Weekly Reading 1/14/2022

Bill Gross on Demographics and the New Normal

Gross lives up to his name and kicks off his 2010 outlook with bathroom humor… you can skip the first page.

This outlook is now over a decade old but the themes Gross discusses are measured in generations, not years.

• The New Normal, coined in the wake of the Financial Crisis, involved deleveraging, reregulation, and deglobalization.
  • All three of these forces put downward pressure on economic growth
    • Instead of supporting economic growth, capital is used to pay down debts.
    • Across all averages, regulation stifles business growth and hurts confidence.
    • Deglobalization removes efficiencies and raises costs.
• Another force exerting downward pressure is demographics
  “Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence. The more and more consumers, the more and more need for things to be produced. I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population.”
• “The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debts a percentage of GDP from 150% to over 300% in the United States, for example. Lacking an accelerating population base, all developing countries promoted the financing of more and more consumption per capita in order to maintain existing GDP growth rates.”
• Things have changed quite a bit since 2010, the Trump Tax Cuts followed by COVID-19 relief measures have reversed the deleveraging theme.



• Most economic models assume that GDP growth is mean-reverting with terminal growth rates settling in somewhere around 2-3%.
• With US population growth projected to flat-line 2-3% economic growth is a tall order!



• What does a world with less look like? Does capitalism (or at least the ideals underpinning it) survive? Without capitalism can democracies survive in their present state? Japan hasn’t grown and seems to be doing just fine. Could there be other metrics of wealth that aren’t captured by economic data?

Palm Valley Capital Fund (PVCMX)

Reminder: Discussion of securities does not constitute a recommendation to buy. Please review full disclosure below.

One of my favorite contrarian managers to read. Palm Valley is a deep-value shop focused on absolute performance. At a time when many managers have abandoned their convictions to chase performance, Palm Valley has stood firm despite very tough performance and few investment opportunities. Palm Valley ended 4Q21 with 79% of their assets in cash. They clearly have conviction- you have to respect that!

This quarter’s letter includes Mike Rowe from Dirty Jobs and a reference to Dumb and Dumber.

Palm Valley seeks to take an unbiased and clear approach that looks through distortions to focus on free cash flow. To do this, they make adjustments to a company’s reported numbers to account for the balance sheet, share-based compensation, and other noise that can otherwise impact analysis.

The Zanzibar Chest by Aiden Hartley

Aiden Hartley was working as a foreign correspondent for Reuters in the 1990s and covered the Rwandan genocide. Below is part of a story about a boy named Dibadirigwa.

“I was standing next to one of the pits one day taking notes. African volunteer orderlies in face masks, with plastic gloves or socks on their hands, tossed the cadavers out of the trucks and into the hole. French Foreign Legionnaires were directing the burial. At first the orderlies lined up the dead neatly. As the layers increased they began dumping them any old how. There was a smacking noise as bodies landed on top of one another, pulling free of their raffia shrouds. A French legionnaire scattered quicklime over the pile of bodies, which would burn up and dissolve them swiftly. The white powder coated the heap and gave the appearance of a carved relief on a marble monument of many Africans, almost serene with their eyes closed and tangled up in a heap of clothes, feet, hands, and heads.

I was gazing at this and waiting for the bulldozer to move in and cover them with dark volcanic earth when the legionnaire cried out for it to halt. His eyes were wide behind his mask and he pointed into the pit.

“I can’t believe this,” he exclaimed in a strangled voice. “This is beyond my imagination!”

I looked. And though it is difficult for me now to write this, I have to tell you. I saw movement. An arm, a raised small hand.

The legionnaire and I leaped into the pit together. We clambered among the dead. I sunk among bodies, stepped on gassy, hollow bellies, slipped on limbs, found purchase on a head, reached down and pulled free the raised hand. It was a little boy.”

John Schreiber on Twitter