Past newsletters sent by Luka

In this thread, you will find all of the newsletters written by Luka, in chronological order from oldest to newest.

PS: As you might imagine, the content is not investment advice, just Luka thinking on the current market environment. It is also not an invitation to buy or sell any financial instrument mentioned or in the articles linked.

NEWSLETTER - 16.6.2022

Hello.

Recently I have been reading a lot of articles and social media posts about the upcoming recession. It seems that everyone is already expecting it due to increasing interest rates, the negative wealth effect of lower asset prices, and of course inflation pressures on consumers.

High growth companies which have felt the stock price decreases the most have started reducing their employee count with the aim of adjusting to the new reality - investors seem to focus now more on sustainable/profitable business models compared to being focused solely on growth since Covid.

I’m a bit conflicted about the situation. On one hand, the global economy is obviously slowing with inflation reducing spending and rising interest rates lowering demand for assets like real estate. On the other hand, there is a large savings glut still present in the developed world where governments have given away free money via subsidies to combat Covid lockdowns - these savings could make the recession relatively short lived…

Interesting podcasts that and listened to recently:

Podcast: Edward O. Thorp, A Man For All Markets — Beating Blackjack and Roulette, Beating the Stock Market, Spotting Bernie Madoff Early, and Knowing When Enough is Enough

Podcast: Aswath Damodaran - Making Sense of the Market

That’s all from me for now.

Best,
Luka

NEWSLETTER - 7.7.2022

Hello.

All eyes are on central banks.

The economy has been running hot since the government provided support to consumers and businesses during lockdowns, which has increased inflation and lowered the unemployment rate. Central banks usually focus on these two metrics when setting the monetary policy.

The question now is, how much will they tighten the belt before the economy slows down too much?

The majority of commodity prices have seen price declines in past weeks, supply chains seem not to be disrupted anymore, while fiscal policy is also tightening. There is a high probability that inflation will decrease to more normal levels in the following quarters, while the unemployment rate might tick higher if the recent reductions in the number of employees in the high-growth tech sector spreads to the rest of the economy.

Will that mean a reversal of the current strategy that central banks are pursuing? We’ll have to wait and see…

Interesting articles and podcasts I’ve read and listened to in the past weeks:

Interview with Howard Marks from Oaktree Capital Management:
https://www.oaktreecapital.com/insights/memo/conversation-at-panmure-house

Research by Michael Mauboussin from Morgan Stanley about the boom and bust cycle:

Podcast: Breaking down Warren Buffett’s Berkshire Hathaway:

A picture is worth a thousand words:

Best,
Luka

NEWSLETTER - 21.7.2022

Hello.

Recession fears have increased significantly in the past couple of weeks. Looking at the Google Trends screenshot shown below, which tracks keywords people are searching for, the search term “recession” has obviously entered the collective mind.

Consumer sentiment (second chart below) is at the lowest point since the global financial crisis in 2008. Interestingly, the negative sentiment is probably driven mostly by inflation since employment numbers still look good.

Compared to the 2008 recession, when consumers were also losing their jobs and the financial system was collapsing, this time around the slowdown does not seem as bad as it was back then…

Interesting articles I read and videos that I’ve watched in the past weeks:

Article about what’s priced in by Michael Batnick:

Have we reached the bottom in stock markets? John Hussmann does not think so:

Interesting interview with Steve Keen on the details of how macroeconomics works:

Two pictures are worth a couple of thousand words:


Best,
Luka

NEWSLETTER - 4.8.2022

Hello.

Everyone is talking about yield curve inversion.

When the central bank starts aggressively raising interest rates, yields on short-term bonds follow. Currently, the FED funds rate is 2.50% (it was 0.25% just 6 months ago) and yields on 2-year US government bonds are above 3% (they were almost 0% at the start of the year).

In normal times, long-term bonds have higher yields than short-term bonds, the logic is that if I lend you money, there is a higher probability of something going wrong (you not paying back) in longer periods compared to short-term loans, which is why the so-called slope of the yield curve is positive in normal times (short term yield lower compared to long term yield).

Right now, the situation is different. The yield curve has inverted - long-term bonds have a lower yield than short-term bonds. 10-year yields are currently 2.75% which makes the difference between the 2-year and 10-year yields negative, as shown in the picture below.

When the yield curve is inverted, a recession usually follows.

Interesting article I read and podcasts that I’ve listened in the past weeks:

A new memo from legendary investor Howard Marks
https://www.oaktreecapital.com/insights/memo-podcast/i-beg-to-differ

Review of research on investor behaviour and reasons for their underperformance

Podcast on long holding periods and compounding companies

A picture worth a thousand words:

Best,
Luka

NEWSLETTER - 18.8.2022

Hello.

I hope you are doing well, and not paying too much for electricity…

Energy prices have skyrocketed in Europe. Electricity prices in Germany and France are 10x higher than two years ago while natural gas prices are 6x higher in the EU compared to the US.

Although they do not represent a high percentage of the overall European consumer spending, such increases have an impact on other discretionary spending and have a severe impact on factories that consume a lot of power.

Some analysts are expecting a major slowdown of the European economy which might change the interest rate hiking plans of the European Central Bank.

Interesting articles I read and podcast that I’ve listened to in the past weeks:

A study - Disclosure, inducements, and suitability rules for retail investors

Article from John Hussman - The structural drivers of investment returns

Podcast - The market doesn’t have to crash with Raoul Pal

A picture is worth a thousand words:

Best,
Luka

NEWSLETTER - 1.9.2022

Hello.

If you are buying a house/apartment, it might be better to wait a bit.

Housing market is showing signs of slowing down. With interest rates rising rapidly the demand for housing is severely impacted - higher borrowing costs means that buyers can’t afford high prices anymore. There has been a collapse in number of transactions while the supply of housing has increased (as Covid supply chain issues are resolving), creating one of the largest jumps in monthly supply of new houses in US, pictured below.

Such rapid increases in monthly supply have almost always preceded recessions which is even more worrisome. Risky assets might therefore see a lot more volatility in the future months which might bring some interesting investment opportunities.

Interesting articles I read and podcasts that I’ve listened to in the past weeks:

Interview with Howard and Andrew Marks (Acquired podcast)

The Housing Market is Going to Crash…or Not? (Video by Cullen Roche)

Why company fundamentals matter? (Blog post by OSAM)

A picture is worth a thousand words:

Best,
Luka

NEWSLETTER - 15.9.2022

Hello.

I hope you are doing well.

The recent energy crisis in Europe is just one of the reasons for European stocks to be underperforming their US counterparts. After the global financial crisis, the US economy started its recovery while the EU fell into another recession in 2012. In response to Covid-19, the US government supported its residents and businesses with a much larger stimulus package than EU member states, which additionally had a more significant positive effect on the economic growth in the US.

Looking at the stock market valuations, pictured below, it can be seen that the US market has a significantly higher valuation (in blue) as measured by the cyclically adjusted P/E ratio compared to Europe (brown). If one believes that the current negative situation in Europe is only temporary, European stocks might offer better investment opportunities than the US market.

Interesting article I read, podcast that I’ve listened to and a video I watched in the past weeks:

Podcast with Michael Mauboussin about investing process

Brand values and long-term stock returns

Will the surging dollar crash the global economy

Best,
Luka

NEWSLETTER - 20.10.2022

Hello.

I hope you are fortunate enough to find exciting investment opportunities in these uncertain times.
As you know, the pendulum swung from excessive optimism about a year ago to the great pessimism that currently prevails among investors. And uncertainty only continues to grow.

“When there’s blood in the streets, you should buy,” goes an old investor saying. Combine the slump in the stock & bond markets so far with the negative sentiment, and you might think that this is a good time to invest in risky assets again.

However, as you can read in the article below, John Hussman does not agree. In his view, the market still has a long way to go before it bottoms out. This is due to a combination of still high valuations, internal market factors and tightening by central banks.

Remember that bear traps are very common during a free fall. This is when the market recovers some of its losses for a short period of time before continuing its downward trend.

The time of great opportunity is approaching, but it may not have arrived yet.

Here are a few articles that might help you think about the current market environment:

Estimating Downside Market Risk by John Hussman

Global Wealth Report by Credit Suisse

Guide to the Markets by JP Morgan

A picture is worth a thousand words:

Best,
Luka

NEWSLETTER - 3.11.2022

Hello.

I hope you are doing well.
Real estate prices have been increasing rapidly in most of the western world. The asset class is well known for its correlation with (and protection against) inflation. But the recent price increases have been significantly higher than the inflation rate.

Looking at the really long-term trend (400 years!) of house prices in Amsterdam, we can see (in the chart below) that houses were indeed good long-term protection against inflation as their prices, in real terms, mostly stayed flat. The last 20 years have been different - prices have been increasing much faster than inflation, pushing the inflation-adjusted prices through the roof while the actual rents stayed almost unchanged.

There might be multiple reasons for that, including demographics and people moving more to cities, but most of all, the price increases can be attributed to the financialization of the asset class - houses are not just a place to live anymore, they are seen as an investment opportunity. With low-interest rates in the past decade, this trend has accelerated as the financing costs were lower than the income from renting, making leveraged real estate investment very profitable.

Some say this trend is reversing due to the end of the “cheap money” era. US central bank (FED) has again increased its rates while other central banks are doing the same, which makes any type of lending, including purchasing real estate with a mortgage, much more expensive. New buyers are therefore not willing to pay the high prices, while some existing owners that do not have a fixed mortgage rate might be forced to sell due to an increase in monthly payments - although the majority of the mortgages are fixed rate, so this time around we should not see a high rise in delinquencies as we did in 2007-2009.

Interesting content I enjoyed in the past weeks:

[Article] Three Things I Think I Think – Changing My Mind

[Video] Liquidity & Recession Problem - Interview with David Rosenberg

[Video] Central Banks Are Having A Sudden Change Of Heart

A picture is worth a thousand words:

Best,
Luka

NEWSLETTER - 17.11.2022

Hello.

I hope you are doing well.

Major fraud happened in crypto (again, unfortunately), ending in the bankruptcy of one of the largest crypto exchanges. FTX mishandled clients’ assets by lending them to its affiliated hedge fund (Alameda) that, in turn, lost almost all of it (or invested it in illiquid assets), taking down both companies and a large number of FTX subsidiaries (combined, more than 130 companies were put in bankruptcy protection). The whole story is in the last link below.

It seems that crypto markets are repeating the same mistakes that participants in traditional capital markets made, just with an accelerated timeline. If it took (modern) capital markets 120 years to get to their current less-than-perfect state, crypto markets are currently on the path to almost repeat the whole history in just 12 years. From pump and dump schemes, euphorias, market bubbles, and subsequent collapses to more sophisticated fraud - human psychology (mostly fear and greed) create such cycles no matter what the underlying asset is. There is a reason regulations require that exchanges, brokers, custodians, central securities depositories, etc., are separate entities with their own risk control measures… A lesson that most participants in crypto have not yet learned.

On the other hand, one would expect that the prices of cryptocurrencies would drop significantly more given the scale of the FTX downfall - major cryptocurrencies lost about 20% of their value since the news broke and have stabilised. Bitcoin, for example, is now about 75% lower than a year ago, as seen in the chart below. It is impossible to know if the market bottom has been reached, but the sentiment has changed in the last year from euphoria to pessimism.

Interesting content I’ve read/listened to in the past weeks:

[Podcast] A Macro Tour with Bob Elliot (Invest Like the Best)

[Video] Taking the Punch Bowl Away by David Rosenberg

[Article] FTX’s Balance Sheet Was Bad by Matt Levine

A picture is worth a thousand words:

Best,
Luka

NEWSLETTER - 1.12.2022

Hello.

I hope you are doing well.

Does macro matter when investing?

Markets have been mostly driven by the macro environment in the past few years - lockdowns, supply chain bottlenecks, government subsidies and stimulus packages, the war in Ukraine, and inflation. All events that bottom-up stock picker would usually ignore while they still had a major influence on the returns of all assets.

As the economy is going through cycles, so are markets and the influence of macro on markets. In the two podcasts below about the topic, both Howard Marks and Cullen Roche reach the same conclusion - macro is important, but that does not mean investors should try to forecast it. As Howard says: “You can’t predict, you can prepare”.

[Podcast] What Really Matters by Howard Marks

[Article] What Really Matters by Howard Marks

[Podcast] Why Macro Matters with Cullen Roche

[Podcast] Jim Chanos on Crypto, Tech and the Golden Age of Fraud

Best,
Luka

NEWSLETTER: 15.12.2022

Hello.

I hope you are doing well.

Has the market changed?

Since the end of the Global Financial Crisis in 2009 t, the world has been used to decreasing and low interest rates, easy financial environment, low and stable inflation, optimistic mood with fear of missing out present e,specially in 2021.

Howard Marks describes the recent change in the market and business environment as a “sea change” event which does not happen frequently. We can expect different market conditions in the future years given the changes that already happened - high inflation, increasing (normalisation) of interest rates, lower valuation, larger focus on risk management etc. More on the differences in the table created by Howard below:

Interesting articles I read (and a video I watched) in the past weeks:

[Article] Sea Change by Howard Marks

[Podcast] The new rules in financial markets by The Economist

[Video] Macro Masterclass with Cullen Roche

Interest rates (and yields) on corporate bonds have increased significantly in the last year, from about 3% for European companies to about 8% - which is still far off the highs achieved during the collapse in 2008 when the yields jumped to almost 25% due to the global recession.

Best,
Luka

NEWSLETTER: 5.1.2023

Hello.

I hope you are doing well, and best wishes for 2023.

Last year we saw a reversal of investor sentiment - if 2021 was euphoric, 2022 was sobering. Global stock markets lost 20% on average, bonds decreased in value by about 15%, while other asset classes also had negative performance.

To navigate the markets in 2023 with more clarity, we’ve put together a list of the most renowned financial institution’s market outlooks. To name a few, we’ve included outlooks from Barclays, BlackRock, BNY Mellon, Citi Wealth, Fidelity International, Goldman Sachs and more.

You can find the complete list with the links to the reports at the following link - https://equito.co/stock-market-predictions-2023/.

Interesting content I read and watched over the holiday season:

[VIDEO] 2023 Investing Outlook with Cullen Roche

[VIDEO] A Crazy Year in Finance! by Patrick Boyle

[ARTICLEs] Best investment writing of 2022 by Nick Maggiulli

A picture worth a thousand words:

Best,
Luka

NEWSLETTER: 19.1.2023

Hello.

I hope you are doing well.

Last year, most investors were surprised by the rapid increase in inflation and the subsequent response that the central bankers made to tame it.

It seems that the jump in interest rates has the desired effect.

Used car prices are collapsing while Tesla has announced a price cut on their cars of up to 20%, which would be an unprecedented move during a spiralling inflation cycle (where inflation leads to more inflation). In response to Tesla’s price cut, other car manufacturers are forced to follow, creating deflationary (or at least disinflationary) pressure on the market.

A similar situation is present in real estate and other segments of the economy, which has been a slowdown for the past few quarters. The probability of a recession is increasing while bonds are becoming even more attractive compared to equities.

How long will central banks be able to tighten the monetary policy is now the question - will we see first-rate cuts this year?

Interesting content I consumed in the past weeks:

[Podcast] The DNA of Software Companies

[Podcast] Warren Buffett & Charlie Munger: A Study in Simplicity and Uncommon, Common Sense

[Article] They’ve Ruled Out Tail Risk by John Hussmann

A picture worth a thousand words:

Best,
Luka