No growth, no romance ...

The simple average growth of the US GDP from 1950 is 3.3%. At first sight, the current growth of 3.5% looks good and in line with the past. A closer look suggests that this level is difficult to sustain for an extended period and is due to revert to a lower mean.

Digging a bit further into data, we see that the ten years moving average over the same period is just 1.8%, and the oscillation of this latter value is wrapped within a +/- 1.25 standard deviations. This implies that the growth rate "naturally" oscillates between +4.9% and -1.5%.

10 MA US GDP Growth and 1.5 STD Bollinger band chart

Don't get me wrong on the current prospects of the US economy. All indicators highlight full steam expansion. The Conference Board indicators, for example, are all still in expansion mode.

The Conference Board indicators are highly considered by Prof. Janet Yellen whose opinion is that a more appropriate growth level would be around the 10yr average and some US policies are conflicting. Therefore growth could temporarily contract to 1%.

In perspective though, and this is the only thing that matters to markets, the current growth rate could be deemed as unsustainable. The peaking of the Conference Board indicators, for example, marked the peak of the S&P 500 in the last two main downturns 1999/2000 and before the Global Financial Crisis. The Leading indicator (red line above) fabulously predicted the GFC almost two years in advance. In particular, I refer to the difference between the Leading and the Coincident indicators.

As a historical note, the fund Simplify 02 that has been operating since 2009, originated from the idea of laying patiently on the side of the markets in 2007/2008 and piling up securities opportunistically, somehow cold-blooded, until Spring came again.

So what do to next?

The approach should be twofold. While on one side, it is often not correct to exit the markets prematurely; on the other hand, it is worth start considering "unloved/uncorrelated" stories.

The value of these "unloved" stories lies on the fact that some "themes" fall out of fashion and are overlooked by the mass market. Let me give you some examples:

Sectors vs main index.

Some industrial sectors may, for a certain period, outperform the relevant broader market of which they are part.

In the example below, Peugeot (our top pick in a deeply disregarded industrial sector) vs the French CAC 40 broader index has been a relatively positive both long and short term. This pair trade has very limited market exposure (due, if you are interested, to the un-hedged beta).

Small cap "optionality"

Some companies are either dedicated to specific projects (like ECHO LN and SOU LN that explore natural gas fields. Or ICPT US that is in an advanced stage of the development of a new drug and results will be public in 2019). This, marginal, part of the portfolio is typically oversold in risk-off phases like this and may have a substantial upside (please ask us for more specific rational on these choices and the possible reasons of the sell off)



Gold doesn't have an intrinsic value per se. Compared to the volumes traded in the world, the industrial use of it is about 2% of the total. The social contract determines the value of gold according to which it is the ultimate storage of value. This is mostly conventional, based on thousands of years of social agreement between parties worldwide.

That said, it is possible to try to extrapolate some behavioral price rules from the past (especially after Breton Woods):

1) Any policy implying a weakening of the (mainly US) monetary base is supportive for the gold price...

2) ... consequently raising interest rates typically weaken the price of gold .

3) Raising USD decreased gold too in the past.

4) Systemic risk like in the case of the Global Financial Crisis increases the price of gold.

Taking into consideration these drivers, we can notice that in the past couple of years the price of gold has been remarkably resilient notwithstanding almost all drivers played against a price increase. These were:

1) USD up;

2) FED rates up and FED balance sheet down;

3) US Equity investors "risk on";

4) Systemic risk subdued.

Gold at the moment in one of the central positions in the portfolio. We trade the position rather actively but the average position is around 20/25%.

To make this long story short, as the markets will start discounting a lower growth of the GDP, it is likely that passively following market trends will not work anymore. At least the volatility will increase making everybody nervous. It is important to have in mind in which phase of the economic cycle we are and which are the appropriate strategies.

I took this opportunity of describing the state of the economic growth in the US for reviewing some of the positions in our portfolio that are expected to overcome a possible downturn. For a broader review of the strategy, please download the complete presentation HERE.

Best regards

Federico Polese

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