Weekly Investment Insight. Growth Investor? Or Liquidity Speculator?

September 19, 2021

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1. Growth Investor? Or Liquidity Speculator? 

The chart above was produced by one of the world’s biggest hedge funds, Bridgewater. It shows that Growth as an investment factor in equities has persistently declined since the early 2000s.

The US equity peaks have coincided with significant peaks in liquidity as a factor. Currently the gap has almost closed entirely. Liquidity comes and goes and has different behavior than growth, and so requires its own careful investment consideration.


Long term growth in the US has been in a multi decade decline (see link below) and so equity rallies have become increasingly dependent on liquidity.  Productive investment and long term growth is one thing. Massive government support and stimulus can boost near term spending significantly and boost short term growth. However, once the money is spent growth declines again and, in addition, the “stimulus” leaves behind an ever increasing burden of debt.


2. How much difference has liquidity made on the S&P500? 100% over the last 10 years and accelerating?


3. This is a dangerous time to have your allocation based rigidly on a correlation between stocks and bonds.

QE has typically been characterized as an economic growth tool by the Federal Reserve, but it is now also increasingly impacted by the size of the budget deficit and also the cost of deficit financing. Raising interest rates is much harder to do as the burden of interest costs would expand quickly even at moderately low interest rates by historical standards.

This is a dangerous time to have your allocation based rigidly on a correlation between stocks and bonds.

The chart below suggests the correlation has begun to change already with the one year and 5 year correlations trending back towards zero. The main argument for this allocation strategy is that bonds and stocks have a negative correlation. However, the 150 year history shows that this has very often not been the case.

Many investors have their core allocation strategy set by a risk level which is then applied to a split between stocks and bonds.

My book,  https://geni.us/InvestLiketheBest , challenges the risk level approach to allocation, and history challenges the concept of allocation being resolved solely by different stock and bond portfolio splits.

Make sure your allocation is based on sound and optimal assumptions and strategies.


Equity-bond correlation is not a static number. It can be both
positive and negative. The observed correlation is the result of rich
and dynamic interaction between a multitude of macroeconomic
factors. There is no economic theory or empirical model that fully
captures this dynamism.

Our long historical analysis of equity-bond correlations going
back over 140 years shows that equity-bond correlation has gone
through many regimes. The most recent period of negative correlations began in the ‘90s. Prior to that, equity-bond correlation
was positive for over 40 years.

As the current period of negative correlation seems to be
closing in towards zero, we should not be constrained by any
preconceived notion about what this correlation ought to be. As
history can readily demonstrate, equity-bond correlation can be
positive for quite some time.”


4. Liquidity speculators need to use trading discipline. Watch the price wedges on the SP 500, Nasdaq, and Russell and volatility closely.

5. How distorted are your long term investment expectations? Is 52 years of zero real SP 500 returns possible? What does history tell you?




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