generation vaccines are an upgrade over their predecessors in protecting from infection and severe illness at this point in the pandemic.
Will the single shot remain a mixed-strain, or bivalent, vaccine?
For now, the single shot will be bivalent. But this may not always be the case.
There was a general agreement that the current bivalent shot is preferable to the original vaccine targeted at the Wuhan strain of the virus by itself. But committee members debated whether that original Wuhan vaccine strain should continue to be a part of updated vaccine formulations.
There is no current data comparing a monovalent, or single-strain, vaccine that targets omicron and its subvariants against the current bivalent shot. As a result, it’s unclear how a monovalent shot against recent omicron subvariants would perform in comparison to the bivalent version.
What is immune imprinting, and how does it apply here?
A main reason for the debate over monovalent versus bivalent – or, for that matter, trivalent or tetravalent – vaccines is a lack of understanding around how best to sharpen an immune response to a slightly altered threat. This has long been a debate surrounding annual influenza vaccination strategies, where studies have shown that the immune “memory” that forms in response to a prior vaccine can actively repress a robust immune response to the next.
While a significant portion of the discussion focused on the mRNA vaccine platform used by both Pfizer and Moderna, several committee members emphasized the need for new technologies that could provide broader immunological protection. Dr. Pamela McInnes, a now-retired longtime deputy director of the National Center for Advancing Translational Sciences, highlighted this point, saying, “I would make a plea for ongoing research on broader protection, maybe different platforms, maybe a different approach.”
By simplifying the vaccine schedule to include only a single vaccine formulation, the committee reasoned, it might be easier for competing vaccination platforms to break into the market. In other words, newer vaccine contenders would not have to rely on patients’ having already received their primary series before using their products. Companies seemed ready to take advantage of that future flexibility, with researchers from Pfizer, Moderna and Novavax all revealing their companies’ exploration of a hybrid COVID-19 and flu shot at various stages of clinical trials and testing.
Would the single shot resemble flu vaccine development?
Not necessarily. Currently, the influenza vaccine is decided by committee through the World Health Organization. Because of its seasonal nature, the strains to be included in each season’s flu vaccine strain for the Southern and Northern hemispheres, with their opposing winters, are selected independently. The Northern Hemisphere’s selection is made in February for the following winter based on a vast network of flu monitoring stations around the globe.
Although there was broad consensus among panelists that the shots against SARS-CoV-2 should be updated regularly to more closely match the most current circulating viral strain, there was less agreement on how frequent that would be.
For instance, rapidly mutating strains of the virus in both summer and winter surges might necessitate two updated shots a year instead of just one. As Dr. Eric Rubin, an infectious disease expert from the Harvard T.H. Chan School of Public Health, noted, “It’s hard to say that it’s going to be annual at this point.”
Matthew Woodruff receives funding from the National Institute of Health and the US Department of Defense to support his academic research.
Fukuoka, Japan—Researchers in Japan have uncovered the mechanism for how the measles virus can cause subacute sclerosing panencephalitis, or SSPE, a rare but fatal neurological disorder that can occur several years after a measles infection.
Fukuoka, Japan—Researchers in Japan have uncovered the mechanism for how the measles virus can cause subacute sclerosing panencephalitis, or SSPE, a rare but fatal neurological disorder that can occur several years after a measles infection.
Although the normal form of the measles virus cannot infect the nervous system, the team found that viruses that persist in the body can develop mutations in a key protein that controls how they infect cells. The mutated proteins can interact with its normal form, making it capable of infecting the brain. Their findings were reported in the journal Science Advances.
If you are of a certain age, you may have gotten the measles as a child. Many born after the 1970s have never gotten it thanks to vaccines. The condition is caused by the virus of the same name, which is one of the most contagious pathogens to this day. The World Health Organization estimates that nearly nine million people worldwide were infected with measles in 2021, with the number of deaths reaching 128,000.
“Despite its availability, the recent COVID-19 pandemic has set back vaccinations, especially in the Global South,” explains Yuta Shirogane, Assistant Professor at Kyushu University’s Faculty of Medical Sciences. “SSPE is a rare but fatal condition caused by the measles virus. However, the normal measles virus does not have the ability to propagate in the brain, and thus it is unclear how it causes encephalitis.”
A virus infects cells through a series of proteins that protrude from its surface. Usually, one protein will first facilitate the virus to attach to a cell’s surface, then another surface protein will cause a reaction that lets the virus into the cell, leading to an infection. Therefore, what a virus can or cannot infect can depend heavily on the type of cell.
“Usually, the measles virus only infects your immune and epithelial cells, causing the fever and rash,” continues Shirogane. “Therefore, in patients with SSPE, the measles virus must have remained in their body and mutated, then gained the ability to infect nerve cells. RNA viruses like measles mutate and evolve at very high rates, but the mechanism of how it evolved to infect neurons has been a mystery.”
The key player in allowing the measles virus to infect a cell is a protein called fusion protein, or F protein. In the team’s previous studies, they showed that certain mutations in the F protein puts it in a ‘hyperfusongenic’ state, allowing it to fuse onto neural synapses and infect the brain.
In their latest study, the team analyzed the genome of the measles virus from SSPE patients and found that various mutations had accumulated in their F protein. Interestingly, certain mutations would increase infection activity while others actually decreased it.
“This was surprising to see, but we found an explanation. When the virus infects a neuron, it infects it through ‘en bloc transmission,’ where multiple copies of the viral genome enter the cell,” continues Shirogane. “In this case, the genome encoding the mutant F protein is transmitted simultaneously with the genome of the normal F protein, and both proteins are likely to coexist in the infected cell.”
Based on this hypothesis, the team analyzed the fusion activity of mutant F proteins when normal F proteins were present. Their results showed that fusion activity of a mutant F protein is suppressed due to interference from the normal F proteins, but that interference is overcome by the accumulation of mutations in the F protein.
In another case, the team found that a different set of mutations in the F protein results in a completely opposite result: a reduction in fusion activity. However, to their surprise, this mutation can actually cooperate with normal F proteins to increase fusion activity. Thus, even mutant F proteins that appear to be unable to infect neurons can still infect the brain.
“It is almost counter to the ‘survival of the fittest’ model for viral propagation. In fact, this phenomenon where mutations interfere and/or cooperate with each other is called ‘Sociovirology.’ It’s still a new concept, but viruses have been observed to interact with each other like a group. It’s an exciting prospect” explains Shirogane.
The team hopes that their results will help develop therapeutics for SSPE, as well as elucidate the evolutionary mechanisms common to viruses that have similar infection mechanisms to measles such as novel coronaviruses and herpesviruses.
“There are many mysteries in the mechanisms by which viruses cause diseases. Since I was a medical student, I was interested in how the measles virus caused SSPE. I am happy that we were able to elucidate the mechanism of this disease,” concludes Shirogane.
For more information about this research, see “Collective fusion activity determines neurotropism of an en bloc transmitted enveloped virus” Yuta Shirogane, Hidetaka Harada, Yuichi Hirai, Ryuichi Takemoto, Tateki Suzuki, Takao Hashiguchi, Yusuke Yanagi, https://doi.org/10.1126/sciadv.adf3731
About Kyushu University
Kyushu University is one of Japan’s leading research-oriented institutes of higher education since its founding in 1911. Home to around 19,000 students and 8,000 faculty and staff, Kyushu U’s world-class research centers cover a wide range of study areas and research fields, from the humanities and arts to engineering and medical sciences. Its multiple campuses—including the largest in Japan—are located around Fukuoka City, a coastal metropolis on the southwestern Japanese island of Kyushu that is frequently ranked among the world’s most livable cities and historically known as a gateway to Asia.
Method of Research
Subject of Research
Collective Fusion Activity Determines Neurotropism of an en Bloc Transmitted Enveloped Virus