Private Wealth

Weekly Research Briefing: Not Green or Red

May 18, 2021


Yellow would be my blended portfolio risk advice these days. Valuations are up. Uncertainty has risen. We have gotten paid for much of the future economic bounce. The credit markets are strong. And the global central banks next move will not be to ease rates nor to increase liquidity. While there are some areas of the financial market to remain invested into, increasingly, there are more areas to dial back on or avoid completely. Regime changes in markets are tough. Portfolio managers do not like turnover, especially these days with so much focus on portfolio costs. And taking capital gains is never fun, although it could be this year if the tax rate doubles or triples into 2022. 

Inflation makes the front cover of Barron's this week, as it should, given the biggest surprise ever in the Consumer Price Index last week. Of course, the big question is if this is the start of a trend or if it is just economic restart hiccups? The monthly government data says hiccups, but it is tough not to see the surge in wages and benefits to attract workers, and the continued move in raw commodity and material prices. With the S&P 500 Index trading 20-21x next year's earnings number, there is not much room for a disappointment. Let's keep hoping that prices remain in check and earnings estimates continue to rise as the big retailers report earnings this week. 

In Washington, D.C., it is getting to be crunch time for the infrastructure deal. There is growing consensus to get a bipartisan deal done which means a smaller package with fewer tax increases. Given the strength in the economy, it looks like the odds of a massive Democratic-only deal will not occur as their moderates are beginning to pull at their own shirt collars. Many others, from Wall Street, to business owners, to economists are increasingly backing away from a multi trillion-dollar deal. Watch the prices of treasuries and the U.S. dollar. They are likely the tell on the size of the infrastructure package. Neither will like the size of a ginormous package at this point in the cycle. 

If you are off to a graduation or wedding this week, have a great trip. Spend big, tip large and travel safe.

Goldman Sachs notes that we are entering the more volatile part of the equity market...

The combination of slowing growth momentum and rising inflation has driven another combined sell-off of equities and bonds, or a 'balanced bear'. Weaker growth momentum tends to slow performance of risky assets and procyclical rotations across and within assets, although this depends on the speed and magnitude of the slowdown as well as the interaction with rates. Rising rates – especially real rates – can weigh more on equities than in the past due to longer equity duration (especially in the US). Either way, equity volatility tends to be higher past the peak in the ISM manufacturing.


That said, they also raised their S&P 500 estimate, but not targets for 2021...

We raise our EPS estimates for 2021 (to $193) and 2022 (to $202) following a rebound in S&P 500 profit margins in 1Q, but leave our year-end target unchanged as decelerating US growth, a real rate-driven rise in yields, and the likely passage of tax reform should keep the forward P/E multiple unchanged at ~22x.


Continued positive but slowing EPS growth through 2024


Has another supercycle arrived?

The slow return of capacity is causing a rip in commodity and material prices.

For commodity bulls like Goldman Sachs, the answer is a resounding yes. They argue the coronavirus pandemic has ushered in a new era of commodity-intensive growth, as governments put greater emphasis on job creation and environmental sustainability rather than the focus on financial stability that followed the 2009 global financial crisis. 

They point to President Joe Biden’s $2.3tn American Jobs Plan and Europe’s Green New Deal as evidence, both of which will pump huge amounts of investment into commodity-intensive infrastructure and projects aimed at meeting the goals of the Paris agreement on climate change. 

At the same time, commodity bulls highlight how years of low prices have prompted producers to curb spending on new projects and expansion, crimping supply. “I believe we are in for a supercycle. We don’t have many shovel-ready projects,” said Ivan Glasenberg, chief executive of Glencore, one of the world’s biggest miners and commodity traders, at a recent FT summit, referring to copper. 

This is not only true of the mining industry, where investment has been slashed after a brutal market downturn in 2014, but also oil, where many companies are looking to transition away from fossil fuels to renewable energy. Some Wall Street banks argue that oil demand will continue to outstrip supply growth in the coming years, potentially creating one last price surge before electric vehicles cause consumption to peak.


Input prices are increasingly showing up in the pricing surveys...

Tweet from @RBAdvisors

Last week's Consumer Price Index (CPI) surprise was one for the record books...

@Not_Jim_Cramer: Today's CPI was the largest positive surprise on record Consumer Price Index Surprises vs. Consensus

But much of the CPI spike was due to the post-COVID restart...

“After a downward shock in 2020, tailwinds from reopening the economy conspired in April to drive inflation significantly higher than consensus expectations. However, nearly 60% of the month-over-month increase in the headline was comprised of just five components -- used cars, rental cars, lodging, airfares, and food away from home -- that are very much transient in nature.”

(Andrew Husby and Yelena Shulyatyeva)


Always a silver lining...

"Inflation is not all bad. After all, it has allowed every American to live in a more expensive neighborhood without moving." - Alan Cranston

(Bespoke Investment Group)

Hopefully, a new car or truck is not on your 2021 shopping list...

Americans are shopping for cars in near-record numbers, but the world’s computer-chip shortage has left dealers with the fewest offerings in decades.

The market mismatch is driving up prices, and many buyers expecting to drive new cars off the lot have to wait weeks or months for their vehicles to arrive. Some showroom models sell for thousands of dollars over the sticker price.

“We may just be in the greatest new-car market of our existence,” Philadelphia-area car dealer David Kelleher said, “and we’re doing it with no cars.”

He recently woke up at 3:30 a.m. in a cold sweat and scrolled an iPad to check on his inventory of Jeeps and Ram trucks. After posting his best months ever in March and April, Mr. Kelleher was heading into the busy summer sales season with 98 vehicles on his lot instead of the usual 700.

“That really shook me up in a bad way,” he said. “This is going to be longer and more difficult than most people think.”

Running on Empty


Bank of America on where we stand…

BofA Biggest 2021 Inflows have been into inflation assets

And Bank of America on where we could be going…

BofA Bummer Calls

The market wants to own financials and materials, but not technology...

S&P 500 Sectors: % of Stocks Above 50-DMA


Banks > Semiconductors...

KBW Bank Index/Semiconductor Index


How much longer will Value outperform Growth?

Six-Month Performance Spread Between Large Cap Value & Growth


Not as many cheap stocks today, but plenty of expensive stocks...

Forward P/E: Growth vs Value


The credit markets get better every week...

Credit Suisse High Yield Index CCC Yield

Debt terms that you are only going to find at the top…

Risky companies are selling junk bonds at a record pace, getting ultralow borrowing costs and increasingly loose borrowing terms, such as “pick-your-poison” clauses.

One recent example was the debt package that funded the buyout of Birkenstock GmbH. The maker of frumpy-but-expensive German sandals was taken over in April by the private-equity fund of Bernard Arnault, the French billionaire who controls LVMH Moët Hennessey Louis Vuitton SE.

Birkenstock recently sold €430 million of CCC rated bonds, equivalent to around $522 million, at the riskier end of the ratings scale. The bonds, sold as part of a debt package, yield just 5.25%, comfortably below prevailing market rates. That is despite the debt being worth 7 times the company’s earnings.”

The bonds also contain terms that allow the firm to take on extra debt with a pick-your-poison clause, a term coined by research firm Covenant Review to describe a way for borrowers to get around traditional limits on borrowing.

The pick-your-poison nickname comes from the fact that both cash being paid to shareholders and extra debt being added to the business could be “poison” for existing lenders, but the clause lets the owners of the company choose between taking a dividend or borrowing more money.


Mr. Druckenmiller doesn't want you anywhere near U.S. Treasury Bonds or Notes…

You might want to also reconsider your ownership of U.S. dollars.

Future fiscal burdens will put the kind of political pressure on the central bank that hasn’t been seen in decades. The federal government has added 30% of GDP in extra fiscal deficits in only two years, right as the baby-boomer retirement wave is beginning to accelerate. The Congressional Budget Office projects that in 20 years almost 30% of all yearly fiscal revenues will have to be used solely to pay back interests on government debt, up from a current level of 8%. More taxes simply won’t be enough to bridge the gap, so pressures to monetize the deficit will inevitably rise over the years. The Fed should be adapting policy today to minimize these risks.

The risks are no longer hypothetical. For decades Treasurys have been the preferred asset for foreigners looking to hedge global portfolios. It was therefore shocking and unprecedented that in the midst of last year’s stock-market meltdown and while the Cares Act was being debated, foreigners aggressively sold Treasurys. This was dismissed by the Fed as a problem in the plumbing of financial markets. Even after trillions spent to prop up the bond market, foreigners have continued to be net sellers. The Fed chooses to interpret this troubling sign as the result of technicalities rather than doubts about the soundness of current and past policies.


Cumulative Fiscal Deficit from the start of the recession Stan Druckenmiller's presentation from a speech to USC Marshall School of Business last week is in this link:


Continued bearish thoughts for the U.S. dollar...

Tweet from @TimmerFidelity

Mr. Dalio also throws up the yellow flag...

“The big issue is the amounts of money that have been produced and put into the system,” Mr. Dalio said. Such risks have to “be balanced carefully. Productivity is the key” to keeping the economy from overheating, he said…

He described current stock-market valuations as a bubble, though not one driven by debt.

“There’s two types of bubbles,” Mr. Dalio said. “There’s the debt bubble when the debt time comes back and you can’t pay for it, and then you have the bubble bursting. And the other kind of bubble is the one where there’s just so much money and they don’t tighten it as much, and you lose the value of money. I think we’re more in the second type of bubble.”


There were several requests for us to look at Earnings Risk Premium vs. future market returns, so here you go...

According to Dr. Damodaran's monthly work, the implied Earnings Risk Premium for May 1, 2021 was equal to 3.99%. Like the P/E vs. future market returns chart last week, ERP also suggests a more difficult equity forward return environment.


Subsequent 2 Year Annualized S&P 500 Index Returns


What a great time to be looking for a job...

US Job Openings

Pay scales and benefits are being raised by the largest employers to find new employees...

McDonald’s said on Thursday it expects to pay average hourly wages of $15 an hour at company locations by 2024, as a brutal labor shortage coming out of the pandemic pushes the chain to start paying wages long demanded by labor advocates.

The Chicago-based burger giant plans to give the vast majority of workers at its company-owned restaurants 10% raises. It also plans to raise the starting salary to $11 to $17 an hour. The company expects the average hourly wage to hit $15 in a “phase, market-by-market approach” with some markets hitting that rate this year.

McDonald’s operates just 657 of its 13,682 U.S. restaurants, but the pay increase will impact more than 36,500 workers. Franchisees operate the rest of those locations and their employees are not covered.


SEATTLE--May 13, 2021-- Amazon today announced that it is hiring 75,000 people in its fulfillment and logistics network across the U.S. and Canada as it continues to expand its footprint and serve customers. Amazon recently announced pay increases across its fulfillment and transportation networks, and these open roles offer an average starting pay of over $17 per hour, plus sign-on bonuses in many locations of up to $1,000. In addition, the company offers full-time employees industry-leading benefits, which include health, vision, and dental insurance, 401(k) with 50% company match, paid parental leave, and access to various company-funded upskilling opportunities, including Amazon’s innovative Career Choice program, which prepays 95% of tuition for courses in high-demand fields.


As jobs become increasingly available, wages rise and unemployment benefits end, people are going back to work...

Tweet from @carlquintanilla

Good luck getting anything delivered on time this summer...

I am guessing that somewhere inside the Port of Los Angeles is all my Restoration Hardware patio furniture. Maybe it will arrive by football season?

ACT For-Hire Trucking Index: Driver Availability


A big driver to the economy right now is this bounce in travel data...

TSA Checkpoint Travel Numbers, 7 Day Average


Europe is now vaccinating at the rate that we were in March...

European Vaccinations Have Caught Up With the US


As a result, their confidence is rising rapidly...

European consumer confidence is far strong than last summer


Germany is shifting into a higher gear...

ZEW Germany Current Situation

If you want to follow the U.S. market rebound playbook, check out the European financial stocks...

@verrone_chris: One by one, Euro area yields are going positive, and the Euro Banks keep telling the story... @StrategasRP

Euro Banks Remain A Favorite

Now for a comparison of private debt to public debt...

For the last two weeks, we compared the top categories of private equity to their respective public equity benchmarks. Now let's look at the third largest category of private assets which falls into the debt asset class.

Given that the private debt market was pretty small until the year 2000, we will start our comparison there. And we will compare it to the Credit Suisse Leveraged Loan Index which it has the most asset overlap. In comparing the quarterly returns, we find below the returns for private debt are over two times public debt with a nearly identical standard deviation. This is even better than what we found for the PE buyout and PE growth markets.

Private Debt compared to Public Debt

(Source: Hamilton Lane Data via Cobalt LP and Morningstar)

*Past performance is not indicative of future results. 

Evolution of Private Market categories over time...

Here you can see that private credit is about 15% of the total private asset market, up from 5% back in 2000.

Trailing 3Y Private Markets Fundraising

(Hamilton Lane / Cobalt / Preqin / PEI)

Please refer to definitions at the end of the document.

Battery technology has changed little over the last twenty years, so any advance could be significant...

In a report from The Harvard Gazette, the engineering team has designed a stable, solid-state battery using lithium-metal that can be charged and discharged at least 10,000 times at a high current density. According to the report, this technology has the potential to increase the lifetime of EVs by an additional 10 to 15 years without replacing the battery.

Furthermore, Harvard’s research team believes the solid-state battery could offer EVs the capacity to fully charge in 10 to 20 minutes due to its high current density. Xin Li, associate professor of materials science at the Harvard John A. Paulson School of Engineering and Applied Science (SEAS), explains:

Our research shows that the solid-state battery could be fundamentally different from the commercial liquid electrolyte lithium-ion battery. By studying their fundamental thermodynamics, we can unlock superior performance and harness their abundant opportunities.

A major reason other battery experts have not pursued this lithium-metal approach is due to their less than ideal chemical volatility. When Lithium batteries charge, lithium ions move from the cathode to the anode. With lithium-metal anodes, the moving lithium can cause needle-like structures called dendrites to form on the surface of the anode and beyond. These dendrites can then grow into the electrolyte separating the anode and cathode, causing battery malfunction or even fire.


Finally, what a great looking chart...

Now that we have moved past COVID yet remained diligent about virus germs, it looks like all U.S. deaths are in a freefall.

Weekly Number of Deaths



The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

Endnotes: Strategy Definitions

Credit – This strategy focuses on providing debt capital.

Growth Equity – Any PM fund that focuses on providing growth capital through an equity investment.

Infrastructure – An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.

Mega/Large Buyout – Any buyout fund larger than a certain fund size that depends on the vintage year.

Natural Resources – An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.

Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.

Venture Capital – Venture Capital incudes any PM fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments.

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