Churchouse Letter
November 2016         by Peter Churchouse

To Peter… 47 Years Ago…


In 1972 my wife and I stepped off a ship in Durban after a two week voyage from New Zealand. It would prove to be the start of an incredible journey the length of Africa, to London and ultimately Hong Kong.
Returning to Africa earlier this month, I write a letter to myself back then… what I would tell that young man now about the lessons he will learn. I hope those lessons might prove of use to our readers or perhaps even their children.
We also provide an update on a huge policy shock in India, and our first thoughts on the post-Trump financial market landscape.

In Part II of this month’s edition of The Churchouse Letter I write a letter to the 20-year old me… the surfer guy in New Zealand with long hair and a 1960’s wardrobe.

I write these reflections from the plains of southern Africa, a part of the world that made a deep impression on my inner soul as a young man in my 20’s.

Being back in these parts for the first time in many years awakens hugely meaningful memories, thoughts, histories, and opinions.

There is something about the wilds of Africa that leave an imprint on the inner consciousness that I have not found any-where else (with perhaps the exception of Tierra Del Fuego at the Southern tip of the American continent).

Those Africa experiences in my early 20’s were a turning point in my life, an awakening that could not have happened in my home country in any similar way.

They shaped the life that followed just as much, or perhaps even more, than early childhood and that great education we re-ceived in New Zealand.

I candidly share some of my successes and, more importantly, my failures, of which there are many!

I hope that you, your children and your grandchildren can learn from these life lessons. They are the ones I wish I had known when I was a young man.

Some are very small, practical tips. Others of a bigger picture nature. My focus here is about the lessons that will guide us all in the path of financial independence and self-reliance in the long term.

Remember, it’s never too late – or too early – to make changes that can positively affect your financial future.

And no matter how you look at it, starting the process earlier rather than later is definitely the preferable path to follow.

An Open Letter

Dear Peter,

It is 1969 where, or should I say when, you are.

A great decade is drawing to a close and you are about to embark on the amazing journey that is the rest of your life.

To help you on your way, here are some key lessons that I’d like you to remember.

Follow Your Heart, Use Your Head

A year from now you are going to get married.

It is hard to believe, I know. Few of your friends are anywhere close to this state of affairs. You think that getting hitched so young is a bit old fashioned.

Do not listen to the naysayers. I am telling you now this is the best decision you ever make.

Soon you will come to realise you are very different from those you grew up with and went to school with.

The yearning you feel to travel and obtain that world experience? Embrace it. But do it wisely.

Even now, some 47 years later, I am writing to you from a lodge in the wilds of Zambia, Africa. I have just a satellite phone to keep in touch with the Hong Kong office.
[Oh, and here’s your first piece of advice: make sure you don’t invest in Iridium, a satellite communications company taken public by the bank you end up working for!]

Yes, your home country of New Zealand, will likely give you a familiar and comfortable life. Staying there is the easy choice. Don’t do it.

Your love of surfing is also pushing you to set your sights on the North Shore of Hawaii. You want to surf the best waves in the world and hang out with the surf bums there. Again, don’t do it.

You will soon set sail with your new wife to the shores of South Africa, a pariah state in the depths of apartheid.

Here you will get a crash course in the hard realities of life, a phenomenal career opportunity, and also find those great waves to surf. These life changing lessons and incredible experiences will shape your thinking for-ever.

1611 - Peter & Gabrielle in South Africa 1970's

Value Your Values

Even at this young age you value integrity, tolerance, education, hard work, self-reliance and personal freedom. These are your cornerstones.

In South Africa, these values that you consider so ‘middle of the road’ and conventional, will be seen as ultra-left wing, communist even.

Later when you live in London, you will learn that those same values will paint you as a right-wing conservative.

This teaches you the importance of ignoring the labels that others try to constrain you with.

There will be times when sticking to these principals is hard, but know that it always pays off.

Never Stop Learning

Although you have a young head on your shoulders, you have always known the value of education. Deep down you knew it was going to be the key to a prosperous and fulfilling life.

Mum and Dad never had the chance you have. You know it, so never forget it. The depression of the 1930s and World War II robbed them of much of what the 60s generation took for granted.

So far you’ve studied hard. You get up at 5am and work before breakfast and school. Research will show that the brain is more productive early in the day and, from a practical point of view, there are few distractions before dawn.

You don’t yet know what an ‘email’ is yet… but rest assured you will find out what a distraction this be-comes!

Your life will take you all over the world, sometime visiting over a dozen countries each year to keep your-self and your readers informed.

Yet you cannot speak a foreign language. If you have the chance, change it and learn a second, heck even a third, language.

You read endlessly. It forms an essential part of your professional and business life. You should have learnt to speed read! You could expand your knowledge base enormously if you took the time to master this skill.

Speaking of simple skills, you really should learn to type. You are at the very dawn of the computer age.

It would have paid to devote more time and effort to the rapid developments in technology. It would make you more productive. You would be more in contact with changes in the world of ideas, investment and social change.

And, being able to fix those endless computer problems today would take a good deal of the frustration out of your life.

Honest Hard Work Pays

You got your first job stacking shelves at a supermarket after school when you were 13 years old.

This isn’t even legal these days, by the way.

Schoolteachers gave you grief for this. Working meant you couldn’t be on the school rugby or cricket teams.

Your friends and classmates all trained after school while you had your hands full of potatoes and carrots.

But this work grounded you, it readied you, and it never let you forget where you came from.

Before you leave the shores of New Zealand for good, you will be a wharf worker down on the docks, clean sewers at timber mills, cart and stack frozen carcasses in the abattoirs and freezer works, spray weeds on farms, work on construction sites and put in a stint on an oil rig in the Australian outback.

The ‘roll up your sleeves’ mentality that these hard yards teach you stays with you to this day.

One day you will despair at sights like the below on the streets of Hong Kong, trying to imagine how on earth people can believe the world owes them a living for doing nothing.

Wealthy Begging

The above photo was taken by a friend a week or so ago in Hong Kong. A well-dressed, healthy-looking young woman… her face buried in her mobile phone (Facebook I guess), effectively begging for money so she can ‘travel’. I imagine the ‘real world’ will eventually make its presence known to this lady!


Be Open to Change & Knock On Doors

Your ability to know when to move on and to take professional risks will be of paramount importance.

In South Africa, you will work in computers for a U.S.-based manufacturing giant, then for a local authority, and, will undertake economic studies at a level of intensity that even colleagues in Europe who are 10 years your senior never had the chance to do.

This will put you right at the heart of your chosen field.

Take these opportunities with both hands – they are rare for someone of your age. They will set you in good stead for entering an extremely competitive work and business environment in London and the rest of the world.

And you will still get to surf on weekends!

Surfing Jeffrey's Bay 1970's

You will find that you cannot remain in an apartheid South Africa, despite the incredible career opportunities being offered you. Life will be good, but staying will make you part of a morally bankrupt society, one you cannot condone.

So, you and your wife will pack up the old Volkswagen kombi van and drive the length of Africa to London. You plan for it to take three months. It takes nearly a year but affords you an extraordinary adventure.

You will arrive in London in 1975. The U.K. economy will be a complete shambles under an IMF program.

Yes, an IMF program! The sort of thing that third-world banana republics were forced into, not a leading country of the developed world.

You will need a job. So, what are you going to do? You will literally have to knock on the door of the U.K.’s foremost economist and planner, Nathaniel Lichfield.

Take armfuls of your work done in South Africa and New Zealand, much of which references his own published work. He will be incredulous that a young guy in his mid-20s carries such a depth and breadth of experience and take you on immediately.

He will give you lots of great assignments, including analysis of the early stage development of the oil industry in Scotland, planning of the second terminal at Gatwick airport, assessment of the nuclear power program in Israel, and planning of a new state capital in Nigeria, to name a few.

And all because you go and knock on his door…

But after five years you will know in your heart that it is time for a change. London is a great city, but the weather is terrible and you miss the sea.

You will find in life, time and again, that simply being open to change frequently attracts it!

This time will be no different. Embrace it.

Out of the blue you will receive phone call from a former colleague. It will be the catalyst to another life-changing career move.

You will join a consultancy team as project econo-mist to plan and design a private-sector new town in Hong Kong to accommodate 535,000 people, and all the jobs that a city of this size would need.

You think you will be stationed in Hong Kong for six months… but you will still happily be living here 36 years later!

Hooray for Hong Kong

When you touch down in Hong Kong on 5th March 1980, prepare to embark on a journey that will transform your whole life, from family and lifelong friends to your professional career and financial prospects.

A phenomenon nicknamed the “Big Bang” will occur a few years after you arrive. Thatcher’s government policy back in the U.K. will throw you, and literally millions of people in developing Asia, the most incredible opportunity.

The ‘Big Bang’ was the sudden deregulation of U.K. financial markets under the Margaret Thatcher Conservative government in the early to mid-1980’s. It was a hugely important part of Thatcher’s reform program that would ultimately lay the foundation for London to become the pre-eminent global financial centre.

You will be there at the dawn of a new era in trade, economics, finance, and investing. Right place, right time. So, stay put!

The Hong Kong branch of the consultancy practice you will run, Shankland Cox, will take the lion’s share of the company’s total profits.

The partners in London will do well. But despite your key role in securing the spoils, it will become clear that you aren’t going to get your share.

Time to move on… Don’t look back!

Remember, openness to change brings forth opportunity. A chance meeting in London means a former colleague who you respect greatly, Honor Chapman, will lead you to her firm Jones Lang Wootton (now Jones Lang Lasalle) hiring you in Hong Kong.

Your mission? To set up a real estate research and consultancy division for the company in Hong Kong and the region.

It will quickly become clear that no one else in the real estate industry is undertaking any genuine, intellectually rigorous research. And it is perhaps THE most important industry sector in the economy at this time.

What an opportunity!

There will be huge demand for your skills and insights from the waves of stockbrokers, bankers and fund managers who are just starting to pour into the region in the wake of the “big bang” in the U.K.

Real estate will be by far the largest sector in the local stock market and the major driver of earnings for all the major local banks, including HSBC, the bank that was girding its loins to go global.

Your research provides insights into the all-important real estate markets that will drive stock markets and investment flows to the city and beyond. The media and conference organisers will beat a path to your door.

Your professional life will move from academia to one of making forecasts, predictions and judgments in the world of finance.

From real estate your expertise will move more broadly into public securities, finance, stock markets, asset management, hedge funds and private equity.
In 1987 you can expect a momentous knock on your door from a chap called Barton Biggs.

He’s the global strategist for Morgan Stanley out of New York, and an early leader in emerging market investing and analysis among American financial houses.

Signing up with Morgan Stanley will be the beginning of a new career that is truly transformational in so many ways.

Possibly the best of several great career moves you will make over the years.

You will get to work with some of the smartest minds on the planet in the world of finance: Barton Biggs, Byron Wien, Steve Roach, David Roche, Jack Wadsworth, and Mayree Clark.

You will pore over and debate investment ideas with funds management legends such as Julian Robertson, Stan Druckenmiller, George Soros, Leon Black, George Noble, Jack Mussey, and many more.

Learn How To Invest – Part A

You’ve always had an appreciation of the need for and power of money. You were not afraid to work hard for it. And you did a good job of saving money. All great values!

But looking back, you could have done a much, much better job of making your money WORK for you.

Your first attempt at turning your savings into investments, is a disaster. You get sold an insurance-linked investment scheme that, with all the hidden fees and penalties, is no investment at all.

At best, you’ll get the money you invested returned to you, but decades of upside stripped away.

If you want insurance, buy insurance. If you want to invest, invest.

NEVER mix the two. You WILL get screwed.

You will regret simply not buying stock in Berkshire Hathaway the month after you landed in Hong Kong in 1980… a simple $10,000 tucked away would be worth multi-millions.

Don’t blame anyone else but yourself for this.

It is easy to say “well no one ever taught me about investing”, or “personal finance wasn’t even a basic part of your education” (it still isn’t at most schools!). But the buck stops with you.
Looking around today, you realise that you were not alone. The conversations you will eventually have with contemporaries of my generation belies this.

Your career ultimately turned to finance, and that helped you get up to speed. But even so you didn’t take enough time to really put together a proper personal finance plan when you were young.

That realisation has come a later in your life than it should have.

However, it has engendered a passion to bring this message to your readers, colleagues, and friends. And more importantly to try to help people prepare for the degree of self-sufficiency that is going to be necessary.

This requires a degree of discipline to set aside money for asset and wealth building. And equally important, investing it in ways that will provide you the safety nets and lifestyle longer term that once might have been provided by governments or your pension schemes.

Like most people, you were a bit slow to get into serious investing for the future. Again, like most young-er people, your early investments were mainly about capital growth.

But as you have gone down the investment path it has become increasingly apparent that in the future it will probably be more about investments that produce cash flow than capital growth in your investments.

And this brings me nicely on to Part B…

Looking back at where I went wrong, the problem was I didn’t plan systematically.This is without a shadow of a doubt the biggest single regret I have when it comes to my own investments and finances. I did a lot of things right… I accumulated real estate and I invested… but I didn’t do so within a clear framework…

Setting a measurable goal at an early stage would have definitely made my investment portfolio substantially bigger and more productive than it is today.

For example, why didn’t you simply say to yourself, “By date so and so I want to have XXX square feet of grade A/B residential and commercial rental space in the portfolio” – or whatever measure – so many rental flats/houses, commercial units etc. Whatever the measure, define it and hold yourself to meeting that target.

Likewise, that should have been my goal in other asset classes.

The equity and bond portfolio, the private equity investments, the insurance policies…

And while we are on the subject of planning, you should have set more clear risk management strategies.

Putting a measurable, quantifiable plan in place – and nailing it to the office wall – would have encouraged a bit more discipline in your investment process.

It would have resulted in a somewhat larger portfolio, and one that is better structured to meet your longer term financial and lifestyle goals.

Learn How To Invest – Part B

Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

Andrew Carnegie, billionaire industrialist

Here’s the good news Peter, you become one of that ninety percent Andrew Carnegie talks about.

In fact, successful real estate investing will create more wealth for you than all the salary and bonuses you will ever receive in the next half century.

How do you become such a successful real estate investor?

A combination of three factors; research, risk mitigation, and exploiting volatility.

You buy your first property in London in the late 1970s.

You get a 90% mortgage so it was affordable. You could have bought bigger, but you have the foresight not to over-extend. You saw that inflation was heading up and that interest rates would surely follow.

By mitigating risk, you manage to hold on to that investment when your contemporaries couldn’t.

As a result, by the time you sell the flat 20 years later, the annual rent equals 125% of the original purchase price.

Your capital return is roughly 200 times your original investment.

You then move to Hong Kong, perhaps the most volatile property market in the world and in the early 1980’s make your best personal real estate investment… putting a US$10,000 down payment on a property that you still live in today and is worth some 1,400 times that.

Although there was a general idea to build and grow a portfolio of investment properties there was no real plan… no clearly defined end goal or objective.

Setting a measurable, definable, and realistically achievable goal would have put you in an even better position.

Your luck, good insights, risk assessment and ability to take decisions produce a tidy and profitable portfolio.

But again, you could have done much better.

I still wince when people who don’t own ANY property at all tell me about the fancy car they just bought, or the “investment” they just made in some bar or restaurant.

I don’t know how many times I’ve said this, but I’ll say it again: do what you can to buy real estate.

It should be your number one investment priority, especially if you’re in your 30s or 40s. I know there are plenty of old-timers who read The Churchouse Letter, but I’m begging my younger readers to please focus your efforts on acquiring property.

And it’s not hard!

Just take a look at my simple guide “Peter’s Rules for Buying Real Estate: Lessons from the Trenches”.

It’s a short primer summarising the key rules I follow when investing in real estate.

[Note: I use these rules both in my personal investments, and in our private equity real estate investment vehicle where we manage other people’s money.]

As I mention previously, I never set any specific ‘goals’ for either my real estate or investment portfolios. I’ve done better than most, but the lack of defined goals was a huge mistake.

“By date so and so I want to have XXX square feet of grade A/B residential and commercial rental space in my portfolio” – or whatever measure – so many rental flats/houses, commercial units etc…

Whatever the measure, define it and hold yourself to meeting that target.

It IS doable… even if you are starting small. Even a little studio apartment somewhere just to get you on the ladder.

It’s easier said than done… but it’s a lot easier done than you think!

Safeguard Your Reputation

It is not in your nature to take shortcuts, badmouth people, or be dishonest. Stay that way. Hong Kong is a small town and everybody knows everyone.

In Asia, doing an initial round of due diligence involves picking up the phone and asking: “What’s so-and-so like?” “Have you done any business with him? Do you know anyone that has?” “He’s pitching us a deal, have you heard anything about him?”

You will quickly become a visible commentator and be seen as a thought-leader in Asian real estate.

The media will call you the “property guru” and even the “Delphic oracle”…. And yes, you will cringe.

Many of your industry peers at that time show little respect for journalists and some companies do not allow media contact.

Yes, journalists in Asia are often young, naive, and inexperienced. They can ask dumb questions – sometimes over and over again. But haven’t we all.

It is a tough career. It is not highly paid, and journalists are often treated badly by people in business and finance. English is not the mother tongue for many journalists here, so getting a complex (or even simple) message across can be tricky.

Remember your values. Be respectful of their job. Be patient in answering their questions. Give them the same common courtesy you would to anyone else. They will treat you well in return.

You remain in demand by the media as the go-to property commentator for print, radio and television, often on a weekly basis still.

You Are On Your Own

Growing up in a socially responsible society dulls the senses to the need for long-term self-sufficiency.

Many people have a built-in belief that the government will look after their education, healthcare and pension needs.

Well my friend, thankfully you will soon disavow yourself of that notion completely. You are on your own financially, and the sooner you realise it the better.

It is being in Hong Kong in the 1980’s that finally convinces you of the need for total financial self-reliance.

It is a place where there is little in the way of safety nets.

Friends and acquaintances who never learned that lesson will fall hard, and it will be difficult to watch. Over the years, even the developed world’s safety nets become overburdened and fall apart.

Yet so very few people have prepared themselves financially for self-sufficiency in their twilight years. Their lifestyles, homes and health are at risk.

Again, real estate is the best retirement plan.

Take time for Yourself

Finally there is something that you have done reasonably well over the years!

Perhaps better than many of your colleagues in finance. And that is that phrase that has become a bit clichéd in recent years – maintain a sound “work life balance”.

From an early age you tended to work hard during the week, and then take weekends off to relax, surf, hike, go fishing.

You carried those habits with you into professional life. So many of your colleagues, particularly those in banking, did not seem to do so.

As a result they had no real interests outside of work.

Leave It All On the Table

Before I leave you, I just want to share one final thing.

I read a story a couple of years ago about a palliative nurse who’d spent time with many people in their final days. She’d recorded their last epiphanies and summed out the top five regrets of the dying.

So, before I go…

  1. Don’t work too hard!
    Nobody ever gets to their death bed saying “I’m glad I spent so much time in the office”.
  2. Have the courage to live life true to yourself.
    Travel, spend time with your friends, make new ones… and always stay curious.
  3. Express yourself!
  4. Keep in touch with your friends.
    Funerals become a depressingly regular fixture as you approach my age.
  5. Be Happy.
    It’s a choice.

Good living (and good investing),


P.S. Buy Berkshire Hathaway stock when you get to Hong Kong!!!


If you are reading this, then chances are you are in a far better position than most – you have taken the time and effort to understand investing.

But are your children armed with this same knowledge? Your grandchildren? Nephews and nieces? Is it even on their radar?

I am not talking about just buying stocks here, I am talking about understanding the full spectrum of personal finance… saving, tax, insurance, interest, loans… the lot.

It astounds me that even basic personal finance is still not a mandatory part of school education.

Just having those basics can provide huge multi-decade compounding benefits if executed correctly.

I might be biased, but I always have and always will tell my readers to buy real estate.

So let me finish with a short story.

Recently I took my sailing boat on a Sunday cruise as I regularly do. The crowd is usually a mix of old friends, folks from out of town visiting, interesting people I’ve met and invited, and of course some friends-of-friends.

As we were all standing on deck waiting for the last guests to board, a woman came up to me and introduced herself.

She told me she’d gone to a talk that I’d given on property some ten years ago. I’d made a very strong case for buying Hong Kong residential real estate.

Clearly I’d been passionate enough that this lady went home and told her husband that they had to buy some real estate.

A week later, they signed a sale and purchase agreement on a property.

She thanked me profusely.

It was, she said, by far and away the very best financial decision they ever made… and it was the only reason they were able to remain in Hong Kong.


The Market Is Getting Ahead of Itself

A clear narrative has guided global financial markets in the days following President-elect Donald Trump’s victory over Hillary Clinton.

It goes a little something like this:

  • Trump will massively ramp up spending, in particular on infrastructure and the military.
  • This expansion in spending will be combined with broad and extensive tax cuts.
  • Finally, sweeping dismantling of regulation will hark a return to happy days for wall street, big pharma and of course energy*. *Note: Donald has stated that climate change is merely a “hoax” perpetrated by the Chinese so we would expect his energy policy to reflect that opinion.
  • All of these policy approaches are pro-growth and inflationary.
  • As a result, we should expect higher levels of future inflation, an increase in economic growth, and a faster normalisation of interest rates from the Federal reserve.
  • In addition to expansive fiscal policy, Trump’s protectionist policy rhetoric on the campaign trail implies the introduction of tariffs on major trading partners, in particular China and Mexico.
  • Higher tariffs on imported goods will increase the price of those goods for both consumers and businesses who use those imported components in their supply chains.
  • This will lead to higher inflation, thereby driving a faster rate hike schedule from the Fed.

So far so good.

As a result, we have seen a violent global bond market sell-off.

A ‘bloodbath’… a ‘Trump Tantrum’ if you will…

The yield on 10 year U.S. Treasury bonds has risen from around 1.8%, to north of 2.35% in a matter of days. Likewise, the 30 year-year-old has risen by 40 ba-sis points to around 3%.
I confess we’ve been taken aback by the speed of the sell-off in bonds.

But let me say right now that it is far, far too early to be calling this a bond market “meltdown” as some in the financial media are doing.

This looks to me to be a classic overreaction to an event that most (myself included) didn’t adequately price in.

We need to take a step back here for a moment and look at the bigger picture.

Yes, it’s true that the kind of policy measures Trump is espousing should lead to higher growth, and there-fore a quicker tightening from the Fed.
But let’s remember a few things:

First, Trumps administration can’t actually implement anything for another three months at the earliest. On top of which we don’t really know how deep these policies will go.

Second, even if Trump could enact these policies quickly we’d be looking at least another year before the actual effects pass through to the real economy.

Thirdly, it appears that the market is simply assuming that Donald Trump will get whatever fiscal stimulus he wants.

But the Fed has been crying out for stimulus for years. It has simply been politically impossible. And now we are assuming that the party of fiscal conservatism will greenlight measures that will absolutely necessitate an increase in debt?

Remember, large-scale fiscal expansion is typically a by-product of desperate economic circumstances; a collapse of the stock market, huge unemployment, deflation, an economy in deep recession.

But in the U.S. right now?

Inflation is running at around 1.5%. The Dow Jones industrial average just hit a record high. Unemployment is sub-5%… comfortably below the long-term average going back to 1948 of 5.8%. And the latest GDP data showed the economy expanding by 2.9% annualised in the third quarter.

I’m not saying everything is hunky-dory, rather that the prerequisite conditions for large scale fiscal stimulus are not there.

When it comes to infrastructure spending in particular, it takes time!

Regular readers will know that we have been banging on the drum for quite some time now. As I wrote in our March 2016 edition:

“The conclusion is simple: governments MUST promote growth-inducing fiscal policies in tandem with easy monetary policies to pull us out of this economic rut.

By fiscal policies I mean government policies and spending. This involves everything from tax cuts to large infrastructure projects and public investment.

In terms of simple economics, these are policies that will generate demand. Non-wasteful infrastructure spending for one is a painfully obvious strategy. Building bridges (to somewhere, not ‘nowhere’), schools, hospitals and upgrading public infrastructure for example.

Unlike individual tax breaks that can be saved or spent on imported goods, this kind of fiscal spending has a lot of benefits tied to it.

Unfortunately, this requires political will. Printing money and lowering interest rates are easy by comparison. Large scale public spending and structural reform in particular are hard to achieve politically.

President Obama proposed a public infrastructure bank but it failed to clear the Senate (which simultaneously blocked a US$50 billion plan on road, rail and airport improvements).”

But before we look at equity markets, we have to start with bonds… specifically treasuries.

I read a comment from a senior asset manager here in Hong Kong say that “bonds have been in a bubble and the bubble has burst”.

Take a look at Figure 4. It shows the 10-year treasury yield six months, five years, and 55 years.

U.S. 10 Year Treasury Yields

Since Trump won the election, we’ve seen yields spike dramatically.

But then you take a step back at look at a 5-year time horizon. This 40 basis point yield jump looks a little less scary.

In fact, we’ve seen numerous bouts of bond market weakness since the GFC (see chart)… the ‘taper tantrum’ of 2013 being the most prominent example.

And then, take a few more steps back at look and the long-term secular yield trend… the one that has persisted through booms, busts, political upheaval, wars and everything in between.

Here is one of the most important questions we need to be asking ourselves right now:

Do we genuinely believe that the election of Donald Trump marks the end of the 35-year secular trend in bond markets?

Me? I’m not convinced just yet… But we have to be open to the possibility.

Personally, I want to take a bit more time answering this question because it profoundly affects how we invest going forwards.

Ray Dalio, one of the great macro investors of all time said a week after the election;

“As for the effects of this particular ideological/environmental shift, we think that there’s a significant likelihood that we have made the 30-year top in bond prices.”

The key here being the magnitude of the ideological shift that a Trump presidency brings… it can’t be overstated enough.

Whilst avoiding any knee-jerk reactions, I recognize we currently have a buy recommendation on the Vanguard Extended Duration Treasury ETF (EDV US).

This holds a basket of long-dated zero-coupon bonds and represents our hedge against a deflationary downturn.

When we made the recommendation earlier this year we said at the time:

“Remember, this is not a big ‘core’ fixed income position like the 10-year government bond ETF ‘workhorses’ in your portfolio… this is a leveraged hedge against a deflationary bust.”

The market is pricing in the opposite of a ‘deflationary bust’. Expected future inflation has risen and with it a big rise in 30 year yields. As a result we’ve seen that position take a substantial hit (although we have not quite hit our trailing stop loss).

Note: for a recap on duration risk, read Tama’s “How U.S. Treasuries can be as risky as Emerging Market stocks…”.

We recommend maintaining this hedge for the meantime.

We are around 5% away from our trailing stop which we will of course honour if we hit.

I’d like to flag another observation to bear in mind when it comes to bond market prices and yields… and it comes courtesy of Charles Gave of Gavekal Research, a 40-year veteran investor who notes;

“…the recent rise in interest rates will hit an econo-my which has been flirting with a recession for the best part of the last 12 months. This could tip the economy over the edge into recession.

To put it simply: the rise in rates is going to have an impact today on an economy which was already bordering on recession, while the acceleration in growth caused by the policies of the incoming administration is only likely to become apparent in another 12 months at the earliest. As a result, the current rise in rates could be the catalyst for a new recession.”

Equity markets and more pertinently bond markets are counting the chickens of expected future Trump growth, growth that could take years to come to fruition…

But the sell-off in the bond market is leading to increases in interest rates today. And higher interest rates are clearly a constraint on the actual realization of all this expected growth.

Companies are already paying nearly 1% more for 10-year money than they were at the beginning of July.

The dilemma is clear.

And don’t forget about the risk of recession. This is hugely overlooked by the vast majority of investors.

Since the great depression of 1929 the United States has experienced a total of 14 recessions.

In addition to that the average gap between these recessions is just under five years.

And today? Well it’s nearly 7 years since the last one!

We are overdue…

So regarding our long-duration ETF position, remember this is a hedge…

And on the flipside we’ve seen ~5% gains across Health Care, Robotics, Dividend Aristocrats and Low Volatility/High Dividend ETF recommendations.

This brings us to equities.

No surprises as to which markets are in the red fol-lowing Trump’s election (see Figure 5).

U.S. 10 Year Treasury Yields

Mexico and emerging markets, particularly Latin America and south-east Asia, have been hit hard along with India (see below for further analysis on India).

The Japanese market has done extremely well as the yen has depreciated from around 105 to 113 against the dollar. A weaker yen benefits highly export -dependent Japanese companies.
Russia is up nearly 4% in anticipation of warmer relations between Vladimir Putin and Donald Trump.

And U.S. equity markets continue their Trump rally (expecting corporate tax cuts, deregulation, and pro-growth policies et…).

Breaking down U.S. equity performance since the election by sector is illuminating (Figure 6).

S&P500 Sub Sector Performance

The divergence in particular amongst sectors since the election is huge… 15.5% separates the best and worst performing sectors since the election!

The big winners? Well, they live on Wall Street… financials are up double digits.

Then we have industrials and energy (remember all that deregulation and infrastructure spending!), and consumer discretionary (everyone will start buying stuff as the economy grows).

On the flipside, consumer staples have underperformed. This is no surprise given the sudden ‘risk on’ mania sweeping financial markets.

Staples are defensive and susceptible to a rising rates environment.

Regardless, we are in no hurry to offload the sector just yet.

India Ignored

On the evening of the U.S. presidential election, half a world away from Donald Trump and Hillary Clinton, Narendra Modi, India’s Prime Minister delivered a surprise televised address.

Understandably the vast majority of the world’s media and attention was focused elsewhere. But the message he was about to deliver would send shockwaves through one of the world’s most populous nations.

He informed his one billion fellow Indian citizens that the two most valuable notes in circulation would no longer be considered legal tender from midnight that night, and would be rendered completely worthless after 31 December this year.

Indian citizens would have to either exchange their cash for new notes or deposit it in their banks.

On 31st December 2017, millions of 500 (US$7.50) and 1000 (US$15) rupee notes will be worth nothing more than a used napkin.

“Brothers and sisters, To break the grip of corruption and black money, we have decided that the notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016. This means that these notes will not be acceptable for transactions from midnight onwards. The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. The rights and the inter-ests of honest, hard-working people will be fully protected.”

Narendra Modi, 8th November 2016

This is all the more spectacular move when you consider that these notes account for 86% of India’s currency in circulation. We are talking about more than 23 billion high denomination notes here…

This is no small feat and the first question of course is why?

The simple reason is that Modi is going after India’s shadow economy which stands by some estimates at more than 20% of GDP.

Tax authorities will be notified for cash amounts exceeding 250,000 rupees (US$3,750) deposited into bank accounts. If there is a mismatch against declared income, then further action could take place.

Ultimately the tax net should be widened.

This move will also help reduce corruption and clean out counterfeit currency from the financial system. (Having said that, it’s not clear just how much “black money” is kept in currency. Much of it is stored in real estate, gold or offshore.)

These might be laudable goals but the months ahead will be painful for the Indian population.

If you’ve seen any of the footage coming out of India in the past few days, it looks pretty chaotic. And it will be at least for the next few weeks.

India is still a cash-based economy. And when you effectively outlaw over 85% of all cash in circulation then it going to be disruptive.

Around 80% of all consumer transactions are done with cash. A large proportion of those transactions have now ground to a halt.

The central bank is struggling to print enough replacement currency (it doesn’t help that the new notes are the wrong size for existing ATM machines).

Huge swathes of rural India use cash for the vast majority of their transactions. The urgent need to deposit or swap banknotes has swamped bank branches with lines around the block in many cases.

But if you know anything about India and its people, you’ll know that they can deal with chaos. Just try getting on a rush-hour train in Mumbai!

The disruption will pass…

And there will be ultimately some benefit to this. As I mentioned tax collections should be boosted as people will be forced to declare unaccounted income (of course some will find a way to evade this).

It really can’t be emphasised enough how important this is. Indian tax revenues as a percentage of GDP are around 17%. This compares to mid to high 20%’s for the likes of comparable emerging markets like Vietnam, South Africa and Turkey.

The banks should also benefit with a substantial in-crease in the deposit base. However, time will tell and we need to keep an eye on just how big positive this is.

Payment networks (Visa and MasterCard) and mo-bile wallets will obviously benefit as this policy measure will encourage a shift to digital transactions.

We currently have two outstanding India recommendations, a broad equity and an infrastructure play respectively.

Since Modi’s announcement we’ve taken hits on both those positions as understandably investors have opted to sell first and analyse later.

The rupee is also down around 3.7% against the dollar which doesn’t help our US dollar denominated India ETF’s.

In the short term this radical economic experiment (and huge political roll of the dice) will be a drag on the economyOur secular positive view on the remains in place but this is an unanticipated additional hurdle that we must clear.

As a result, we are reducing our India recommendations to HOLD with a view to wait-and-see how the market digests this over the next month or so.

Note: As per Figure 7, projected Indian infrastructure spending growth remains robust.

India Government Infrastructure Spending

China Government Bonds Stop Out

In our August 2015 newsletter we recommended buying Chinese Government bonds using the CSOP China 5-Year Treasury Bond ETF (3199 HK).

At the time we said;

“…there’s a lot I like about our recommendation this month: currency strength and low volatility, good yield (for a sovereign with no creditworthiness concerns right now), and low correlation with similar sovereign bonds.

The final reason I like this trade is our interest rate duration risk.”

We predicted that yields would continue to fall benefitting bond holders (i.e. ETF holders).

They did… falling from 3.2% to as low as 2.45%.

However, we have hit our stop loss due to renminbi weakness against the dollar.

This weakness has been exacerbated by the results of the U.S. Presidential election which has seen the dollar hit its highest levels against major developing market currencies in nearly 15 years.

Although with Chinese inflation starting to creep up, we think it’s a good time to exit this trade regardless.

ACTION: In the meantime sell the CSOP China 5-Year Treasury Bond ETF (3199 HK) for around a 6.5% loss (we’ve collected some income which offsets the capital loss).

The next edition of The Churchouse Letter is well underway and will be out shortly as we get back on schedule.

We will be covering the impact President-elect Donald Trump’s on financial markets with a particular focus on what a Trump administration might mean for Asia.

Although I’ve had a huge amount of discussions about Trump with people whose opinions I value, I’ve be at pains to not come to any knee-jerk conclusions.

Frankly speaking, I’m seeing far too many commentators and investors making extremely quick and broad-sweeping assessments… and I think markets in general are also guilty of reflecting that.

Financial markets are utterly euphoric at the moment and focused purely on the potential benefits of a Trump Presidency.

The Dow and S&P500 are at record highs… gold has sold off heavily… the Fed is expected to quickly normalise…

Let the good times roll?

We’re not so sure.

Good investing,

Peter Churchouse





  1. Be suspicious of market euphoria and don’t be quick to call the end of the multi-decade bond bull market just yet.
  2. Sell the Chinese Government Bond ETF – inflation and currency weakness will weigh on this trade.
  3. Indian equities to HOLD. Modi’s demonetization plan caught us all by surprise – we need to wait-and-see


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