9 min read

11 / Things Fall Apart

11 / Things Fall Apart

This week's doses of finance, the world and sources of interest:

#1. Doses of Finance đź’°

The relationship between stocks and bonds has broken down

The breakdown in the traditional stocks/bonds correlation has made the first half of this year rather unsettling for conventional 60/40 investment portfolios, where investments are split 60% in stocks and 40% in bonds:

Charlie Bilello

The classic 60/40 portfolio has taken a beating this year as both asset classes have tanked.

In the first six months, it took its deepest first-half dive since 1988.


And last quarter was worse than in the depths of the global financial crisis and during the pandemic rout.


Whether bonds will still work as a hedge against stocks is an ongoing debate.

And as usual there are boffins on either side of the argument...

Goldman Sachs thinks Treasuries remain dead as a hedge as central bankers tighten monetary policy.

JPMorgan Asset Management reckon yields at multi-year highs will help bonds flourish in the next crash.

Another guessing game, then.

In general, stock and bond market returns tend to have opposite exposures to economic growth news, but directionally similar exposures to inflation news.

In other words, the correlation is pushed negative when there is more growth news (or uncertainty), and pushed more positive when there is more inflation news (or uncertainty).

As it looks, a more prolonged positive stock/bond correlation would probably require a rise in longer-term inflation uncertainty, along with monetary policy errors.

This remains a very real risk.

Only four times over one century, annual performances of both stocks and bonds were negative: 1931, 1941, 1969 and this year (2022 YTD).

So What?

Bonds are boring anyway. And in any case, what has happened this year shows that you need to be diversified, perhaps come up with new ways to protect your portfolio and stop relying only on bonds.

I talked about some ways you can do that here and here.

Demand for alternative investments is set to grow by up to 46% over the next 12-months.

Other ways include investing in commodities (which has proven its worth this year), and seeking dynamic strategies such as long/short equity and trend following.

If you want to be more of a snob than investing in fine art, another low-profile alternative is worth mentioning. Fine wine.

Higher demand and limited supply of fine wine have helped generate impressive returns in the last couple of decades. Just look at the Liv-ex 1000 industry benchmark which tracks 1000 of the most traded wines across the world. Its value has risen by 26% in the last year alone, beating the S&P 500 by almost 40%.


I would not suggest an aggressive deallocation from bonds, but rather (if this positive correlation really worries you), a focus on increasing the size and diversifying power of the alternatives allocation.

A final thought...

It doesn't make sense (at least not now) to have a 60/40 portfolio that is only exposed to the U.S.

Sure, the U.S. stock market has long been considered the source of the greatest returns for investors, outperforming all other types of financial securities over the past century or so.

But the world has changed. Investing has and will continue to change. Cryptos were not around before. China wasn't that powerful. The democratisation of traditionally unreachable asset classes has never been so pronounced.

+ The Many Reasons ESG Is a Loser [WSJ]. "1) ESG funds have underperformed; 2) companies that tout their ESG credentials have worse compliance records for labor and environmental rules; 3) ESG scores of companies that signed the U.N. Principles of Investment didn’t improve after they signed, and financial returns were lower for those that signed; and my favorite point, 4) Companies publicly embrace ESG as a cover for poor business performance." See also How to make sustainable investing work [FT].

I have always believed, rather than avoiding bad apples, actually seeking to apply positive benefit can make ESG work. Impact investing is the only way forward and should be the future of all ESG investing. Away with the BS marketing ploy.

+ Active Funds Are on Top Again. It Took a Bear Market to Put Them There [Barron's]. "After more than a decade of chronic underperformance, more actively managed stock mutual funds and exchange-traded funds have been beating their passive peers at a steadily rising rate during the stock market’s selloff this year. Just over half of U.S. stock funds outperformed the average passive portfolio through May, compared with 45% in 2021. Nevertheless, it’s too soon for managers to wash down years of humble pie with Champagne."

The jury is still out whether active will continue to outperform. They've absolutely been blessed with crap market conditions. Over the long term, many active managers will continue to have a hard time sustaining outperformance. They will either close down or be unable to keep up through different market cycles. The real test will come in the next bull run.

#2. In the World 🌎


Is the World Really Falling Apart, or Does It Just Feel That Way? [Gift Article: New York Times]

A reassuring piece. Perhaps more so for economists...

"Scanning the headlines, it’s easy to conclude that something has broken. The pandemic. Accelerating crises from climate change. Global grain shortage. Russia's war on Ukraine. Political and economic meltdown in Sri Lanka. A former prime minister’s assassination in Japan. And, in the United States: inflation, mass shootings, a reckoning over Jan. 6 and collapsing abortion rights."

But in many ways, Max Fisher writes, people around the world are better off than they ever have been:

War is rarer today and significantly less deadly.

Genocides and mass atrocities are less common.

Life expectancy, literacy and standards of living have all risen to historic highs.

Hunger, child mortality and extreme poverty have declined.

"Still, try visiting a society in turmoil — Hong Kong amid encroaching authoritarianism, say, or Lebanon in economic free-fall — and telling people that they live in an age of rising well-being and receding threats. You are likely to be met with incredulous glares."

The internet and breaking news obviously amplifies the bad. Media in general is not very helpful.

The feeling that the world is going to shit is not universal though. Fisher notes that in low-income and middle-income countries (which make up most of the world’s population), survey after survey has found people tend to express optimism about the future. Pessimism is the prevailing mood only in wealthy countries like the U.S.

Perceptions on democracy is a different story. That seems to be going to shit everywhere. Probably back to Ancient Greece and Roman times!

+ Live in Bali taxi-free as a Digital Nomad [Indian Express]. An explanation of how to live tax-free on a beach so Indonesia can revive its economy. And other places offering 'nomad' visas.

+ France's unspoken, unfinished civil war [The Critic]. This is a neat story. For the past 20 years, an endless cycle of paradox and performative acts has defined French politics. Social unrest and politically polarised elections has its roots in the Algerian conflict that most French do not even know about. "The French paradox: it is a country that is both revolutionary and deeply conservative at the same time, both ungovernable and technocratic, a country where the Republic never really took hold and therefore has had to sustain itself in the symbolism of administrative order. It is a country of equality but not integration."

+ Jill Biden apologizes after citing 'bodegas' and 'breakfast tacos' to praise Hispanic diversity [CNN]...


Western countries will like these estimates. Despite being a democratic mess in recent years, India is still the world's largest democracy. This probably won't be much of a counterweight to China's influence in the region though, or the world for that matter. Antony Blinken was right when he said that China is the only [other] country in the world with the intent to reshape the international order, and increasingly the economic, military, diplomatic and technological power to do it. India isn't even close.

#3. Sources of Interest đź’ˇ


  • A Plane of Monkeys, a Pandemic, and a Botched Deal: Inside the Science Crisis You’ve Never Heard Of [Mother Jones]. "Experts say there’s a dire shortage of primates for biomedical research—and it’s putting human lives at risk."
  • Buddhism has found a new institutional home in the West: the corporation [Guernica]. Seems like a good thing on the face of it. But then I kept reading, and as I did, I couldn't help but think of Adam Neumann's WeWork as a prime example: "Corporate spirituality is turning work into a religion. In an industry where 70+ hour workweeks are normal, the boundary between private life and work has been erased. Almost all Fortune 500 companies are now organizing themselves to function as religious organizations. They have an origin story, a mission, ethics, and a particular set of practices, and many of them have a charismatic leader, which are all basic components of organized religion."
  • The dawn of a new era in astronomy has begun [NASA]. See link for the first images from the James Webb Space Telescope. If you haven't already I don't know what planet you're living on. The $10 billion, tennis-court sized spacecraft is the largest, most powerful telescope ever put in space. 10 years behind schedule and double its original budget. Its sensors are powerful enough to spot the heat of a bumblebee at the distance of the Moon from the Earth. Give yourself the opportunity to peer back in time and reflect on your utterly inconsequential existence. Read why it is such a big deal.


  • Revisionist History [Pushkin]. "Revisionist History is Malcolm Gladwell's journey through the overlooked and the misunderstood. Every episode re-examines something from the past—an event, a person, an idea, even a song—and asks whether we got it right the first time."


  • The Gatekeepers [Youtube]. A fascinating and edifying documentary. It was nominated for Best Documentary Feature at the 85th Academy Awards and The New York Times described it as "essential, eye-opening viewing if you think you understand the Middle East." Here is the official description: "Charged with overseeing Israel’s war on terror—both Palestinian and Jewish—the head of the Shin Bet, Israel’s secret service, is present at the crossroad of every decision made. For the first time ever, six former heads of the agency agreed to share their insights and reflect publicly on their actions and decisions. The Gatekeepers offers an exclusive account of the sum of their successes and failures. It validates the reasons that each man individually and the six as a group came to reconsider their hard-line positions and advocate a conciliatory approach toward their enemies based on a two-state solution." You can read the reception section on Wikipedia to see the broader scope of the response to the film.
  • The Anarchists. This is a bit wild. A new six-part documentary series from HBO about a fringe political community in the Mexican resort city of Acapulco. See Anarchy in paradise: how a fringe community descended into darkness for a detailed read about the series which is worth the read whether you watch it or not. The series isn’t about the philosophy of anarchism, which is opposed to all hierarchical structures and thus inherently anti-capitalist. It focuses on a small subset known as anarcho-capitalism, which believes in governance by the free market of unfettered capitalism. "Unsurprisingly, given the characters drawn to statelessness, the philosophical divisions within anarcho-capitalism, the quicksilver fortunes of bitcoin investments, and the general messiness of human relationships, the answer was drama and chaos." This is a story of the clash of utopian ideology with the unpredictability of human nature. See the trailer below:

+ If you've got this far and want more sources of interest, this will keep you occupied: An interactive history of the world, as told through Wikipedia articles. [Histography]. View on a computer.

I hope that some of these passages gave you something to think about or enjoy.

Let me know which links or comments resonate with you, what you think of the newsletter, and if there’s anything I can support you with.

Happy Weekend.