Earlier today, Morgan Stanley’s Head of Global Developed Markets Gerard Minack announced his retirement.
Most people have never heard of this Australia-based strategist. However, his concise two-page notes regularly provided the sharpest insights on the state of the markets. The savviest investors followed his work closely. And we often featured his wild charts on Business Insider.
Here are a few highlights from Minack’s recent work that show why he was the most underrated strategist on Wall Street:
1) The time he showed why Wall Street analysts are horrible: “As they say, forecasting is difficult – particularly the future. Consensus earnings forecasts show just how difficult: Exhibit 1 illustrates consensus EPS forecasts for the S&P 500 from 1985, with the initial forecast for each year indexed to 100.”
2) The time he explained the connection between inequality and political disfunction: “Politics has become a more intrusive factor for investors. The prospect of heightened political uncertainty is one reason to think risk asset valuations will be structurally lower compared to the past 30 years… Rising inequality has gone hand-in-hand with rising political polarization. Exhibit 4 shows income inequality in the US (Gini coefficient) and a measure of polarization in the US Congress.”
3) When he explained why American corporations are the envy of the world: Minack has argued that the recent rally in U.S. stocks has been largely attributable to companies with domestic exposure. This isn’t completely obvious when considering S&P 500 earnings because nearly half of the business generated by the S&P 500 companies comes from abroad. Minack offered this chart separating forecasts for foreign-focused earnings from domestic-focused earnings.
“Poor performance of foreign-focused earnings fits the long-standing (and unsurprising) link between growth in America’s trading partners and foreign-sourced profits,” says Minack.
Jordan Tanner, Morgan Stanley Research
4) When he busted the myth of the Great Rotation: Minack was one of the earliest sceptics to dismantle the “great rotation” thesis that was circulating at the beginning of the year. This was the idea that all of the money that flowed from stocks to bonds would reverse, sending flows from bonds to stocks.
“First,” Minack wrote, “the idea of a ‘great rotation’ from debt into equity presupposes that there has been a massive rotation from equity to debt. It’s not clear that that has happened.”
The chart below shows flows into and out of money market, bond, and equity funds since 2007. While it’s true that money has flowed out of equity funds and into bond funds over that period, it’s clear that there is more to the story.
5) When he took on Bill Gross, and won: While it is true that GDP growth should associate with strong earnings growth generally for companies in those economies, it’s not true that strong earnings growth necessarily associates with strong Earnings Per Share growth.
This was an important insight, that rejected an argument made by Bill Gross, who had claimed that stocks couldn’t outperform growth.
In places where earnings are growing fast, companies are raising a lot of capital by issuing shares, and therefore actual earnings per share fail to keep up, preventing investors from enjoying those gains.
This chart brilliantly shows that in countries with high earnings growth, high share dilution is likely to follow, thus undercutting the return for any given investor.
6) When he poured cold water on the manufacturing renaiisance: “Most see the prospect of America reindustrialising as bullish. In my view, that depends on whether you are an economist or whether you are an investor. The ‘deindustrialisation’ of America was bad for economic growth, but the increased global supply of labour lifted margins and total profits. The effect of wider margins on profits far outweighed the effect of two weak US GDP cycles (the cycles following the 2001 and 2008-09 recessions). Reindustrialisation may reverse this mix: Economic growth may improve, but margins worsen.”
Gerard Minack, Morgan Stanley
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