Investment Talking Points Flashcards
Rule of 72
How many times do you double in 35 years if you’re earning 4% vs. 10%?
The Rule of 72 is a simplified formula that calculates how long it’ll take for an investment to double in value, based on its rate of return.
In 35 years, you double 2 vs. doubling 5 times.
How many post WWII bear markets have there been?
13 bear markets in the post WWII period
Total returns during the markets have ranged from=…?
Total returns during those markets have ranged from -15% to -55%
How long have they lasted? Longest? Median?
From as little as 33 days during 2020 Pandemic, to as long as 31 months, after bursting of the dot-com bubble. Median has been 12 months.
What are the three factors which typically cause recessions?
- Monetary Policy Tightening by the Federal Reserve
- Imbalances in the economy such as those seen:
- during the dot-com bubble in stock prices
- household and financial sector leverage prior to the GFC, which led to imbalances in the housing sector
- Exonegous shocks such as the Covid-19 pandemic in 2020 and the Arab oil embargo in 1973.
Are shocks predictable?
By definition, shocks are not predictable and a much greater deterioration in the trajcetory of this pandemic is one such potential shock.
Whats unique about the pandemic recession?
- The recession was not the result of the kind of global economic excess that take a long time to correct.
- Worldwide policymakers were quick to provide fiscal and monetary policy.
What factors underpin US preeminence?
- The resilience of American institutions and democracy
- Economic strength supported by abundant natural resources
- Human capital advantages
- Vibrant innoative and efficient private corporate sector.
- Diversify of its economy
- Most productive labor force in the world
- Highly educated population
Combination of these make it extremely difficult, if not impossible, for any one country to knock the US off its perch.
GDP List
2020
- US Economy $21 trillion (25%) of world gross domestic product. 40% larger than the next largest economy, which is Chine
- China (although it may outgrow US in the next decade)
- Japan
- Germany
- UK
While size matters, it alone does not equate to preeminence
GDP per Capita
- US = $63,051 (has been widening)
- Germany =$45,466
- UK = $39,229
- Japan = $39,048
- Eurozone = $37,427
- China = $10,582 (adjusting for purchasing power, China’s GDP per capita stands at $17,206).
Switzerland and Luxembourg (populations less than $10 mil) with GDP per capita higher than US
China Growth Model.
What is it?
What are the three constraints on the sustainability of this growth model?
-
Incremental capital China needs to generate the same amount of real GDP growth has been increasing.
- Incremental capital-output ratio has more than doubled over the past 20 years, impying a greater need for capital. The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital
- Chinas Debt has increased significantly from 176% of GDP in 2011 to 289% of GDP in 2020. The government is not inclined to allow debt to continue rising
- High Share of Exports China accounts for 13% of global exports of goods, a share that is 45$ higher than the next-largest exporter, the US, and 64% higher than the third-largest exporter, Germany. Japan peaked at 10.4% of Japan in 1986. China share unlikely to increase given that it is facing even stronger resistance than Japan did from Western partners.
Labor Productivity
US vs. China
Labor productivity is highest in US among developed markets
China - weighted down by service sector. Low productivity due to the non-tradeable nature of certain services and the absence of competitive pressures among foreign companies because of reduced access to the Chinese market.
- China’s low capital-to-labor ratio, which is 33% of the US’s also weighs down the country’s labor productivity.
What at the Corporate metrics used to measure the US?
-
Corporate Management
- China - publicly owned firms have worse management practices in which promotions are not based on performance. SOEs account for 83.5% of the revenues in what China calls “key” industries (defense, electricity, oil and gas, telecommunications, coal, shipping, aviation, and rail) and 43.2% of revenues in so-called “pillar” industries (auto, chemicals, construction, electronics, steel and tech, among others)
-
Earnings Per Share Growth
- US = has had the best earnings growth since pre-gfc peak
- China = second and beat other developed countries (Eurozone, UK, Japan, EM, China). HOWEVER, that is partially due to them increasing leverage over the past 17 years.
- Japan is third, and hasn’t regained pre-GFC levels. Neither have EM, UK, or Eurozone.
-
Cost Competitiveness
- Mexico and China are the most competitive exporters, but China’s competitiveness has eroded since 2004.
- As higher wages and stronger currency erode the cost competitiveness of China at the same time that US-China relations become increasingly strained, Mexico’s cost competitiveness may shift new export-drive manufacturing to Mexico and away from China.
4.
Innovation. What are the following metrics across countries:
Make sure you look at invention patents (not utility patents which account for 40% filed in China but aren’t allowed in US, UK, Canada and are for minor inventions with less stringent requirements).
Especially foreign filed patents - because of high cost.
-
R&D Expenditure
- $584 billion in 2018 by the US was as much as next 3 countries combined.
-
Inventions Patents Filed Abroad
- US dominates. 236,032 followed by Japan at 206,758, Germany 104,736, China at 84,279.
- Problem is China may just steal $500 billion a year (estimate from John Ratcliffe, US Director of National Intelligence under Trump)
- More acceptable to fail after taking a big risk according to Robert Langer (MIT).
Benhamin Graham regarding the short run and the long run of the market?
In the short run the market is a voting machine but in the long run it is a weighing machine
