Europe has handed China a strategic victory

This is the wrong time for the EU to agree an investment treaty with Beijing

Gideon Rachman 

© James Ferguson/FT

Ursula von der Leyen, the president of the European Commission, says she wants to lead a “geopolitical commission”. 

But Ms Von der Leyen concluded 2020 by sending a truly awful geopolitical message — as her commission signed off on an investment treaty between the EU and China.

Over the past year, China has crushed the freedom of Hong Kong, intensified oppression in Xinjiang, killed Indian troops, threatened Taiwan and sanctioned Australia. 

By signing a deal with China nonetheless, the EU has signalled that it doesn’t care about all that. 

As Janka Oertel, director of the Asia programme at the European Council on Foreign Relations think-tank, puts it: “This is a massive diplomatic win for China.”

It is also a considerable kick in the teeth for Joe Biden. The US president-elect has stressed that, after Donald Trump, he wants to make a fresh start with Europe. 

In particular, the Biden administration wants to work on China issues together with fellow democracies. 

Jake Sullivan, Mr Biden’s national security adviser, issued a last-minute plea for the Europeans to hold off on signing the deal — at least until they had a chance to discuss it with the new administration. He was ignored. 

EU officials offer several justifications for their decision. They say that many of the concessions the EU has got from China have already been granted to the US, as part of America’s own “phase-one” trade deal. (These include sectoral openings in several industries, as well as changes to joint-venture requirements.) 

Brussels officials point out that the US did not ask for European permission before concluding its own deal with China. They justify the EU’s decision as a demonstration of “strategic autonomy”. 

These EU arguments sound tough-minded. But, in fact, they are naive. It is naive to believe that China will respect the agreement it has signed. It is naive to ignore the geopolitical implications of doing a deal with China right now. 

And it is naive to think that the darkening political climate in Beijing will never affect life in Brussels or Berlin.

The EU says that this deal will “discipline the behaviour” of China’s state-owned enterprises, which will now be required “to act in accordance with commercial considerations”. 

But China made very similar commitments when it joined the World Trade Organization in 2001. 

Pledges to rein in state subsidies made 20 years ago are now being offered up again as fresh concessions. Beijing’s promise to “work towards” enforcing international conventions on labour standards are also laughably weak. 

As Shi Yinhong, a prominent Chinese academic, pointed out: “On labour, it’s impossible for China to agree. Can you imagine China with free trade unions?” 

Over the past year, China has repeatedly demonstrated its willingness to ignore treaty commitments. Its new national security law violates an agreement with Britain that guaranteed the autonomy of Hong Kong. 

China has also imposed tariffs on Australian goods in violation of the China-Australia free trade agreement. 

The timing of this deal is exquisite for Beijing, since it presents the Biden team with a fait accompli. Reinhard Bütikofer, chairman of the European parliament’s delegation on China, says: “We’ve allowed China to drive a huge wedge between the US and Europe.”

The EU-China deal was pushed hard by Angela Merkel, the German chancellor, and concluded right at the end of her country’s presidency of the EU. Ms Merkel is seen as a champion of liberal values. 

But her approach to China is largely driven by commerce. She knows that the German car industry has had a rough few years, and China is its largest market. 

Ms Merkel’s determination to press ahead may also reflect her own scepticism about the future of the US. In a speech in 2017, she said that Europe could no longer rely on America. The election of Mr Biden has probably not changed that view. 

Many Europeans also believe that the US is on the brink of a new cold war with China — and want little part of that. 

Some of these arguments are reasonable enough. It is hard to look at current events in Washington and feel totally confident about the stability of the US or the Atlantic alliance. A European desire to avoid military confrontation in the Pacific is also rational. 

But relying on an American security guarantee in Europe, while undermining American security policy in the Pacific, does not look like a wise or sustainable policy over the long run.

The Europeans are also kidding themselves if they think they can be blind to the increasingly authoritarian and aggressive nature of Xi Jinping’s China. 

For the past 70 years, Europeans have benefited from the fact that the world’s most powerful nation is a liberal democracy. 

If an authoritarian nation, such as China, displaces America as the dominant global power, then democracies all over the world will feel the consequences. 

Even in the current geopolitical order, China has repeatedly demonstrated its willingness to use its economic power as a strategic weapon. 

By deepening their economic reliance on China — without co-ordinating their policy with fellow democracies — European nations are increasing their vulnerability to pressure from Beijing. 

That is a remarkably shortsighted decision to make, for a “geopolitical commission”.

Waiting For The Last Dance

Jeremy Grantham


- Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another.

- The real trouble with asset allocation, though, is in the remaining times when asset prices move far away from fair value.

- I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble.

- This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely.

Executive Summary

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.

But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. 

Make no mistake - for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.

"The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can't have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both - and the price we pay for having this market go higher and higher is a lower 10-year return from the peak."1

Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another. The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct. 

With reasonable skill at evaluating assets the valuation-based allocator can expect to survive these phases intact with some small outperformance. "Small" because the opportunities themselves are small. If you wanted to be unfriendly you could say that asset allocation in this phase is unlikely to be very important. 

It would certainly help in these periods if the manager could also add value in the implementation, from the effective selection of countries, sectors, industries, and individual securities as well as major asset classes.

The real trouble with asset allocation, though, is in the remaining times when asset prices move far away from fair value. This is not so bad in bear markets because important bear markets tend to be short and brutal. 

The initial response of clients is usually to be shocked into inaction during which phase the manager has time to reposition both portfolio and arguments to retain the business. 

The real problem is in major bull markets that last for years. Long, slow-burning bull markets can spend many years above fair value and even two, three, or four years far above. 

These events can easily outlast the patience of most clients. And when price rises are very rapid, typically toward the end of a bull market, impatience is followed by anxiety and envy. As I like to say, there is nothing more supremely irritating than watching your neighbors get rich.

How are clients to tell the difference between extreme market behavior and a manager who has lost his way? 

The usual evidence of talent is past success, but the long cycles of the market are few and far between. Winning two out of two events or three out of three is not as convincing as a larger sample size would be. 

Even worse the earlier major market breaks are already long gone: 2008, 2000, or 1989 in Japan are practically in the history books. Most of the players will have changed. Certainly, the satisfaction felt by others who eventually won long ago is no solace for current pain experienced by you personally. 

A simpler way of saying this may be that if Keynes really had said, "The market can stay irrational longer than the investor can stay solvent," he would have been right.

I am long retired from the job of portfolio management but I am happy to give my opinion here: it is highly probable that we are in a major bubble event in the U.S. market, of the type we typically have every several decades and last had in the late 1990s. It will very probably end badly, although nothing is certain. 

I will also tell you my definition of success for a bear market call. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. 

This definition of success absolutely does not include precise timing. (Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible.

I came fairly close to calling one bull market peak in 2008 and nailed a bear market low in early 2009 when I wrote "Reinvesting When Terrified." That's far more luck than I could hope for even over a 50-year career. 

Far more typically, I was three years too early in the Japan bubble. We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. 

It seemed prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! 

But we also stayed completely out for three years after the top and ultimately made good money on the round trip.

Similarly, in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. 

We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses.

Believe me, I know these are old stories. 

But they are directly relevant. For this current market event is indeed the same old story. This summer, I said it was likely that we were in the later stages of a bubble, with some doubt created by the unique features of the COVID crash. 

The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals. 

For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation. But now we have it. In record amounts.

My colleagues Ben Inker and John Pease have written about some of these examples of mania in the most recent GMO Quarterly Letter, including Hertz, Kodak, Nikola, and, especially, Tesla. 

As a Model 3 owner, my personal favorite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. 

What has 1929 got to equal that? Any of these tidbits could perhaps be dismissed as isolated cases (trust me: they are not), but big-picture metrics look even worse.

The "Buffett indicator," total stock market capitalization to GDP, broke through its all-time-high 2000 record. In 2020, there were 480 IPOs (including an incredible 248 SPACs2) - more new listings than the 406 IPOs in 2000. 

There are 150 non-micro-cap companies (that is, with market capitalization of over $250 million) that have more than tripled in the year, which is over 3 times as many as any year in the previous decade. 

The volume of small retail purchases, of less than 10 contracts, of call options on U.S. equities has increased 8-fold compared to 2019, and 2019 was already well above long-run average.

Perhaps most troubling of all: Nobel laureate and long-time bear Robert Shiller - who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect - is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks. Oh my!

So, I am not at all surprised that since the summer the market has advanced at an accelerating rate and with increasing speculative excesses. 

It is precisely what you should expect from a late-stage bubble: an accelerating, nearly vertical stage of unknowable length - but typically short. 

Even if it is short, this stage at the end of a bubble is shockingly painful and full of career risk for bears.

I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble. 

A bubble that is beginning to look like a real humdinger.

The strangest feature of this bull market is how unlike every previous great bubble it is in one respect. 

Previous bubbles have combined accommodative monetary conditions with economic conditions that are perceived at the time, rightly or wrongly, as near perfect, which perfection is extrapolated into the indefinite future. 

The state of economic excellence of any previous bubble of course did not last long, but if it could have lasted, then the market would justifiably have sold at a huge multiple of book.

But today's wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. 

Yet the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. 

Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.

This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there's the rub.

All bubbles end with near universal acceptance that the current one will not end yet... because. 

Because in 1929 the economy had clicked into "a permanently high plateau"; because Greenspan's Fed in 2000 was predicting an enduring improvement in productivity and was pledging its loyalty (or moral hazard) to the stock market; because Bernanke believed in 2006 that "U.S. house prices merely reflect a strong U.S. economy" as he perpetuated the moral hazard: if you win you're on your own, but if you lose you can count on our support.

Yellen, and now Powell, maintained this approach. All three of Powell's predecessors claimed that the asset prices they helped inflate in turn aided the economy through the wealth effect. 

Which effect we all admit is real. But all three avoided claiming credit for the ensuing market breaks that inevitably followed: the equity bust of 2000 and the housing bust of 2008, each replete with the accompanying anti-wealth effect that came when we least needed it, exaggerating the already guaranteed weakness in the economy. This game surely is the ultimate deal with the devil.

Now once again the high prices this time will hold because... interest rates will be kept around nil forever, in the ultimate statement of moral hazard - the asymmetrical market risk we have come to know and depend on. 

The mantra of late 2020 was that engineered low rates can prevent a decline in asset prices. Forever! 

But of course, it was a fallacy in 2000 and it is a fallacy now. In the end, moral hazard did not stop the Tech bubble decline, with the NASDAQ falling 82%. Yes, 82%!

Nor, in 2008, did it stop U.S. housing prices declining all the way back to trend and below - which in turn guaranteed first, a shocking loss of over eight trillion dollars of perceived value in housing; second, an ensuing weakness in the economy; and third, a broad rise in risk premia and a broad decline in global asset prices (see Exhibit 1). 

All the promises were in the end worth nothing, except for one; the Fed did what it could to pick up the pieces and help the markets get into stride for the next round of enhanced prices and ensuing decline. And here we are again, waiting for the last dance and, eventually, for the music to stop.


Nothing in investing perfectly repeats. Certainly not investment bubbles. Each form of irrational exuberance is different; we are just looking for what you might call spiritual similarities. 

Even now, I know that this market can soar upwards for a few more weeks or even months - it feels like we could be anywhere between July 1999 and February 2000. Which is to say it is entitled to break any day, having checked all the boxes, but could keep roaring upwards for a few months longer.

My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID vaccine. At that moment, the most pressing issue facing the world economy will have been solved. 

Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID crisis, and valuations are absurd. "Buy the rumor, sell the news." But remember that timing the bursting of bubbles has a long history of disappointment.

Even with hindsight, it is seldom easy to point to the pin that burst the bubble. The main reason for this lack of clarity is that the great bull markets did not break when they were presented with a major unexpected negative. 

Those events, like the portfolio insurance fiasco of 1987, tend to give sharp down legs and quick recoveries. They are in the larger scheme of things unique and technical and are not part of the ebb and flow of the great bubbles. 

The great bull markets typically turn down when the market conditions are very favorable, just subtly less favorable than they were yesterday. And that is why they are always missed.

Either way, the market is now checking off all the touchy-feely characteristics of a major bubble. 

The most impressive features are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears. 

In 1929, to be a bear was to risk physical attack and guarantee character assassination. 

For us, 1999 was the only experience we have had of clients reacting as if we were deliberately and maliciously depriving them of gains. In comparison, 2008 was nothing. 

But in the last few months the hostile tone has been rapidly ratcheting up. 

The irony for bears though is that it's exactly what we want to hear. It's a classic precursor of the ultimate break; together with stocks rising, not for their fundamentals, but simply because they are rising.

Another more measurable feature of a late-stage bull, from the South Sea bubble to the Tech bubble of 1999, has been an acceleration3 of the final leg, which in recent cases has been over 60% in the last 21 months to the peak, a rate well over twice the normal rate of bull market ascents. 

This time, the U.S. indices have advanced from +69% for the S&P 500 to +100% for the Russell 2000 in just 9 months. Not bad! And there may still be more climbing to come. But it has already met this necessary test of a late-stage bubble.

It is a privilege as a market historian to experience a major stock bubble once again. 

Japan in 1989, the 2000 Tech bubble, the 2008 housing and mortgage crisis, and now the current bubble - these are the four most significant and gripping investment events of my life. 

Most of the time in more normal markets you show up for work and do your job. Ho-hum. And then, once in a long while, the market spirals away from fair value and reality. 

Fortunes are made and lost in a hurry and investment advisors have a rare chance to really justify their existence. But, as usual, there is no free lunch. 

These opportunities to be useful come loaded with career risk.

So, here we are again. I expect once again for my bubble call to meet my modest definition of success: at some future date, whenever that may be, it will have paid for you to have ducked from midsummer of 2020. 

But few professional or individual investors will have been able to have ducked. 

The combination of timing uncertainty and rapidly accelerating regret on the part of clients means that the career and business risk of fighting the bubble is too great for large commercial enterprises. 

They can never put their full weight behind bearish advice even if the P/E goes to 65x as it did in Japan.

The nearest any of these giant institutions have ever come to offering fully bearish advice in a bubble was UBS in 1999, whose position was nearly identical to ours at GMO. That is to say, somewhere between brave and foolhardy. 

Luckily for us though, they changed their tack and converted to a fully invested growth stock recommendation at UBS Brinson and its subsidiary, Phillips & Drew, in February 2000, just before the market peak. 

This took out the 800-pound gorilla that would otherwise have taken most of the rewards for stubborn contrariness. 

So, don't wait for the Goldmans and Morgan Stanleys to become bearish: it can never happen. 

For them it is a horribly non-commercial bet. Perhaps it is for anyone.

Profitable and risk-reducing for the clients, yes, but commercially impractical for advisors. Their best policy is clear and simple: always be extremely bullish. 

It is good for business and intellectually undemanding. 

It is appealing to most investors who much prefer optimism to realistic appraisal, as witnessed so vividly with COVID. And when it all ends, you will as a persistent bull have overwhelming company. 

This is why you have always had bullish advice in a bubble and always will.

However, for any manager willing to take on that career risk - or more likely for the individual investor - requiring that you get the timing right is overreach. 

If the hurdle for calling a bubble is set too high, so that you must call the top precisely, you will never try. And that condemns you to ride over the cliff every cycle, along with the great majority of investors and managers.

What to Do?

As often happens at bubbly peaks like 1929, 2000, and the Nifty Fifty of 1972 (a second-tier bubble in the company of champions), today's market features extreme disparities in value by asset class, sector, and company. 

Those at the very cheap end include traditional value stocks all over the world, relative to growth stocks. 

Value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020, with spreads between Growth and Value performance averaging between 20 and 30 percentage points for the single year!

Similarly, Emerging Market equities are at 1 of their 3, more or less co-equal, relative lows against the U.S. of the last 50 years. 

Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow. 

Good luck!

1 Jeremy Grantham, CNBC, November 12, 2020.

2 A SPAC is a Special Purpose Acquisition Company, a shell that is created for the specific purpose of merging with some private company to take that company public more quickly than could have been the case with a normal initial public offering (NYSEARCA:IPO) process.

3 My paper of January 2018, "Bracing Yourself for a Possible Near-term Melt-up," has substantially more data and exhibits on this topic.

Hedge fund industry assets surge to record $3.6tn

Sector delivered best performance in more than a decade in 2020

Ortenca Aliaj

Share price information is displayed on screens at the London Stock Exchange offices © Getty Images

Hedge fund assets hit a record last year as the industry delivered its best performance in more than a decade during the most tumultuous year for markets since the 2008 financial crisis. 

Assets surged $290bn during the final three months of the year, marking the biggest-ever quarterly jump and bringing total assets under management to a record $3.6tn, according to data provider HFRI.

Against a backdrop of rising markets, strong performance helped to boost hedge fund assets. 

The HFRI Fund Weighted Composite index, which tracks a range of strategies, gained 11.6 per cent in 2020, its best return since 2009. 

Meanwhile, investors ploughed a net $16bn into the industry during the second half of the year, HFRI said. 

The strong returns and inflows come as a source of relief for an industry that has struggled to justify its place in investor portfolios following years of lacklustre performance while charging high fees. 

Over the past decade, hedge funds have been forced to compete with the emergence of much cheaper tracker funds and a growing interest in other so-called alternatives strategies such as private equity and private debt. 

In conversations with their investors, managers insisted that they were handicapped by the longest bull run in history and record-low interest rates but would outperform during a downturn. 

The benchmark S&P 500 still beat the average hedge fund last year, returning 18.4 per cent. 

The robust stock market recovery helped equity-focused funds outperform other strategies and exceed $1tn in assets. 

While hedge funds on the whole delivered strong returns, the coronavirus crisis wrongfooted some of the industry’s biggest players. 

Renaissance Technologies, the secretive hedge fund founded by Jim Simons, had one of its worst years. 

Its Institutional Equities Fund lost close to 20 per cent, while its Institutional Diversified Alpha declined by 31 per cent, investors said. 

The fund’s assets dropped by $15bn to $60bn, according to people close to the firm, due partly to outflows.

Bridgewater Associates, another stalwart of the industry, also had a difficult year, though it managed to claw back some of its losses during the second half of 2020. 

Its flagship Pure Alpha fund was down more than 10 per cent at the end of December.

A market collapse might have to wait

Liron Zaidin

Rather than hunting for a Tesla or fearing the worst, we should set about building a portfolio we're comfortable with, writes Liron Zaidin.

"The deer hunter doesn't see the mountains," the proverb says. 

It's true of most human activity that focus on some particular thing can make one lose general perspective, and it's especially true of investment in financial markets.

When we become involved, whether in enthusiasm for a bull market or in fear of a collapse around the corner, we tend to focus on the event itself and ignore everything else. 

I myself was very pessimistic about the consequences of the coronavirus pandemic, and thought that a once-in-a-century pandemic would have a more severe effect on the real economy and on the financial markets. 

In the event, I was proved wrong (and it's good that I was) but despite the fear of an unknown disease, I recommended buying 100-year Israel government bonds that were issued at $1 and were traded on the last day of 2020 at over $1.33, after reaching more than $1.5 two months ago. Since the bond was issued in April, even someone who sells today has made a return of 35% in eight months.

As far as hard-hit commodities are concerned, eventually the day will come when the world will have to get back to routine, which means production, infrastructures and development, requiring metals, and a lot of them.

What happened in 2020 is hard to explain even in retrospect. 

It's easy to write that everything is artificial and the central banks are keeping the markets afloat, but that's only a partial explanation. 

In the end, what the central banks did was to restore confidence that things will turn out right, that the world will not collapse and that even if there's a tough period it will pass and someone is providing a safety net.

Had what the central banks did failed to convince the public, no financial power could have prevented an economic crash.

The public's resilience, cool judgment, and the speed with which information was disseminated, led to higher volatility on the financial markets, but also to swift corrections after every fall. 

In the financial crisis of 2008, it took the markets about two years to return to their pre-crisis levels. Today, after the world has been coping with a once-in-a-century pandemic, within a few months the markets broke through the peaks seen before the global health crisis.

With every crisis that passes, investors become more inured, and better able to tolerate the next one, saying to themselves "Why sell in a crisis, if the correction is only a matter of time?"

At this point, it is just as pretentious to try to explain the past as it is to predict the future.

So what should the strategy be for 2021?

The attempt to forecast a financial year and assess whether it will be a crisis year or not is like trying to spot a "dream" stock, which could turn out to be a broken dream. 

When you look at financial assets that have risen extraordinarily steeply, whether its Tesla shares or Bitcoin, it's easy to become obsessed with the thought "how much money I would have if only I'd put in NIS 10,000 at the start," but it’s a mistaken thought.

At the start of venturesome investments, the risk is high, and the entire investment can be lost, and so no-one with any sense invests large amounts of their capital at high risk.

The most effective way of operating when there's uncertainty is to create certainty; not to invest in airlines, but in airports, because when the coronavirus pandemic is over, airlines might collapse, or go into administration and continue operating that way, to the detriment of shareholders and bondholders, whereas an airport is a monopoly. You can't compete with an airport. 

What, for example, will airlines do if they decide to boycott Ben Gurion? Land on Road 1?

The new year started on Friday, but the markets' direction in 2021 will be determined by the event that will take place on January 20, when Joe Biden is sworn in as president of the US. 

At this stage, I would hold a portfolio with a cash component of at least 25%, for the practical reason that anyone not holding cash when a crisis hits doesn't buy anything. 

When people see their other investments losing, it has a paralyzing effect, and in the end they do nothing. 

Someone with cash, however, can exploit the situation to buy cheaply what only yesterday was dear.

I estimate that the markets will be disappointed by Biden's economic program, whatever it is, because it's impossible to please everybody. 

To the extent that there's volatility, it will be worthwhile putting together a portfolio of stocks or bonds that will yield a regular cash flow from interest or dividends. 

That way, we will be more indifferent to the standard deviation, and at the same time we will have a steady return.

From that point of view, anyone debating whether to buy an investment home or build an income-producing securities portfolio needs to take into account that on the capital market he doesn't need to bother with tenants and maintaining the property, while the return is higher than the 3% rental return in central Israel.

Extreme investments, if they happen at all, are usually in small amounts. Instead of trying to hunt the deer - when there's a chance that we'll succeed but also a chance that the deer will get away - it's worthwhile stopping, looking around at the mountains, and finding a pleasant spot for a picnic. 

So with the capital market - the desirable to thing is to have a portfolio we feel comfortable with, one that instead of making our hearts flutter, gives us a regular cash flow.

The writer is CEO of OXTP Investments and head of Fixed Income at Oscar Gruss. 

Is Biden Up to the Good Jobs Challenge?

The pre-pandemic US economy may have had a record-low official unemployment rate and sky-high stock-market valuations, but it was hardly serving the majority of Americans. Good jobs for those without a college degree have been disappearing, and this ominous trend will not reverse itself without an overhaul of economic policy.

Daron Acemoglu

BOSTON – With US President-elect Joe Biden’s imminent inauguration and the rollout of COVID-19 vaccinations, there is growing optimism for an economic rebound in 2021. 

But such hopes are misplaced, and not only because the virus is likely to remain a problem for longer than people think. The real problem is that the pre-pandemic US economy is unworthy of being emulated.

Broadly defined, intervention refers to actions that influence the domestic affairs of another sovereign state, and they can range from broadcasts, economic aid, and support for opposition parties to blockades, cyber attacks, drone strikes, and military invasion. 

Which ones will the US president-elect favor? 

To be sure, the unemployment rate had hit a record low of 3.6%, and stock market valuations had reached new heights. 

But the US economy also had an acute shortage of good jobs with high pay and meaningful opportunities for career advancement, particularly among workers without post-secondary education and specialized skills (such as programming or top athletic talent).

From the 1950s to the 1970s, good jobs were the US economy’s lifeblood, delivering broadly shared prosperity and social cohesion for a growing middle class. 

Though there was still significant progress to be made toward racial and gender equality, the private sector’s demand for labor grew at a striking pace during this period. 

US businesses’ total payments to labor increased by about 2.5 percentage points per year faster than population growth, implying real (inflation-adjusted) income growth above 2% per year. 

Even more remarkably, this growth benefited college-degree holders and less-educated workers alike, such that overall income inequality remained stable or even declined.

This all changed in the 1980s, when growth in labor demand began to slow. From 2000 onward, it has essentially stagnated, and a huge gulf emerged between workers with bachelor’s degrees and everyone else. 

Workers with only a high-school education or less suffered a precipitous decline in real earnings, and even college-educated men have not experienced much real wage growth since 1980.

The pre-pandemic combination of anemic labor demand, dwindling earnings at the bottom, and record-low unemployment illustrates what happens when good jobs disappear. Although the US economy was indeed creating new jobs (on net), they were concentrated at the bottom of the wage distribution, because low-wage jobs were replacing higher-paying careers.

As attractive job opportunities for less-educated workers evaporated and inequality rose, the male prime-age labor-force participation rate declined. In the 1960s, less than 8% of men between the ages of 25 and 54 were neither employed nor looking for employment. 

By the late 2010s, that number had risen to about 12% – and to more than 15% for male workers with only a high-school education or less. 

Indeed, part of the reason why official unemployment was so low before the pandemic is that many people had dropped out of the labor force, and thus were not counted in government statistics.

Labor-force participation would have fallen even more had it not been for the welfare reform legislation of the 1990s (which induced single mothers to seek jobs at all costs), the rise of the gig economy (which supplied plenty of low-wage jobs), and the earned income tax credit (which reduced the tax burden for low-paid workers).

Similarly, sky-high equity prices are not necessarily a sign of a healthy economy. The stock market can, of course, rally because the economy is delivering high productivity growth and shared prosperity. 

But it can also rally because the larger firms that are listed in stock-market indices are profiting at the expense of their competitors and workers.

Stock markets can balloon even more if the government slashes taxes on corporate profits and capital income, as successive US administrations have done.

Indeed, the spectacular rise of the Dow and S&P 500 indices over the last two decades has coincided with a massive increase in the share of national income accruing to capital, as companies such as Google, Amazon, Walmart, UnitedHealth, and Apple have expanded their market share at the expense of their competitors (and sometimes consumers).

A rebound in 2021 would not reverse any of these ominous trends – at least not on its own. There is no sign that high-paying jobs for non-college-educated workers are coming back. If anything, large corporations have become even more dominant during the pandemic (hence Wall Street’s impressive performance despite Main Street’s doldrums).

Historically, economic booms have tended to conceal and deepen underlying fault lines. After the 2008 financial crisis, the flow of foreign capital into emerging economies like Turkey, India, and South Africa allowed those governments to cover up structural shortcomings and avoid reforms. 

If we are to avoid the same mistake on a more colossal scale, we need to recognize the underlying economic and social problems that were plaguing the pre-pandemic economy.

Some solutions, such as a significant increase in the federal minimum wage, are straightforward and already on Biden’s agenda. But at least two more fundamental changes are necessary. 

First, as I have argued previously, we need to stop investing all of our creativity in labor-replacing automation, and start using our technological capabilities to develop opportunities for workers of all backgrounds. 

An economy geared toward ever more automation offers no foundation for good jobs or shared prosperity.

Second, we have to reverse large corporations’ growing ideological influence on economic and social life. Having just a few companies call the shots on the direction of innovation and the shape of economic policy is hardly conducive to the creation of good jobs or to a level playing field in the economy. 

But correcting this particular imbalance will not be easy, because it requires a deeper cultural transformation to flatten the status hierarchy in the United States. 

Without a broader recognition of the pernicious effects that a handful of businesses have had on policymaking, no such transformation will be possible.

Although Biden represents the best chance that the US will have to make progress on these challenging issues in the coming years, he has so far been following in the footsteps of previous Democratic presidents – namely, Bill Clinton and Barack Obama – who appointed business insiders to top positions. 

Even more disappointingly, some of these advisers hail from precisely those companies that have left their self-serving imprint on the American economic ethos.

Daron Acemoglu, Professor of Economics at MIT, is co-author (with James A. Robinson) of Why Nations Fail: The Origins of Power, Prosperity and Poverty and The Narrow Corridor: States, Societies, and the Fate of Liberty.