Curveballs and Peak Christmas ??????

Of course the issue with going early on Christmas (tree up 1st Dec) is that by this time there's a very real chance of being absolutely "over it" with the opening chords of jingle bells going down like a shot of orange juice after brushing your teeth. I'm not quite there yet but have had to dial back on the Christmas Spotify playlists for a bit, we'll bring them back christmas eve.

On the other hand the Snowman theatre production has been a huge highlight with the boys and quite a lovely family moment. My falsetto singing voice is not what anyone needs to hear but it's hard to resist "We're walking in the aiiiiir .... we're floating in the moooonlit skyy". Hearing little Sacha singing that in bed when he wakes up in the morning has been quite wonderful!

We've been doing that custom advent calendar thing where you put a little surprise in a numbered pocket each day, well I say we but Mrs M has taken on all the considerable work associated with that although I managed to score some mini gingerbread men from a biscuit popup in the office lobby so that was a win. Some job keeping that going the whole month, if anyone out there's doing it do share ideas!

Curveballs

The only thing I'm more over than Christmas songs is 2025 outlooks but helpfully a number of teams seem to have pivoted to offering "Curveball" thought pieces covering a range of off-consensus ideas. I actually quite like this as a patchwork of scenarios, some bad, some good, some weird is I think often more helpful than a single view of the world. Jim Reid's team at Deutsche have put one out as have the team at Absolute Strategy although neither is available publicly. We had a good discussion of some of these in the team today.

Core ideas include things like: another boom year for equities like the late 90's, a peace dividend from a grand bargain with China or peace in Ukraine and even unexpectedly strong growth in Europe. On the downside a resurgence in inflation, central bank rate rises, geopolitics, a bursting AI bubble and the return of the bond vigilantes.

Markets mumble

The Fed's expected rate cut plus accompanying commentary which reduced expectations for cuts next year put the cat amongst the proverbial pigeons yesterday. Stocks were down a couple percent, the dollar up and rates up.

All stock markets gave up a decent chunk of gains, but the US remains leading with a huge gap between US returns (red below) and non-US (purple below).

10-year rates are UP, with ten year gilts at their highest levels this cycle around 4.6%

Ideas that stuck - 2024 edition

How many ideas are you exposed to in a year? Dozens? Hundreds, maybe a thousand? but how many really stick once the presentation is closed or the call is over.

In the year dominated by US exceptionalism, booming markets, interest rate cuts and no recession, here's what really stuck for me:

1. We're not early or late cycle but post-cycle.

The Compound and Friends with Dr David Kelly (web | apple)

“We aren’t early or late cycle we’re post-cycle". Post WWII recessions used to occur every 6-7 years on average but now they don't - haven't really seen a recession since 2008. Could be driven by the shift from a traditionally manufacturing driven economy that is hit by the ebb and flow of inventory cycles to more of a services and intangible economy.

2. Valuation multiples have lost relevance

Mauboussin paper [link]

tl;dr "Multiples have lost informativeness because of how accounting works and the nature of investment being more intangible. Earnings are less informative than they used to be."

Multiples have lost relevance because of the widening gulf between earnings and what they are trying to reflect.

Adjacent idea - the Present Value of Growth Opportunities - piece on shareholder return including the concept of Present Value of Growth Opportunities

3. the Deep challenge

The global challenges of our time are trying to advance prosperity for billions of folks around the world while also trying to stay within the physical boundaries of our planet. The DEEP challenge is the fact that the prior century of thinkers and policy makers didn't face these challenges so concepts and institutions aren't helpful. Says Kate Raworth on the long now podcast.

4. Stock market has got less not more efficient

Cliff Asness (link)

He offers three explanations -

1. Indexing broke the market
2. Blame low interest rates
3. We have the effect of technology backward (speed doesn't equal accuracy) - in his view the biggest one

5. Tennis lessons from the Fed (link to video)

This Roger Federer Dartmouth speech is a wonderful watch and just a real pleasure to listen to with some very deep life lessons thrown in! A recommend.

One of the striking snippets from it which has done all the rounds on social media is this stat that out of 1,500 professional tennis matches Federer won close to 80% of matches, but just 54% of points within those matches. The stats for the stock market being up on any given day vs in any given year are similar. Some important lessons flow from that. Taking each point serious in the moment but then moving straight on. But have a listen as Roger says it best.

6. Markets put a long term multiple on a short-term surplus

Modest Proposal with Patrick O'Shaughnessy (apple | web)

One thing the market gets wrong is the market routinely puts a long term multiple on a short term surplus that has materialised when increased demand meets inelastic supply . But not a sustainable position , causes noise in market pricing . Prices a temporary surplus. Saw it in commodities in mid-2000s, saw it during Covid. Maybe seeing now in chips and in power consumption. Might be right on growth rate over 2-3 years, but not permanent but gets priced

US vs rest of world was thought of as a cyclical wave but that’s being challenged . “We were all brought up to be mean reversionists” US big tech a little over long term average valuation pricing but not instantly obvious that people are losing their minds.

7. Be more precise about responsible investing

(Alex Edmans | WEF) [link]

• "In order for responsible investing to have meaning, we must be clear about its objectives.
• Some of its objectives are in harmony, others are in conflict – leading to trade-offs between them."

(chaser - Tom Gosling on how universal owners can use modest objectives to achieve more. (link))

8. “The enemy of knowledge is not ignorance it’s the illusion of knowledge . The fallacious belief that you know , which stops you inquiring “ - Howard Marks

"Don’t just be contrarian for the sake of going against consensus . Needs to be a deeper thinking process than that . Why is our view different . What does the consensus have wrong , how could this be exposed." Investors should seek to "take the temperature of the market".

Because this list is never complete without a Howard Marks quote or two.

9. Panels are rubbish (and how they could be better) - Alison Taylor on Linkedin

Fix them by thinking deeper about who should be on the panel, making it more coherent, and working together to uncover the story to be told while entertaining the audience.

Grab bag

the economist ranks Spain as the most successful economy of the year- which I was not expecting. An interesting combination of growth, a strong stock market, low inflation and falling unemployment that seems to owe a decent amount to tourism but is certainly an interesting counterpoint to the usual gloom associated with Europe.

Digging through prior editions of the newsletter to find all the above ideas gave me a good opportunity to resurface a few interesting charts and datapoints that I enjoyed this year.

Where the castles are at and Ray Dalio is a Swiftie - Happy Christmas!