Charts of the Month - November '21

As we were drafting this email the DOW hit, for the first time ever, the 30,000 mark. If we can live in a moment of suspended reality, forget everything we think we know about market fundamentals and instead focus on the two whales that drive financial markets (stimulus and passive flows), is there even an argument to be made for a market correction in the near future? It's generally accepted that stimulus will not end, and passive flows are here to stay. Why does the music have to stop anytime soon, especially in a year in which we danced so little?

"Bitcoin to me is the only thing I've seen so far that is really fundamentally uncorrelated to that decision-making process and to the decision-making body, because, at the end of the day, any other asset class, equity, debt, real estate, commodities, they're all tightly, tightly coupled to a legislative framework and an interconnectedness in the financial markets that brings together many of the governments that are sort of behaving this way."Chamath Palihapitiya, Social Capital

Is it time for Ford and GM to bury their century-long rivalry and merge in order to stay relevant and compete for the auto market of the future?

A refocus on their core product offerings, SUVs and Trucks, to milk those cash cows for all they're worth and reinvest in an EV infrastructure that will have to compete with the likes of Tesla, Toyota and VW?

In September, the CBO updated their 10-year Budget Forecast, and the most notable update from the previous March forecast is that Yield Curve Control (YCC) is now front and center (that is, aside from the new nose bleed level of deficit added this year).

The first two charts show the forecast change in Effective Interest Rates on USTs and their impact on Interest Expense as a % of Tax Receipts. We can see that the CBO now expects significantly lower rates for the next decade when compared to the pre-pandemic forecast, which reduces Interest Expense as % of Tax Receipts.

But the problem is much larger than the level of Interest Expense. The updated forecast on Tax Receipts minus Mandatory and Discretionary spending (the two big-budget line items before interest is paid) tells us that there's a $12.5 trillion dollar gap that needs to be funded...before we account for what we need to pay in interest.

While Yield Curve Control will bring down Interest Expense, we're still dealing with $4 trillion+ on top of the $12.5 trillion Deficit. Where will this money come from?

With Joe Biden all but securing the US Presidency (how is this shit not over yet?), one of the first items on the agenda (ex-pandemic) appears to be what to do with the runaway growth of student loan debt. Rightfully so.

Debt on student loans has grown at an 8% CAGR over the last ten years, while real wages for 25-year-olds with at least some college education has only barely kept up with CPI-based inflation.

AOC and Bernie are already proposing forgiving $10,000 worth of debt to at least 37 million borrowers, which would help bring nominal levels down. Will there be an airline industry type bailout of over-levered student loan balance sheets? We hope that tackling the growth of education expenses and the cost to acquire the debt to finance them (~7%+ interest rate) becomes a central part of this administrations' agenda.

Lastly, we're going to be exploring the ESG / Impact space in-depth as our next iteration of Lykeion begins to unfold, and one of the things we are going to be hyper-focused on is how capital flows into this space. These charts illustrate what we believe to be at least part of the problem.

Today, investors wanting to put their dollars to work while simultaneously arguing that they're doing good for the world are essentially investing into FAAMG-driven thematic funds, which tend to select holdings based on negative screens (i.e. companies that don't harm) rather than positive screens (i.e. companies that do good). From the looks of it, the four largest ESG funds seem to simply remove Oil & Gas holdings and overweight tech holdings.

This industry is still in its infancy so there is a lot of room for improvement. Stay tuned for more, and if you know great companies or great thinkers in the space, please do send them our way.