Get Ripped (Or Your Insurance Doubles)

Why obesity will soon come with a steep price tag

Author

Tim Vollans
October 17, 2023 • Estimated Reading Time: 7 minutes

A deeper look at the battle between Project Fat™ & ProjectThin™ plus… genuine alternatives to buying stocks, & economists getting stuff wrong again…

🧠 The Big Brain
#MakeAmericaNormalWeightAgain

Obesity is big business.

Both creating it, and potentially curing it.

Enter…

the semaglutide revolution that is taking the world (well, the US, where it’s most needed) by storm, to try and counteract Project Fat™ from the food and drink makers.

Said last week that we’d be going deeper into this theme, including an insurer’s angle. So we did 👇

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⚡ The Spark
This Time IS Different

… is a quote you tend to associate with some overly-optimistic punter who’s gone all-in on the latest fad.

You can picture them in your mind’s eye, hopefully clutching their shares, praying that they’ll pay out like a winning lotto ticket.

Usually it doesn’t work out.

It’s not however, a quote you’d typically associate with a rational, highly experienced investor like Howard Marks.

Still, it’s a funny old world, and he definitely said it, even referencing Templeton’s famous quote (“the four most dangerous words in investing are ““this time is different””) in the process:

Importantly, however, Templeton allowed that things might really be different 20% of the time. On rare occasions, something fundamental does change, with significant implications for investing.

Howard Marks

That thing, according to Marks, is that we’re not going back to the old zero rate policies.

A little lower than current rates? Sure.

Once the inflation beast is caged, there’s no need to keep rates up here.

But NOT back to zero.

None of what he’s saying is controversial either. The full note is well worth your time (it’s not that long) and there’s one thing I want to particularly highlight.

The role of leverage

See, we've lived through an era of easy/cheap/free money. Which meant you could take a strategy and lever it up, borrowing at an extremely low cost.

Even better, because interest rates were generally trending lower, you could usually refinance at the same rate or an even lower rate.

That’s no longer true. 

Which could be a pretty big deal.

Marks uses this example to illustrate:

Five years ago, an investor went to the bank for a loan, and the banker said, “We’ll give you $800 million at 5%.”

Now the loan has to be refinanced, and the banker says, “We’ll give you $500 million at 8%.”

That means the investor’s cost of capital is up, his net return on the investment is down (or negative), and he has a $300 million hole to fill.

Which leads on to some pretty key questions…

  • Will asset ownership be as profitable in the years ahead as in the 2009-21 period?

  • Will leverage add as much to returns if interest rates don’t decline over time or if the cost of borrowing isn’t much below the expected rate of return on the assets purchased?

Take the example from before.

If you want to buy stocks (expected to return 10% per year, on average), but your cost of capital is 8%, how attractive is it to lever up that bet?

That doesn’t mean people won’t lever up anyway. 

Nonetheless, it’s a valid question…

Especially when compared to alternatives.

Nowadays, the ICE BofA U.S. High Yield Constrained Index offers a yield of over 8.5%, the CS Leveraged Loan Index offers roughly 10.0%, and private loans offer considerably more. 

In other words, expected pre-tax yields from non-investment grade debt investments now approach or exceed the historical returns from equity.

And, importantly, these are contractual returns.

See, if you’re buying stocks, you’re always reliant on the mood of the market, (and someone else paying a higher price in the future).

With credit, that’s not the case. There’s a contractual obligation to return the funds plus interest, or risk losing the entire business through bankruptcy.

An entirely different world.

Summing up, Marks says credit investors can access returns today that:

  • are highly competitive versus the historical returns on equities

  • exceed many investors’ required returns or actuarial assumptions

  • are much less uncertain than equity returns

“Unless there are serious holes in my logic, I believe significant reallocation of capital toward credit is warranted”

Narrator: There are no holes in his logic.

Here’s a great chart from Schroders pointing out the exact same thing:

So, allocation away from stocks and into credit/bonds might be warranted, the question is… Will it happen?

Investors’ love of stocks is so entrenched, maybe they just stick with what they know.

One thing that’s definitely different this time? Investors have alternative options…

đź’ˇ The Lightbulb
Economists Get It Wrong Again

Even the top professionals, with all the tools, knowledge and data at their fingertips, struggle to predict anything accurately.

Canadian inflation was expected at 4% today.

Just a few days ago, the Bank of Canada was fretting. Governor Macklem said the BoC would be weighing whether to let previous rate hikes work through the economy or raise again to counter still sticky inflation.

The conditions for doing nothing?

"What we're looking for are clear signs that core inflation, underlying inflation, those pressures are easing and inflation is going to be coming down,"

Monthly inflation came in negative at -0.1%. Annual inflation dropped to 3.8%. Probably enough progress to keep the Canadian central bank on hold. 

Over in the US, economists were surprised in the opposite direction.

US retail sales smashed the expectations of 0.3% growth for September, printing a spicy 0.7% 🔥 instead.

Economists and analysts are constantly getting stuff wrong. It’s not ALL their fault, predicting is a tough gig.

Worth remembering when anyone’s on their soapbox confidently predicting the future.

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