What is the Elephant Chart?

Income inequality has been rising globally for several decades now. One does not need to be a rocket scientist or have a Ph.D. in economics to see that the rich is getting richer and the poor is getting poorer – especially in the developed world. Ocassionally we learn about how these people actually maintain and growth their wealth. Revelations in Paradise Papers, Panama Papers, etc. show how the global elite pull this off right under noses of governments and regulators alike around the world.

In this month’s edition of The Absolute Return Letter, Niels Clemen Jensen writes about “The Lost Decade” in which he discusses about wage growth or lack there of, global income inequality, British home prices, robots, etc. The entire article is fascinating to read as he ties together the various pieces to put a convincing argument. One thing that caught my attention was the Elephant Chart. This chart shows the loss of labor to capital over many years.

From the article:

The elephant in the room

Before I suggest how this could all pan out, allow me to make one further observation. The fact that labour has lost out to capital for several decades has led to what is frequently referred to as the elephant chart (exhibit 8). If you take a closer look, I am sure you can see the resemblance with an elephant.

Exhibit 8: Global income growth, 1988-2008 (%)
Exhibit 8: Global income growth, 1988-2008 (%)
Source: World Bank

As is evident when looking at the chart, the middle classes of the developed world have been the biggest losers over the past few decades. Their income growth in the 1988-2008 period was negative and, even more remarkably, it was lower than that of the world’s poorest.

The chart is admittedly a tad long in the tooth. That said, other information I have access to confirms that the trend continues to this very day, so don’t expect me to conclude any differently, had exhibit 8 been up-to-date.

Meanwhile, EM middle classes have done well, and so have the global elite. No wonder the man in the street in our part of the world is not particularly happy. Whether governments are prepared to address the problem is an altogether different question.

Source: The Lost Decade by Niels Clemen Jensen, The Absolute Return Letter – November 2017, Absolute Return Partners

Interested readers may want to read the complete piece here.

US Markets Since The Election of Trump

The S&P 500 is up over 15% year-to-date. Since the election of Trump as President over a year ago US markets have soared. Investors are betting on a tax cut, more deregulation and other pro-business policies from the former business man. The S&P 500 has shot up over 22% thru the end of October since Nov 8, 2017 when he was elected.  The chart below shows the rally in US markets since the election:

Click to enlarge

The sectors that have performed the best and worst since the election:

Source:  One year of President Trump: the impact on markets by David Brett, Schroders

From the article:

President Trump has credited himself for the rise in the stockmarket since he won the US election 12 months ago.

It is not fake news. Demand for equities has been strong because it is hoped the Trump administration will pass legislation reducing tax for companies, which should boost their profitability.

Since the election on 8 November 2016 US stocks have risen by 22.1%. The S&P 500’s most recent all-time high of 2,581.07 was set on 27 October 2017.

It’s not just US stocks that have been buoyed. Global stocks are up 21.2% in the past year, as measured by the MSCI World index, and at all-time highs too.

It should be noted that markets are in the midst of a bull run that is in its ninth year. The S&P 500 is up 281% since its March 2009 low, equating to average annual rise of around 18%.

Stocks have recovered from the global financial crisis and continue to benefit from loose central bank monetary policy and low interest rates.

Markets rose fastest immediately after the election with investors buying into the “Trump trade” – the hope of tax cuts and policies that would boost spending, such as on infrastructure, and create inflationary pressure, which can make equities more attractive.

Trumps pro-business proposals included:
Lower corporate taxes
A repatriation tax holiday – a tax break on overseas profits
Massive infrastructure spending
Financial deregulation

It remains to be seen if President Trump will succeed in getting his proposals passed and if the current bull market in US equities will continue.

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Duration and Returns of US Bull Markets Since 1962

The current bull market in US stocks is one of the longest in history. Since the troughs reached in early 2009, the S&P 500 has continued to soar with mutiple records in recent weeks.The following chart shows the length and return of bull markets since 1962:

Click to enlarge

Source: When Time Is On Your Side: The Cyclical Nature of Fundamental Active Management by Michael W. Roberge, MFS, Sept 2017

Nobody knows how long the current expansion would continue. However the experts at Fidelity predict stocks may continue to run higher for some more time. From a article published last month at FE Trustnet:

Strategists at the group point out that there are a number of reasons to be negative on the outlook for equity markets from here – but there are also enough reasons to rule out an immediate correction.

For example, the S&P 500 has been hovering around the 2,400 mark for several months and it is possible to make a compelling argument for the index reaching as high as 2,700. While further expansion of valuation multiples is unlikely given how stretched they are at present, the US is seeing double-digit earnings growth that could drive stocks higher.

However, there are fewer arguments for the index moving much further past 2,700. Fidelity added: “When the market runs out of fundamental reasons to go up, then we are essentially entering bubble territory. We have already seen some remarkable price moves in some hot areas of the US stock market that look to be sentiment driven.”

That said, history suggests the bull market could continue without significant upheaval, according to the strategists. Given that an early exit by investors could leave a lot of potential return on the table, many could be unwilling to sell up until a turning point is clear and present.


Source: “Be braver for longer”: Fidelity calls the final phase of the bull market, FE Trustnet

Trying to predict the end of the bull market is a fool’s game. So intead of worried about how long good times will last or when stocks will crash investors are wise to focus on things that are under their control. For example, having cash on hand to deploy when there is bloods on the streets is one point to remember.

Falling Number of Listed Companies in the US Market: Chart

One of the reasons for the current bull market in US equities is the limited number of publicly listed companies. As more and more cash enters the market chasing a declining number of firms leads to more concentration. The chart below from a recent article at Schwab shows the dramatic fall in the number of public US firms since 1996:

Click to enlarge

Source: Charles Schwab, World Bank data as of 10/29/2017.

Source: Spirit of the Season: Scary Charts for Investors by JEFFREY KLEINTOP, Schwab, Oct 30, 2017

From the article:

Vanishing stocks

The number of companies listed in the U.S. stock markets has been cut in half over the past 20 years, going from 8,000 to about 4,000, as you can see in the chart below. The disappearing public stock market is a frightful prospect for active managers left with fewer stocks to pick from and investors concentrating more and more of their savings into fewer and fewer stocks.

Fortunately, this fear can be calmed by recognizing that the increasing number of non-U.S. stocks has more than offset the shrinking U.S. stock market. While there may be 4,000 fewer listed companies in the U.S. than 20 years ago, the number of non-U.S. listed companies has risen by 10,000 over the same period to about 27,000. (emphasis mine)

Jeff makes a good argument for international diversification. In addition to the traditional benefits of diversification going abroad also helps from the concentration risk in US stocks.