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Forstrong Global Asset Management Inc. Page | 1January 2020

AroundSUPER TRENDS AND TACTICAL VIEWS

2020

The world in

80Minutes

Super Trends Report:Around The World In Eighty Minutes

President and Chief Investment Officer

Tyler Mordy

January 2020

A wager is made in Jules Verne’s acclaimed 1872 novel Around The World In Eighty Days that the protagonist can circle the earth in under that time. Back then, it was a dubious claim. Yet today, that journey is possible in just over two days.

Perhaps a more important innovation relates to advances in the speed of data. Investors now have nearly unlimited information. We live in a hyper-connected world where digital flows are exploding. Knowledge has become the most important resource.

But a dark side has developed. Infinite information should have led to a more informed population. Instead, an unexpected outcome surfaced: digital platforms often serve as echo chambers for already held beliefs, enclosing members in an intellectually impenetrable layer of like-minded peers, biased blogs and partisan views.

How to make sense of it all? A long-running practice at Forstrong has been to take a wide-angle world perspective and rigorously track the most significant “super trends” — those enduring themes that will have the largest impact on global markets.

The annual report is a travelogue of sorts, summarizing the best ideas from our research and travel to several continents. These trends are multi-year in nature, providing crucial frameworks and a roadmap for setting investment strategy.

As always, we will continue to provide investment guidance on our shorter-term and tactical views in our Ask Forstrong series and monthly Portfolio Dashboard (written by the bright mind of my colleague, David Kletz).

Our hope is that Super Trends — about an eighty-minute read — will help investors make sense of the unfolding macro landscape. A special thank you to all our clients for joining us on this journey. It is a distinct privilege to steward your financial futures.

Super Trends

Splintering World Views 1Still Living In The Long Shadow Of the Global Financial Crisis 2How To Train Your Draghi: Do Whatever It Takes3Globalization 2.0: New Patterns Of Connectedness 4The End Of Team America’s Unbreakable Run 5The Inflation Outlook: Eternal Stagnation Of The Spotless Mind 6The Unbearable Lightness Of Asia’s Economic Ascent 7

Page | 4January 2020 Super Trend 1 - Splintering World Views

Splintering

Something is broken with the flow of information today. Not everyone feels it. But the evidence is hard to miss. Financial market participants scramble to react to every twist and turn, every new data point and, lately, every declaration of trade war détente — not to mention living with the ambient terror of Donald Trump’s capricious Twitter feed. Global anxieties are high.

Yet, the most conspicuous part of all of this is the growing divergence of public opinion. Gaps in world views continue to widen.

We begin 2020’s annual Super Trends report on a philosophical note: the world is splintering. On the surface, some of the causality should be well-known. Tensions over wealth inequality and stagnating median incomes have been building for decades and now dominate public discourse. Populism has reared its ugly head. The past year has seen uprisings in Paris, Hong Kong, Cairo, Beirut, Barcelona and Santiago. Clearly, the roots of discontent are deeply entrenched. Yet until more inclusive economic growth emerges (don’t hold your breath), stresses will persist.

But it’s not just a growing gap between the haves and have-nots. Splintering is occurring right across the world. Deeper undercurrents are at work. For example, the online doomster community (for lack of a better term) aggressively gained recruits since 2008’s global financial crisis. Schadenfreudian pundits are their leading prophets, stoking allegiances by warning about potentially overlooked looming disasters. Dozens of

possible dystopian futures dominate their chat rooms. Most surprisingly, however, is not the extremism of their views, but the makeup of their membership: a wide variety of backgrounds — in race, culture and socioeconomic status — firmly subscribe to this worldview. Something must be really wrong.

It is. Technology promised a richer future. People, capital, goods, services and, especially data, flow freely and frictionless in our modern age. We are more connected than ever. Many predicted that this ease of communication and travel would reduce biases and unfounded prejudices. People with very different experiences could no longer ignore each other’s views. And unlimited information should have led to a more informed and objective population. Instead, an unexpected outcome surfaced: different investors are now drawing radically different conclusions from the same data.

In many ways, we are further from each other than ever before.

Technology promised a richer future. People, capital, goods, services and, especially data, flow freely and frictionless in our modern age. We are more connected than ever.

World Views

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How did this happen? This author has pondered deeply on this and arrived at a simple conclusion: it may be as basic as the human desire to belong. Increasingly, people satisfy this third Maslowian need online, a substitute for disappearing forms of human contact and face-to-face interaction. Individuals can now seamlessly plug into a kind of virtual fellowship. Almost immediately, they feel part of something larger.

Yet serious problems can arise. Digital platforms often serve as echo chambers for already held beliefs, enclosing members in an intellectually impenetrable layer of like-minded peers, biased blogs and partisan views. The world can look completely different depending on the type of media consumed or the group that one identifies with.

Of course, it’s a trap. Never leaving one’s world presents a clear and present danger. New realities are not experienced. A potentially rich, textured subject stays one dimensional. And so, one’s world view remains one-sided with a cult-like focus on certain insider voices — deprived of any new evidence.

Behavioural scientists warned us about this. Humans are indeed wired for belonging. The pain of social exclusion is felt in the same place of your brain as physical pain. So exposure to contrary views is not only intellectually uncomfortable, but is actually similar to having someone repeatedly bang your head against a wall (note: don’t try this at home).

No surprise then that individuals become part of social structures that systematically exclude sources of information, surviving on a steady drip-feed of confirming views and an exaggerated confidence in their beliefs.

On a broader level, the results are disastrous. Individuals are siloed into strictly defined groups. Deep divisions are sowed within societies. Inequalities are even amplified between nations.

Crucially, tribal allegiances replace rational analysis. Looking ahead, arbitraging this will be the winning investment strategy.

INVESTMENT IMPLICATIONSTo be sure, the spread of misinformation is nothing new. Basic truths have always been

under assault by catchy conspiracy theories, extremist fundamentalism and, yes, that elusive description of modern media: fake news.

How to solve for all of this? Simple answers do not exist. Global travel can take us to the edge of places: the physical borders of unfamiliar destinations but also the margins of our own beliefs and understandings. This has been particularly stimulating over the last year as our investment team travelled to several continents, exploring the outer limits of international business, technology, science and investing (and, okay, dabbled in some food and cultural sights along the way).

But travel is not enough. Increasingly, wide-angle global perspectives are essential to any investment process: they are fatal to localized biases and radically reduce the risk of falling victim to groupthink. Conversely, rigid ideology, accompanied by the usual investor overconfidence, are the twin enemies of outperformance.

We have been working on our global approach for several decades now (extending back to our founder’s tenure as CIO of Canada’s largest global investment group). By design, investing is an intellectual contact sport at Forstrong … a collegial intersection of ideas, spirited debate and, yes, wrestling with the probability that we have some things wrong. Actively seeking information or views that are different from our own — and updating our beliefs when the evidence suggests we should — is hardwired into our investment process. Neither task is easy. Clients can count on us that this will continue.

G7 GINI COEFFICIENTS - CHANGE SINCE 1995

Page | 6January 2020 Super Trend 2 - The Long Shadow of the Global Financial Crisis

Still Living In The Long Shadow Of The Global Financial Crisis

The rules of investor engagement changed after 2008. Noticeably absent this cycle is animal spirits — that colorful name John Maynard Keynes gave to reckless human confidence. In fact, a total estrangement with any sort of runaway euphoria has marked the times. Instead, most investors have opted to panic early and often. And yet, tranquility has been a signature characteristic of stock markets: every dip has proved to be a buying opportunity.

It wasn’t always this way. Prior to 2008, many market episodes carried investors from a well-founded optimism into collective mania. They repeatedly became enraptured with the stunning possibilities of great wealth. In the 1990s, the stock market became the main channel for indulging this. By the end of the decade, the idea of growing risks or market fragility never penetrated the public consciousness. The times demanded caution but were met with jubilation.

Indeed, once upon a time, investors were bubble-prone. How quaint. Today, euphoria is out and sobriety is in. Yes, there have been pockets of irrational optimism after 2008 (ahem, millennial portfolios consisting of 60% Cannabis, 40% Crypto). But these manias tapped into the zeitgeist of our times — a mistrust of policymakers, disruptive technology and general pessimism. They were perfect echo bubbles born of the ashes of the global financial crisis.

More broadly, safety is the operative word. Equities continue to be shunned. Bonds are the most favored asset class. Regulators have clamped down on the financial sector. Even yoga classes have replaced liquid lunches. The mantra of “greed is good” has become an anachronism.

How best to think about the above shift? Some background is needed here. In 2009, our investment team embarked on an extensive excavation of financial history. The questions at hand were as follows: are there any precedents for periods after major financial crises? What are the common properties among these episodes? And, finally, can we reach back in history and broaden our understanding of these periods?

Turns out, tiny hammers and brushes were insufficient. Deep digging was required, with tools that could tunnel us decades back. Important discoveries were revealed. Crucially, history shows that post-financial crisis periods tend to be protracted affairs. The private sector typically deleverages, inflation stays low and traditional industry is disrupted. Meanwhile,

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public policy fumbles around in search of an elusive “right mix” (i.e. witness the rolling alphabet soup of credit facilities: TARP, QE, LTROs and now forays into fiscal stimulus).

Investor behavior also changes. Scarred by a searing financial crisis, many stay close to shore. Endless fears of another financial meltdown persist. And, every time volatility erupts, capital quickly flows back to perceived safe assets (witness the chronic outperformance of the US assets, the perceived safest house in the global neighborhood since 2009).

The depth and length of these periods after crisis is determined by the percentage of the global economy simultaneously dealing with imbalances. Since 2008, the portion of the global economy facing intense deleveraging and banking system strains soared to levels not seen since the 1930s Great Depression. Importantly, the two major economic regions of the world — the US and Eurozone — faced serious impairment in 2008.

We confirm a decade-long Forstrong theme in this publication: post-crisis periods are fundamentally different. They are typically characterized by muddling growth, interventionist governments, and, importantly, regular recession shrieks but no major 2008-style downturn for some time. To be sure, this is very different from the typical post-war boom and bust cycle. It should be no surprise then that models that worked well in the past have lost their predictive significance.

Few forecast this. Instead, the dominant framework of understanding has been built around a story with a tidy beginning, middle and end. Of course, this continually begs the rather existential question—how long do we have left?

But persistently trying to pinpoint the end assumes there will be a “big one” soon … that markets are always balancing on a crumbly ledge between blue skies and calamity.

If only it were that binary and simple. What if instead a series of smaller “resets” extended the life of this unique cycle? In fact, to date, this has happened. This cycle’s major corrections coincided with significant economic downturns and adjustments, most notably the European crisis in 2011-2012, the commodity collapse and US dollar surge (beginning in mid-2014 and lasting until early-2016) and, recently, 2019’s global stock market sell-off driven by trade tensions.

Indeed, rather than marking a point of departure, 2019’s action extends a long narrative. Markets have just experienced the third soft patch since 2008 where a broad consensus misdiagnosed an imminent global recession.

Smart money should recognize that these near-death episodes — what our investment team has dubbed “born again bull markets” — serve as a kind of system re-boot, providing lower interest rates, better valuations and decreased investor expectations. Ultimately, this reset extends the life of the cycle. The latest episode will be no different. After 3 years of decelerating global GDP (from 3.8% in 2017 to 3.0% in 2019), expect stabilizing and even accelerating global growth in the first half of 2020.

INVESTMENT IMPLICATIONS The biggest fear over the last decade has been a repeat of an economic fallout like 2008’s crisis. Clients and industry colleagues have repeatedly asked our

Since 2008, the portion of the global economy facing intense deleveraging and banking system strains soared to levels not seen since the 1930s Great Depression. Importantly, the two major economic regions of the world — the US and Eurozone — faced serious impairment.

Page | 8January 2020 Super Trend 2 - The Long Shadow of the Global Financial Crisis

team this question. The big surprise is that this will not occur any time soon.

To be sure, some imbalances exist that could lead to another crisis. In the US, the non-financial corporate sector has borrowed aggressively to buy back their own stock. Parts of these credit markets are weak links and accidents will occur down the road. But the corporate sector has not over-invested in capital spending and a sharp reduction will not be required to restore balance. Nor are central bankers eager to hike rates any time soon. The can will be kicked further along.

Imbalances also exist within some of the smaller developed economies (Canada, Australia and parts of Scandinavia). These economies have witnessed substantial housing and credit bubbles that must eventually be unwound. Yet, none of these economies – individually or in aggregate – are major global growth engines (accounting for about one-fifth of global GDP). Most importantly, monetary policymakers are in no rush to raise rates.

Looking back, the big story since 2008 has been the unwinding of private sector excesses in the two major growth regions of the world: the US and Eurozone. The primary reason for disinflation and sluggish growth has been this phenomenon. It has also limited the ability of fresh imbalances to take root.

Deleveraging has now occurred in these regions. The household sector is in much better shape than prior to the crisis. And globally, aggregate imbalances in these economies have now diminished substantially. This also remains true for emerging markets who have built up significant buffers to protect against another 1990s-style balance of payments crisis.

Looking ahead, investor expectations will progressively improve as evidence surfaces that another world crisis is not imminent. Indeed, the next recession will be shallow, garden-variety and will help re-calibrate investor perspectives on the stability of world economies. This will create several multi-year investment opportunities and, yes, bring back into the landscape that familiar sighting: bubbles. Our investment team will be monitoring closely.

BORN AGAIN BULL MARKETS


How To Train Your Draghi: Do Whatever It TakesThe law of diminishing returns usually applies to any production milked with stubborn marketing persistence. Think the vampires of Twilight or the vanishing franchise of Fifty Shades. Not so with How To Train Your Dragon, Dreamworks’ beloved dragon-riding trilogy (full disclosure: the film is a hit with kids and parents alike in the Mordy household).

The series follows it unlikely heroes — a band of misfit Vikings who have learned to coexist with the creatures they once feared — who face progressively thorny challenges, evolving as humans and honing their leadership skills along the way. The result is one of the greatest character arcs in animated film.

A parallel is happening in the world of policymaking: the last several decades have seen a long evolution of central banking. Sure, the setting is not a mythical Viking world. But it may as well be. Central bankers have had to fight soaring inflation, deflation and, lately, the overhang of the largest financial crisis in our lifetimes. Dragons have lurked around every corner.

In this environment, central banker communication and policy tools have had to adapt. Since the formation of the US Federal Reserve in 1914, there have been 16 chairs. Let’s start with our favorite, the late Paul Volcker who served from 1979 – 1987. His persistent assault on inflation — not to mention his towering presence or old school cigar-smoking press conferences — were the beginnings of the cult of the central banker.

The next chair, Alan Greenspan, dubbed the “maestro”, took it to a whole new level. He developed an impenetrable linguistic style for use in public, clearly indulging and enjoying his own type of oracular aloofness. Mystique was his language and inaccessibility his technique.

But stripped of their enigma and protective jargon, these sages of the Fed had a simple mechanism available to them — a single great lever. The options were rather medieval: pull up, pull down or leave untouched … really, just a blunt on-off switch for broad economic growth.

Everything changed after 2008. Yes, the celebrity has survived. Witness the rock-star status of Mark Carney (the George Clooney of central bankers), the groupie-like following of former Reserve Bank of India governor Raghuram Rajan or, recently, the extreme savoir-faire and luminous glow of incoming President of the European Central Bank, Christine Lagarde.

But much is different. The simple lever that once existed has been replaced with a comprehensive dashboard of quantitative easing, negative rates, and a widespread enthusiasm to experiment with other features. The central banker cockpit is now fully equipped.

The most experienced pilot of this new operating environment is Mario Draghi, outgoing President of the ECB. Draghi leaves a potent legacy. His eight-year term included exactly eight rate cuts and zero hikes, leaving the deposit rate burrowed deeply in a subterranean lair of negative 50 basis points. As a parting shot ahead of his October 31, 2019 departure, Draghi reintroduced QE, cranking up the asset purchases to €20 billion per month. The ECB’s balance sheet currently stands at an eye-watering — whisper it — €4.7 trillion, equivalent to a monstrous 38% of the Eurozone’s 2018’s GDP.

Draghi’s confident communication style was, without exaggeration, paradigm shifting. In his fiery response to the possibility of a Eurozone breakup in July 2012, he immortalized the words “do whatever it takes”, promising to protect the Euro. “Believe me,” Draghi huffed, “it will be enough.”

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Page | 10January 2020 Super Trend 3 - How to Train your Draghi

All of this is impressive by several measures. But, rather ironically, where Draghi really took flight is consistently conveying that central bank powers have limits. We completely agree and have written extensively on the inability of QE to produce an automatic inflationary effect (pro tip: the real impediment is lack of private sector credit demand). But with governments refusing to engage the fiscal lever in the post-crisis period (especially in Germany, where even inflation-phobic Jens Weidmann has warned of the “fetishness” of balanced budgets), central banks were forced to carry the entire policy burden.

But Draghi’s main contention was that central bankers should be more collaborative with fiscal authorities. Christine Lagarde now agrees. In her introductory remarks, she said that the ECB “welcomes the Eurogroup's call for differentiated fiscal responses and its readiness to coordinate.”

These ideas are not unique to the Eurozone. Hardly anyone believes that central banks can fix a stalling world economy even with the newly expanded toolkit. Everywhere around the world proposals are being submitted. Ray Dalio is one such leading proponent of some form of blurring between monetary and fiscal policies. “When you have the next downturn, QE isn’t going to be as effective, interest rates aren’t

going to be effective,’’ Dalio recently said. “Then you need fiscal policies and debt monetization … we’re going to enter a new realm.’’ Translation? Direct and permanent injections of cash (often called “helicopter money”) are coming to a theatre near you soon.

Of course, this type of stimulus is hotly debated. History is littered with cautionary tales in which coordination between the central bank and Treasury coffers have led to runaway inflation. But all of that is the future. Falling prices are still the widespread fear. As Christine Lagarde has said, “Deflation is the ogre that must be fought decisively.”

To be sure, we believe these are grubby solutions. Central banks endorsing direct money injections or higher government budget deficits is fraught with risk. But until the deficiency of global demand has been resolved these policies are not unthinkable. And whether we agree with the above prescriptions or not is irrelevant: investors need to anticipate the world as it will be, not as they would like it to be.

INVESTMENT IMPLICATIONS

The third installment of How To Train Your Dragon was released recently and does not disappoint. The story includes many of the same themes as earlier incarnations. Once again, the protagonists must save

But, rather ironically, where Draghi really took flight is consistently conveying that central bank powers have limits.


the day. But there’s a new maturity in the characters that makes the final film a no less visceral but more complex experience.

So it is in central banking. The plot has thickened and odds now seem stacked against global policymakers. Almost no one believes any arrows are left in the quivers. A profound mistrust of governments marks the times.

To be sure, we are aware that central banks have become the lead sponsors of rising asset prices, effectively becoming victims of their own success. In many ways, central banks are creatures of financial markets rather than stewards of the real economy. Is this good? Of course not. Attempts to cushion volatility always end up creating instabilities in the future.

Yet, in a world aflame with populism and existential angst, nothing is more contrarian than declaring that policymakers still have a few scenes left. The pain trade — if you will allow us to extend the movie metaphor way beyond its breaking point — is to learn to ride the dragon, accepting that we may only be in the middle scenes of a long journey.

THE EUROPEAN CENTRAL BANK UNDER MARIO DRAGHI

Page | 12January 2020 Super Trend 4 - Globalization 2.0

Globalization 2.0: New Patterns Of Connectedness

While elegant in theory, globalization has not exactly worked in practice. Initially, benefits were promised for all. Free trade, the invisible grease of globalization, had the support of David Ricardo’s nineteenth-century classical law of comparative advantage: each country could boost its prosperity by specializing and trading with other nations.

But that was superficial treatment of the subject. Ricardo’s lead example (England and Portugal swapping wine for clothing) bears little resemblance to today’s interconnected, data-driven world. And now, a new variable has entered the equation: populism has thrown a giant stick in the spoke of global commerce. International trade is sputtering, and world GDP sank to 2.3% in 2019 — the lowest rate since the global financial crisis of 2008–2009.

How to make sense of all this? First, we must acknowledge a simple fact: globalization has created enormous prosperity. Contrary to popular belief, worldwide living standards are rising faster than at any point in history. And, although much work remains, material improvements have coincided with rapid progress in combating hunger, promoting literacy and extending life. Since the end of World War II, global economic integration was also widely seen as a force for peace. From the EU project, to Bretton Woods institutions, to the removal of capital controls and more frictionless national borders, a more interconnected world meant more international order and cooperation. A smaller world was better.

But globalization has a dark side: distributed gains have been conspicuously asymmetric. Capital owners in the developed world have benefited enormously as corporate profits soared. Millions of manufacturing jobs have been created in developing countries and wages have risen dramatically. Particularly left behind, however, is the middle class in the developed world. Household incomes have been stagnant for years.

Unsurprisingly, a revolt against global integration is under way in the West. With the rise of populism, we have already seen the threat to established international organizations and to relatively free trade — staples of post-war political stability. A view is now emerging that “peak globalization” has arrived. Even the UN is warning that “slobalisation” threatens to undermine progress.

Let’s separate fact from fiction. The main danger is that rules may be re-written, with the world moving from an era of liberal trade and open markets to one of growing protectionism. Such a shift would mark the largest and most dangerous change in economic thought and order in decades. Trump’s border wall has become somewhat of a symbol of this anti-globalization backlash. Build a tall fence and all will be well. Admittedly, it’s brilliant marketing.

If only it were that simple. Populist movements have little to do with trade agreements of the last generation. The US economy was largely open by the Reagan-era of the early 1980s. Agreements since then reduced

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The real reason for populist movements is much simpler: the entrance of emerging markets as major participants in the global economy.

other nation’s barriers far more than America’s. China’s 2001 accession to the World Trade Organization is the leading case in point. “The trade war,” according to a senior Chinese economist we recently met in Beijing “is the most over-studied macro issue today.”

We agree. Tariffs are economically illiterate, prescribing bilateral remedies for more complex problems. Consider that America’s colossal trade deficit reflects imbalances with over 100 countries. In a world with globalized supply chains, slapping tariffs on China simply diverts trade to higher-cost foreign producers — the equivalent of a tax hike on US consumers. What’s more, targeting bilateral trade ignores underlying causality. Linkages among ballooning budget deficits, low savings rates, consumption bubbles and the resulting trade imbalances receive almost no profile in these discussions.

But, outside the current US administration, do any serious policymakers really believe in protectionism? Hardly. Even Chinese President Xi Jinping has warned against tariffs, likening protectionism to “locking oneself in a dark room” to defend from danger but

also depriving the room of “light and air”. Bingo Xi!

The real reason for populist movements is much simpler: the entrance of emerging markets as major participants in the global economy. That’s hard to miss. By far, the biggest macro story of our lifetimes is the emergence of 3 billion new consumers, producers, and savers. What set off this Super Trend was a confluence of three historic events — the dissolution of the Soviet bloc, the opening of China, and the end of the Cold War between communism and capitalism in the developing world. This is not something the US could have single-handedly stopped or could even reasonably aspire to contain.

Like the proverbial Gordian Knot, globalization is almost impossible to untie. World economies and financial markets are now a sprawling and sophisticated web of people, information and capital. The globe is now connected by instantaneous cross-border dissemination of knowledge-based services — a once non-tradable sector. This is a crucial difference and will not be reversed.

Page | 14January 2020 Super Trend 4 - Globalization 2.0

Still, global trade is hardly broken. The loss of industrial tailwinds conceals new patterns of connectedness.

Looking back, the most recent version of globalization was all about industrialization. To understand why this is true, one need not look further than China — a country whose labor force grew by 200 million people in the ten years spanning 2002 through 2011 (for perspective, the American labour force is just 157 million) and a country whose average annual GDP growth rate was 10% during that period. This created a prodigious surge in global demand for industrial goods and raw materials needed for manufacturing facilities, infrastructure and urban housing. Unsurprisingly, commodity countries like Canada boomed in this environment, not to mention the substantial multiplier effect seen in soaring growth and wealth of many other countries.

But all this is history. China’s rapid industrialization era is now over as a consequence of economic rebalancing (as fixed investment declines as a share of GDP, from a very high level), reduced scope for productivity gains (as incomes rise and the pool of cheap labor from rural areas dries up) and demographic changes (as the country’s labor force peaks). Naturally, world trade volumes have been stagnant since 2017. Deleveraging in the US and Eurozone have aggravated these trends, reducing aggregate demand and creating ample spare capacity.

Still, global trade is hardly broken. The loss of industrial tailwinds conceals new patterns of connectedness. The rapid penetration of technology into a wide array of goods and services has increasingly been the most influential trend in global consumption and trade patterns. In fact, a global decline in discretionary spending has not occurred. Rather, consumption is shifting away from physical goods. Many products that were once manufactured offshore and shipped around the world can now be downloaded onto a smartphone or other device. This includes autos and industrial machinery where updates come in the form of software and not hardware upgrades. What’s more, value chains are becoming more regionally concentrated as companies increasingly locate

production near final demand. Compounding all of this is the rise of the sharing economy which reduces overall ownership levels. Retail store fronts are also quickly disappearing. Why pay for bricks and mortar when companies can sell online?

Broadly, global value chains are becoming more knowledge-based. Digital flows of finance, data, video and other forms of communication are surging. But these data exchanges do not always count in the export figures. Comparing global trade to the rapid industrialization phase just experienced is misleading. Many companies and institutions are now making that mistake.

Looking ahead, where might another boom in hard goods come from? A few candidates exist but none have immediate catalysts. The most obvious area would be public infrastructure in developed economies (anyone suffered the indignity of flying through the zoo that is JFK airport?). This would provide a fresh boost for global engineering and industrial machinery.

India is another front runner. A resurgent optimism has surfaced toward the country’s economic prospects. This is ramped up by a belief that Prime Minister Narendra Modi can return India to its high growth path of the mid-2000s, and so trigger Chinese–style transformational development. The reality is more messy. The execution of Modi’s politically-charged reform agenda has been painful to watch. And, the tough question still lingers: can public policy direct the resulting savings build-up from a more stable monetary environment into productive investment rather than public hand-outs. We are not there yet.

INVESTMENT IMPLICATIONSInvestors who have focused on rising protectionism and trade pullbacks miss the bigger picture. Globalization has not reversed, it has merely shifted patterns. Unsurprisingly, traditional leading indicators have lost their predictive abilities. For example, manufacturing measures were often used to gauge the health of the global economy. Yet, in the post-crisis period, these


indices have repeatedly painted too gloomy of a picture. A plunge in worldwide manufacturing activity in the summer 2019 was the third recessionary false alarm since 2008. By contrast, services-based indicators held up and were more reliable as barometers of the health of the global economy.

In this environment, expect commodities to remain in a wide trading range and generally underperform other growth-oriented assets (especially those in technology, finance and consumer sectors). We have written on this extensively starting in the early 2010s. Our view has not changed. This year, stability may have arrived and a mild global growth upturn will help boost prices. However, history strongly suggests that a renewed mania is unlikely to take hold any time soon. Prices went through a very typical secular phase — rising demand amidst constrained supply in the early 2000s was met with an enormous surge in capital spending. Combined with damaged investor psychology (preventing large capital flows back into commodities), this increase in supply will keep a ceiling on prices for years.

Other trends also argue for a move away from hard assets. The environmental movement has broad policy support across the world and alternative energy sources continue to proliferate. The fuel intensity of global growth also continues to decline as emerging economies rapidly catch up to the efficiencies of developed ones. Countries are scrambling to diversify the makeup of their economies. Canada is one such nation.

But the clear poster child of this movement is Saudi Arabia. The oil sector accounts for nearly 90% of its exports. The timing of Saudi Aramco’s IPO (the largest one in history) is no coincidence. The intent is to fund the government’s “Vision 2030” plan that envisions prosperous and industry-diverse cities rising out of the desert. But this pivot will take time — measured in decades. Even when lavished with capital, transcending the resource curse is difficult.

Looking ahead more broadly, investors need to reframe their view of globalization. When viewed through a knowledge-based lens, the outlook becomes far brighter.

QUARTERLY GLOBAL EXPORTS (IN USD)

Super Trend 5 - The End of Team America’s Unbreakable Run Page | 16January 2020

The End Of Team America’s Unbreakable Run

Most of us beyond middle age feel a steady creep of declining youth — even the sting of mortality. Then there is Tom Brady. At forty-two years old, the age-defying football player has won more games than any quarterback in history. The dynasty of New England Patriots dominance was so persistent that it seemed like a law of physics — a constant winning streak contested by few. But Brady’s legacy also approached magic. His sustained stretch of outperformance was studded with thirty-six fourth quarter comebacks. Nine occurred in the playoffs.

Investors with US-dominated portfolios over the last decade may feel like the indomitable Brady. Since 2009, the US experienced an almost uninterrupted stock market swing, complete with unstoppable technology titans and a chronically strong currency. Booming corporate profits have underpinned the entire show.

Looking back over that period, the leading stock market in the world has been the United States. Domestic stock prices have surged relative to their non-US counterparts by a magnitude that that is on par with the 1990s bull run. Most glaringly, European equities have underperformed the US by some 50 percentage points over the last decade.

The problem with long periods of outperformance is investor perception. The association with excellence and achievement builds on itself. With every crowd-pleasing rally higher, another coat of varnish goes on. Soon, the asset class glistens so radiantly that no one can see any downside. The brightness becomes blinding. Even more, an aura of invincibility takes hold.

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This is the challenge with investment leadership changes. Old narratives take time to be replaced by new ones. Investors have a hard time updating their mental models when something has worked well for so long. Many really do come to believe in immutable constants … and magic.

Yet bull markets are driven by mortals. Yes, they are arenas of action and greatness. But — much to the chagrin of those still carrying the torch for the Efficient Market Hypothesis — are driven by ephemeral views, layered with dialectics of suppositions, crowd-driven opinions and, most importantly, flawed assumptions. Unlike in physics, what’s right in one regime could be wrong in the next.

Looking back, American equity domination does make sense. In environments of subdued global growth, US stocks tend to thrive. Given that the US has the largest equity culture, home biases tend to enlarge when confidence in the outlook is lacking. The makeup of the US stock market, with its larger weighting in growth stocks, is also a factor. With a sluggish backdrop, growth can command a premium.

What’s more, several tailwinds have benefited the US. Starting lines are always important. Beginning in 2009, the Fed was the most aggressive liquidity provider, leading the world in unconventional monetary policy and introducing us to an alphabet soup of monetary policy tools (QE, TARP, etc.). The US also initially benefitted from an extraordinarily competitive currency and an inexpensive stock market.

Yet, few of those factors remain in place today. The FAANGS have been underperforming for some time now, increasingly viewed as tech monopolists abusing their power. US equity valuations have also become stretched, trading at a 33.6% premium to the remainder of the global benchmark on a

price/book basis and some 113% on a forward P/E basis.¹ Eight of the world’s top ten companies by market capitalization are American. And even though the US share of global GDP declined from 32% in 2001 to only 23% recently, its share values nevertheless now commands 63.7% of the MSCI World market capitalization. US stocks are priced for near perfection. Yikes.

Deeper fundamental change is also afoot. America’s waning global leadership has diminished the attractiveness of its country as a destination for foreign capital. Trump’s infidelity to the post-war system and his rants from the Twitter pulpit (totaling nearly 50,000 tweets since he joined the platform) took a proverbial wrecking ball to long-standing alliances. “America first” policies have clearly been counterproductive. Few fans have been made. In a globalized world defined by a move toward closer interconnectedness, the biggest loser has been the US.

INVESTMENT IMPLICATIONS

In sport and financial markets, expectations can easily change outcomes. Overconfidence can be a dangerous setup with much room for negative surprises. Brady’s likely last game as a Patriot is a case in point. On a foggy night in Massachusetts, no one believed they would lose to the Tennessee Titans. But lose they did. Brady’s final pass was an uncharacteristic pick-six (an interception that gets returned for a touchdown). And with that, the most enduring sports dynasty of the twenty-first century sputtered to an ignominious end.

There will be parallels, perhaps not as dramatic, to the coming underperformance of US equities. Expectations have risen steadily over the last decade.

This is the challenge with investment leadership changes. Old narratives take time to be replaced by new ones. Investors have a hard time updating their mental models when something has worked well for so long.

Super Trend 5 - The End of Team America’s Unbreakable Run Page | 18January 2020

But no season of outperformance lasts forever. Looking ahead, just as emerging quarterbacks like Patrick Mahomes and Lamar Jackson are taking the torch from Brady, our base case is that select non-US equities will take leadership. Expectations for many regions outside of the US are abysmally low, valuations are far cheaper and ex-US growth stories are starting to attract capital. Crucially, the US dollar will also begin its foray into a multi-year bear market. Most macro forces that have favored the dollar — relative growth, interest rate differentials, and a persistent safe haven appeal — are now reversing.

Adding all the above, the conditions for a multi-year rotation away from the US have arrived. Longer-running opportunities in Europe, Japan and select emerging markets are now very compelling. Intrepid global asset allocators should prepare for another winning streak. The dynasty of America’s dominance is over.

(Here, we cannot resist a shameless plug: Forstrong launched a global ex-North America equity strategy on January 1, 2020. Our children — and perhaps Tom Brady, if he ever returns our emails — will be heavily invested alongside other clients.)

¹ MSCI figures as of end of December 2019.

US EQUITIES - AN UNSUSTAINABLE RISE


The Inflation Outlook: Eternal Stagnation Of The Spotless Mind

Need evidence of collective amnesia? Never mind the trillions sunk into negative-yielding sovereign debt. Stand in wonder of the more bizarre bonds of the world, now priced for eternal stagnation.

Memory loss can sometimes be instructive. Charlie Kaufman’s 2004 science fiction film Eternal Sunshine Of The Spotless Mind is a case in point. The movie follows an estranged couple who both consciously undergo a procedure to erase each other from their memories. The subject matter makes for stimulating cinema and this one is admittedly an absurd premise. But it is classic Kaufman: his screenplays typically jump the rails and tumble into a cerebral maze of time and reality.

Yet the film’s wisdom lies in the way memory interacts with the mind. A fragmented recollection may provoke an unforeseen reaction, or a forgotten experience may change the way we lead our entire lives. Kaufman’s mental alchemy suggests even more possible permutations. Perhaps the film’s central idea is that memory — and its impact on our emotions — is always in a fragile state. It can mistranslate information or fail us altogether.

Memory loss is a recurring theme in financial markets too. Investors unconsciously repress thoughts of past losses or difficult market periods. Most damaging is that our brains can manufacture a more flattering version of reality (known as hindsight bias for behavioral finance nerds). For example, many investors recall not losing money in 2008. In fact, they did.

Indeed, entire memories can be reconstructed to make us feel good. Kaufmanesque brain-scanning head gear is not needed. Rather, memory distorts over time, often taking a generation to set in. What remains is a spotless history, wiped clean of any disturbing thoughts.

Today’s most important loss of memory relates to inflation. Investors have simply forgotten that higher prices are possible. Need evidence of collective amnesia? Never mind the trillions sunk into negative-yielding sovereign debt. Stand in wonder of the more bizarre bonds of the world, now priced for eternal stagnation. The Republic

Super Trend 6

Super Trend 6 - The Inflation Outlook Page | 20January 2020

of Austria recently brought back its “century bond” — riddled with interest rate risk — at a whopping 1.2%. Swiss bank UBS now charges wealthy customers for short-term deposits. And Denmark’s Jyske Bank will pay you to take out a mortgage. Clearly, almost no one expects any inflation in the future.

Let us venture out on the shakiest of limbs to toss out a non-consensus idea: the conditions for a long period of higher inflation have arrived. Note that we are not calling for rampant 1970s style inflation. Rather, a gradual uptick in overall inflation will glacially play out over many years. It will be nearly imperceptible at first. In the same way that investors took more than a decade after 1981 to believe that inflation would not rise again into double digit figures, today’s investors — conditioned by 39 years of disinflation and declining interest rates — will take years to become convinced that the secular environment has changed.

Looking ahead, several cyclical, policy and structural factors point to higher inflation. Deflationary fears are way overdone. Yes, a credible threat of falling prices did emerge during the global financial crisis and the double-dip recession in the Euro area and Japan. But these forces were mainly driven by a deleveraging process in the US and Eurozone that needed to run its course. These balance sheet adjustments are now largely complete. Private sector debt levels in the US have returned to 2004 levels when measured against GDP (figures from the Bank For International Settlements at June 30, 2019).

At the same time, most excess capacity in the global economy has been absorbed and many labor markets have returned to near full employment. The unemployment rate in the G7 has fallen from a peak of 8.4% in 2009 to 4.2% (a full percentage

Almost all major central banks are terrified of making a policy mistake. No surprise then that they are all committed to erring on the side of caution. And now, central banks are all arguing for more collaboration with fiscal authorities.

point below its pre-recession low of 5.2% set in 2007). Upward wage pressure can build from here.

With this backdrop, policymakers remain hell-bent on fighting deflation. This is the exact opposite situation of the early 1980s. Back then, inflation and bond yields were in double digits. Only hawkish policymakers existed, wrongly fearing further inflation. Today, we have low inflation readings and low bond yields. But there are only deflation-phobic doves left. Some are even threatening outright debt monetization and other helicopter-dropping monetary tactics (see ST3, How To Train Your Draghi: Do Whatever It Takes).

The Fed is so fearful of deflation that they staged a dramatic turnaround in 2019 and dropped rates by 75 basis points. This latest move is historic: it is the first time in the Fed’s history where rates were lowered without clear evidence of a recession. No economic data justified a cut.

It’s not just the Fed. Almost all major central banks are terrified of making a policy mistake. No surprise then that they are all committed to erring on the side of caution. And now, central banks are all arguing for more collaboration with fiscal authorities. They are sure to be indulged. With brewing political populism, running larger budget deficits is the path of least resistance. The voting public will ensure that.

Crucially, the impact of monetary stimulus is far different than fiscal thrusts. Most misread the transmission dynamics of QE. What is now clearly known (and forecast as early as 2009 by your favorite Canadian macro managers) is that QE does not work during deleveraging periods. More available liquidity does not automatically lead to more credit creation and higher inflation. This is the classic “pushing on a string” metaphor Keynes originally used during the 1930s depression.


Fiscal stimulus is a different beast altogether. Importantly, the transmission effects of fiscal thrusts are much more direct, boosting consumption and investment. More money immediately enters circulation and leads to inflationary pressures.

What about all the structural deflationary factors that have been cited in support of secular stagnation, new normal and other similar outlooks? Here we refer to the impact of technology, automation, demographics and other disruptive forces on prices. Many of these are a myth. Classic mistakes are often made in the analysis. For example, automation does lead to faster productivity growth and falling prices in several industries. But this will also boost real incomes, leading to more consumption elsewhere. Rising spending lifts prices in other sectors of the economy. This observation holds true for other trends like the rise of the sharing economy and online shopping (reducing the need for retail outlets). Cheaper prices lead to more available discretionary income. Less consumption in one area leads to more in another (see Super Trend 4, Globalization 2.0: New Patterns Of Connectedness).

What about the favorite domain of deflationistas: demography? To be sure, demographics have been a deflationary force for most of the last 40 years. Slower population growth leads to lower demand. And the

West has aged. In general, this tends to lead to higher saving for retirement and less spending.

But all this mainly applies to the developed world. Most emerging countries have far young demographic profiles. Consider that the global millennial generation is larger than the boomer one. In fact, they are now the world’s largest generation — some 1.8 billion strong and nearly a quarter of the world population. And contrary to the image of lazy and entitled Western youth (luckily this author is squarely in generation X), millennials are mainly an emerging markets story. Nearly nine in every ten millennials live outside developed markets. There are more Chinese millennials than the entire US population (hat tip to the FT for supplying these statistics).

All this is bullish. Most emerging markets millennials are experiencing rapid wage growth. The World Data Lab has forecast 2020 as the year when the global spending power of millennials will be greater than any other generation. As the lead consumer cohort, they are set to shape the direction of the global economy in the coming years. Indeed, demography is destiny.

INVESTMENT IMPLICATIONS A scene in Eternal Sunshine Of The Spotless Mind shows a television ad for the company that performs

Super Trend 6 - The Inflation Outlook Page | 22January 2020

the memory-erasing procedure. “Why remember a destructive love affair?” it teases. The clear answer for investors is that, unlike in romance, a clear read of history is important. It instructs. It opens the mind to new scenarios. And, above all, it provides lucidity to the present.

Looking ahead, investors need to be alert to the past. The conditions for a sustained rise in price inflation have arrived. The transition will be gradual and bumpy, allowing many investors a period of denial until underlying pressures are more evident. This is typical during regime changes, as it takes time to release old narratives.

But benign bond markets should not be expected. The path of least resistance for yields is now up and a secular bond bear market will progressively take hold. Bond rallies will still present themselves. Yet the long-term result will be a yield trend of higher lows and higher highs.

This carries profound ramifications for other asset classes in the years ahead. Investors should recognize that many assets were bid up on the “lower forever”

inflation thesis. This includes a variety of interest rate sensitive investments in the West — REITs, dividend payers and the vast assemblage of ETF product that, through financial alchemy and a masterstroke of marketing genius, produced a higher and more tantalizing yield. To be sure, our clients relished in this yield bonanza (with our Global Income mandate producing stellar returns since its June 2008 inception). But no party lasts forever and we are now shifting our income strategies in these mandates. Ironically, equity markets have become a better source of yield than bonds. This is most egregious in the Eurozone, where the dividend yield on the MSCI Germany stock index was a whopping 316 basis points higher than the nominal yield on a 10-year bund (as of end 2019).

Finally, bear in mind, a gradual rise in yields will play out over many years. And while a spike in rates is clearly detrimental to fixed income investors, a slow and steady rise allows for a higher reinvestment rate without incurring large capital losses. This is wonderful news for retirees who have had considerable difficulty generating reasonable income in an abnormally low interest rate environment.

MSCI GERMANY DIVIDEND YIELD - 10 YEAR GERMAN BUND YIELD


Milan Kundera’s post-modern masterpiece from 1984, The Unbearable Lightness of Being, perfectly captures the human paradox of lightness and weight. At times, we sense the transient nature of life, recognizing ourselves as one of many participants in a vast unfolding universe. The world feels weightless. Other times, a heavier hand reminds us of a greater significance. We tighten our belts, reluctantly conceding a unique role in the grand cosmos and recognizing the difficulties that may lie ahead. Suddenly, our existence is heavy again.

Today many investors are experiencing their own existential struggle with emerging Asia’s economic rise. On the one hand, the region — which we classify as China, India, Taiwan, Korea, Indonesia, Malaysia, Philippines, Thailand and Vietnam — has created enormous growth around the world. China alone has delivered roughly half of all global GDP growth over the last decade. This has been a crucial prop to a growth-deficient world.

And yet there is a heaviness to it all. From a Western perspective, it can be difficult to acknowledge another’s relentless rise. The growth is not our own. But new economic realities have surfaced. Investors need to face these facts head on or risk being left behind.

In many ways, the world has turned upside down. Traditionally, Asia and the wider emerging markets complex was the domain of uncertain democracy,

endless elections and other political risks. Yet the reality is that deeper political fault lines now lie in the West. The UK has voted to leave the EU. The wider Eurozone region is still dealing with a failure to reconcile joint monetary and separate fiscal policy. In the US, a shift away from globalization and free movement of production, capital and people is underway. One of the leading democratic candidates is proposing heavy-handed intervention on business and capital markets (not to mention the daily histrionics fired from the current president’s smartphone).

Everywhere you look in the developed world, political risks are elevated. While the West moves firmly in the wrong direction, Asia is moving in the right direction. Yet many investors still view the region as vulnerable to crashing growth and contagion risks. This view simply extrapolates the Asian experience of the late 1990s to the present. That is a big mistake. Asia is much more shock-resistant now. In the last episode, unsustainable debts were amassed in US dollars, local currencies fell, and liquidity faded. Crisis followed. That same situation is highly unlikely today. A whole host of improving macroeconomic factors have vastly improved the region’s stability.

For example, in the mid-1990s inflation rates above 20% were not uncommon. Today’s inflation is trending below 3%. Several drivers underpin this

The Unbearable Lightness of Asia’s Economic Ascent

Super Trend 7

Super Trend 7 - The Unbearable Lightness of Asia’s Economic Ascent Page | 24January 2020

development. Reduced reliance on foreign capital has lowered local currency volatility. Also, as a net oil importing region, Asia has received a terms of trade boost from lower oil prices. And they have taken steps to reduce their exposure to oil: China and India account for the lion’s share of the global increase in renewable energy generation. The wider list of improving factors is lengthy: the emergence of domestic pension systems (which further reduces reliance on foreign funding), improved trade balances and better fiscal positions.

Still, macro misinformation persists. China is the consistent whipping boy here. Sensationalist predictions of a crash have become almost cliché. Yet the reality has been much different. No Minsky moment has arrived. To be sure, the country is at a crucial inflection point. The trade war’s tariffs have reduced external demand and sent broader shock waves across global supply chains. Domestically, the country must deleverage but maintain reasonable levels of output. And growth is slowing.

But contrary to a long running consensus, none of these are existential risks. In fact, the most important facts about China today are not problems of slowing growth and high leverage. Rather they are the shift away from exports and massive infrastructure spending to consumer-led growth, improving margins and financial liberalization (for more detail, see our investment team’s special report from October 2019 Postcard From China). What’s more, the Chinese economy is 30 times larger than 30 years ago (measured in US dollars). Even at a slower GDP rate, China’s contribution to global growth (approximately 21% last year) is far higher than at any time in history and higher than any other economy in the world.

China is also working steadily to strengthen their position in Asia. President Xi Jinping likely views Trump’s retreat from globalization as his own triumph. Consider Obama’s “pivot to Asia”, with the Trans-Pacific Partnership being the centerpiece. America’s involvement is now dead. That leaves Xi’s “Belt-and-Road” strategy as the uncontested blueprint for future economic integration in Asia. Ironically, China’s diplomacy now also offers a positive vision. In Davos last year, President Xi (a first time visit for any Chinese President) defended globalization, positioned his country as a protector of free trade and urged policymakers to “just say no” to protectionism.

Looking ahead, growth in developed economies is forecast to stagnate in the coming years while Asian growth is expected to accelerate. By 2024, GDP growth will only be 1.2% per annum in developed countries but a stellar 5.3% in developing Asia. Overall emerging market countries already account for 68% of world growth. This share will rise to 77% by 2023. For comparison, US growth is just 7% of the world and shrinks to 4% by 2023 (forecasts from the IMF).

Most will gape at these figures. But we would add another crucial insight to the above: emerging Asia still runs traditional monetary policy. The list of countries doing so has dramatically shrunk since 2008. Advanced economies like the US and the Eurozone are well into a type of monetary dark age. In recent years, science and technology may have hurtled forward, but money and banking have stumbled backward. This is a long way from the golden age former Fed Chair Greenspan presided over. Now it is the People’s Bank of China’s governor arguing that the world’s post-crisis experiments with negative interest rates and quantitative easing have been a failure. Ouch.

Investors should pause and reflect on the above points. Developed countries have painted themselves into a policy corner. Their economies are already mature, naturally limiting their ability to grow. But now negative rates limit the effectiveness of the monetary lever. How much lower can they go? Last year, G-20 central banks cut rates a total of 47 times. Only 6 of these cuts were from developed countries — the rest were from developing nations. What’s more, their economic policies are increasingly becoming more populistic, further limiting productivity gains.

By contrast, developing Asia is a region with far more policy options than growth headwinds. This remains their ace in the hole. With ample room for further monetary easing (from far higher real rates), other forms of fiscal stimulus (due to generally lower government debt levels) and ongoing structural reform, Asian policymakers are far less concerned about a sudden growth downturn than the common narrative would lead one to believe.

INVESTMENT IMPLICATIONSIn a period defined by global gloom and deep negativity (where pessimism is the common language), developing Asia’s growth outlook is refreshingly bright. Markets should be cheering this


on. They aren’t. Instead, after a decade of hyper-easy monetary policy and slow growth, global capital has become grossly misallocated into developed markets. Broadly, the marginal dollar invested here is priced for disappointing returns.

By contrast, emerging Asian assets are on sale. Even after a respectable equity rally in 2019, equity valuations of both onshore and offshore Chinese stocks remain near the lower range of historical norms. Bank stocks are deep value plays. Emerging market bonds also offer nicely positive real yields, stable currencies and the potential for price appreciation. Our investment team calculates that a broad basket of EM bonds will likely return approximately 50% over the next five years. Imagine any Western bond offering those return prospects.

Looking out further, the ascent of Asia as an independent economic center of gravity is a boon for investors. With diverging economic trajectories and monetary policies (especially from the United States which, in the post-war period, has functioned as the de facto leader of world order and economic stability), macro trends in Asia are highly diversifying for investor portfolios. Asian, and especially Chinese, assets reflect this showing low correlation to rest-of-world stocks and bonds.

Investors seem to have missed the memo on all this.

Instead “end of cycle” fears plague the landscape, further force-feeding capital into negative-yielding bonds and the perceived safety of US stocks. This is a dangerously American-centric perspective of the world. Yes, the US has been recovering since 2009. But this does not hold true for the rest of the world. Most economic engines took longer to start.

What’s more, the MSCI Emerging Asia equity index in US dollar terms trades at the same levels as 2007 — 13 years of going nowhere. Equally important is that late cycle conditions are not yet evident (see Super Trend 2, Still Living In the Long Shadow Of The Financial Crisis). Cycles end when an economy is hit by an external shock (e.g. an oil price spike) or, more traditionally, when a policy mistake is made (typically when the central bank hikes rates to prohibitively high levels). Finally, there is limited evidence almost everywhere, but especially in Asia, of those essential properties of a classic bubble: broad investor euphoria and, importantly, a massive credit expansion.

All this is a perfect multi-year setup for global asset allocators. Low expectations and low Asian asset valuations mean higher future returns. It doesn’t feel that way to most right now. But the time is near when those invested in Asian assets will feel light again.

13 YEARS OF GOING NOWHERE

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