Research and Writing

As an asset manager, we need 1) products that people want 2) those products to perform well. Both things require us to have a point of view on what the world will look like tomorrow, and what that will mean for investors.

Easier said than done! There is no playbook for how to do this, and obviously it requires a healthy dollop of both art and science. One thing we do to help us divine the future is we study the past. While the world we live in changes rapidly, it is still operated by human beings, and human beings don’t really change. So history provides clues on how humans are likely to react to different stimuli.

Over the course of the Roaring 1920s, the top marginal tax rate in the US was cut from 73% to 24%, while the estate tax was capped at 20% and cap gains were taxed at 12.5%. Unsurprisingly, inequality - both wealth and income - exploded. By 1929, the top 1% earned 24% of the income and controlled 45% of the wealth.

What happened next isn’t much of a surprise: populism. Our belief is that the primary goal of most politicians is to get re-elected and they will behave accordingly. In normal times, the best way to get re-elected is with money, and so politicians pander to their funding sources. However, once populism reaches a certain scale, this flips - it becomes impossible to get re-elected without pandering to the masses, and so you see even previously conservative politicians suddenly supporting redistributive policies. This has happened again and again in history.

The Great Depression lit the fuse and by the mid 1930s the top marginal tax rate was back up to 79%, the estate tax was capped at 70%, and most cap gains were taxed as income. Did inequality collapse? It did. How much was because of the tax code versus WWII? Impossible to say and completely irrelevant. The key formula is low tax rates relative to history + a triggering populism event = jacking up of tax rates.

Income and wealth inequality today is now approaching the levels last seen in the 1920s. The top 1% control about 20% of the income and about a third of the wealth. Whether the fuse has been lit or not is only a question of degree at this point. It is clear that persistently-rising cost of living has helped fuel the rise of populist, redistributive candidates and policy proposals. AI-related job losses, should they materialize, have the potential to add more gasoline. Putting it all together, we think tax rates on the type of folks we work with are likely at secular lows, and unlikely to stay there for very long.

As I said above, we need products that perform well, and “perform well” is an after-tax concept. Many investment strategies become DOA in an environment like the one we had in 1935. Sorting through that now - before it is clearly too late - is a core part of what it means today to skate to where the puck is going.

Obviously South Korea and Taiwan jump off the page - they are dominated by a small number of large semiconductor companies, so it’s not a surprise they have ripped. Indonesia sticks out at the other end, a comedy of errors that represents the platonic ideal of an EM equity market gone wrong.

What is most surprising though is the US. What makes it so surprising is that the US has been exactly in the middle, 25th of the 50 countries we track, despite the tailwind of a historic retail feeding frenzy. Seven of the ten most active retail trading days of all time happened in June. The flood of activity has gotten particularly wacky when there is a dip to buy. The chart below shows the difference in the size of retail equity buying on down days versus up:

That chart shows equity purchases, but the real gangsters spice it up by using options to get leverage. June was far and away the most active retail traders have ever been in options markets, and half of those options expired the same day - meaning they were bets that the stock market was going up in the next few hours.

We remain neutral weight on the US, as the forces of speculation and excess liquidity continue to overwhelm the appalling valuation picture. However, we are watching these flows closely for signs of exhaustion, and are ready to act.

Or take Alexander Fleming. That guy ran his lab with the same hygiene standards my son uses to run his bedroom. He came back from vacation to see that mold had invaded one of his bacteria experiments…and wiped them out. Ta-da, penicillin. This accident saved a couple hundred million lives and got him knighted.

While obviously less important than those examples, we’ve got another potential case of accidental brilliance going on as we speak. In Feb of 2025, the US announced a Section 232 investigation into copper - basically, investigating the merits of tariffs on copper for national security reasons. Since then, there have been a dizzying number of announcements, proclamations, and tweets - many self-contradicting - creating chaos in the market as everyone fruitlessly tries to figure out where the tariffs will ultimately land.

Put yourself in the shoes of someone who imports copper as a critical input to your business. Copper is cheap to move, cheap to store. Your cost of capital is low. All-in, adding to your inventories is a drop in the bucket compared to what tariffs could cost you. Why wouldn’t you just stockpile it?

Stockpile it they have. As this saga has dragged and dragged with no clear resolution in sight, the stockpile has grown and grown. The chart below shows the picture. We now have coverage for roughly 9 months of imports if supply chains get disrupted:

In other words, we now (in some sense) have a US copper strategic reserve! Brilliant!

We’ve shifted from a world of positive-sum global trade arrangements to one of zero-sum trade protectionism. In that world, commodity stockpiles are prudent. While this one is…unique…in its implementation, we think it is just one of many more stockpiles to come across countries and across commodities, providing another tailwind to the asset class in portfolios with longer time horizons.

1. Warren Buffett famously never participated in IPOs, with his logic being that the people who know the company best are also the ones who get to pick the timing of the transaction.

2. Warren’s folksy wisdom holds up extremely well empirically (though all but 2 made money on the first day):

3. I’m not going to short SpaceX because I like being able to buy food for my family. I’m not going to buy it because they are burning cash faster than I could with a can of gasoline and a blowtorch. It’s ok to sit one out!

The SpaceX IPO made Elon Musk the world’s first trillionaire. This prompted many a joke about how being a trillionaire is nothing special, Zimbabwe minted millions of trillionaires in the 2000s during their hyperinflation.

Obviously the US is not Zimbabwe. Still, it’s good fodder for a thought experiment. Why do we say the Zimbabwe Dollar fell by 99.something percent (where “something” is a long string of 9s) against the USD? Why don’t we say the USD rallied by a gazillion percent? It’s just an exchange rate - who can say whether one side fell or the other side rallied?

The answer is you need a fixed third reference point. The price of bread is a good one, and the “exchange rate” between bread and USD didn’t change much during that period while the exchange rate between bread and the Zimbabwe Dollar changed a lot. So there’s your answer.

If you start the clock at Jan 1, 2000 and look at what are traditionally thought of as exchange rates, you might say the USD traded in a pretty narrow range against major global currencies. It’s down some against the Euro and Yuan, up some against the Pound and Yen. You could be forgiven for saying that the USD hasn’t changed value much.

But if you look at other reference points - other “exchange rates” - such as goods, services, and financial assets, the picture tells a different story. The “Multiple” column below shows how much the price of each thing in USD has changed since the start of the century.

This century the USD lost half it’s value when compared to a loaf of bread, and against everything else on the table it is worse. A college education, health insurance, and a share of Exxon have all maintained a similar exchange rate versus each other, and all have appreciated 3-4x vs the dollar - which again, is pretty flat against other global currencies. Fiat money is melting in front of our eyes. Sorry Elon, but a trillion bucks isn’t worth what it used to be.

But what is it worth? For that, we need another point of reference. When John Rockefeller became the first billionaire in 1916, his wealth was equal to about ~3% of US GDP. Musk’s wealth…is about 3% of US GDP. The exchange rate between “the richest man in the world” and “the world’s largest economy” has barely changed over the last 100 years!

Despite that inevitable outcome, the wisdom of the old gamblers had a lot more value than just supplying Kenny Rogers with his lyrics. I often think back to old poker adages when pondering over decisions at Avos. One such adage is “money you don’t lose still buys groceries.” The point is that you make money in the long run not only by scooping big pots, but also by losing the least amount possible when you lose.

For most investors, the biggest source of losing - by far - is taxes. So losing less to taxes means you can buy more groceries. But for some unfathomable reason, the tax code is written to punish diversification. For example, the US government taxes you more for lending them money than for holding equities. That leaves you with the choice of having a more diversified portfolio and paying more in taxes, or paying less in taxes and taking the risk of all equities. We have our own way of balancing those considerations in our client portfolios, but reasonable people can certainly disagree.

Right now we are seeing a very strong trend towards wanting more diversification…but trying to do it without paying heavy taxes. This trend makes perfect sense to us. In our investment systems that power our equity ETF, 29 of the 38 countries we trade have negative long-term value signals. Or put more plainly, for most of the world’s equity markets we expect the next 10 years to be worse than average. The flipside of that observation is that diversification is likely to be more useful than average over the next 10 years.

A strong demand signal from investors is, in turn, leading to an explosion in tax-advantaged products. Our 351 exchange ETF is one example, but there are many others, such as long-short equity strategies, PPLI, and exchange funds. As we look forward, we think this trend is likely to continue to pick up steam, and we plan on participating. So stay tuned. And in the interim, if you want help thinking about how to get more diversification in a tax-advantaged way, don’t hesitate to reach out for a chat.

In financial markets we don’t get many unsolved mysteries. Many, many things are surprising and confusing in the moment, but almost all of them can be unraveled in the post-mortem. There is too much data and transparency (at least to regulators) for big mysteries to persist. The Great Depression, the Tech Bubble, Black Friday, the GFC, all of these things were hard to predict but relatively easy to explain after the fact. We don’t have big head-scratchers from 50 years ago.

As I write this on the last day of May, I wonder if markets are in the midst of their D.B. Cooper event.

The closing of the Strait of Hormuz used to be a classic oil analyst thought experiment. How high would oil prices actually go? I’ll set the stage with a quote I enjoyed a few weeks back from Doomberg, a highly-regarded research shop with a specialty in energy:

"Had we been given the events of the past 75 days and asked to wager on front-month Brent crude at $150 per barrel, we would have greedily pledged our homes to take the over. While we wouldn’t be the first to be made homeless by the brutality of the markets, anybody who claims to have correctly predicted how oil prices would unfold is, well, almost certainly lying."

Normal stuff, in the sense that markets are surprising. So let’s do what we always do and look at what the data tells us is keeping the lid on prices. SPR releases? Sure that helps some. Demand destruction? Yeah, there is some, though even the highest credible estimates don’t get you anywhere close to bringing the market in balance. And then there is this chart:

Whoa. Depending on where you want to draw the starting point, that’s a 3-4 million barrel a day drop in imports. To put that in perspective, that is as much oil as Germany, Spain, and Italy import…combined. All economic activity - and really all of modern civilization - is just the translation of energy from one form to another. That much missing energy should leave a mark. Let’s go back to the data.

Is the Chinese economy collapsing? No.

Have visible Chinese oil inventories been collapsing? They’ve fallen a bit lately, but on net they are up since the beginning of this conflict. So no.

Have they stopped exporting refined products (gasoline, jet fuel, diesel)? No.

Have they stopped manufacturing petrochemicals? No.

So how are they doing this? A lot of ink has been spilled by analysts with theories that are all over the map. But here’s the thing - many of those theories, if true, would be considered “state secrets” for the Chinese government. That means we may literally never know. It’ll be D.B. Cooper all over again.

While we have also been surprised by how long the status quo has been maintained, we continue to believe that the pressures are building for a resolution - one way or another. This has us paying a bit each day in option premium for a large payout if things radically shift in either direction. While we don’t have an edge in forecasting the results (or lack thereof) of the negotiation, we believe that markets are meaningfully underpricing the probability of big moves regardless of how the war proceeds.