We* Read (And Liked)… Only Yesterday – An Informal History Of The 1920s

Frederick Lewis Allen’s Only Yesterday1 is by no means a well-kept secret. It was a best-seller when it was published in 1931, and continues to show up on reading lists of both university courses and famous investors. For anyone interested in learning about the prelude to the Big Crash, this is a must-read.

As the title implies, Only Yesterday chronicles American life in the 1920s. The book reinforces the popular image of that era (a decade of prosperity and riotous living), but most fascinating are Allen’s descriptions of the profound social changes that took place in the 1920s: the clash between young and old after the war and the rise of the consumer economy.

It is impossible to finish the book without reflecting on how history tends to rhyme (if not repeat).

Lewis colourfully describes consumers’ exuberance in the 1920s, which led to the ‘age of thrift’ that eventually became embedded in the generation that lived through the Great Depression. Similarly, today’s sub-par consumption patterns have their roots in the housing/mortgage bubble of the 2000s. Perhaps today’s Millenials are therefore an echo generation of the ‘Silent Generation’ that was born into the depression of the 1930s.

A second important similarity is the role of demographics and generational change. The Lost Generation – the cohort who came of age during the First World War and the 1920s – were often accused of being shallow amusement seekers who drank a lot. But this generation successfully upended social norms and thus forever changed the moral code of America. The coming generational conflict will not look anything like the 1920s, but Lewis’ description of the handover of power to the post-war youth suggest that the looming transition from Baby Boomers to Millenials (now turning 35) will not be without friction.

Hands down though, the most exciting theme in Only Yesterday is the equity mania that builds throughout the decade and how it gradually seduces the masses into believing the business cycle was on a permanent uptrend. For investors, the best part of the book comes at the very end. It is a forty page play-by-play of the rise and fall of stock prices during 1929. You’ll need to read that part in one sitting.

* This month’s book review is authored by our colleague Lenka Martinek, Managing Editor of the BCA Daily Insights service.

1 Allen, Frederick Lewis (2010). Only Yesterday – An Informal History Of The 1920s. New York: Harper Perennial Modern Classics.

The “New, Normal” In EM Ex-China

EM economies ex-China are slowing to a “new, normal growth” phase, which will keep bulks and base metals under pressure this year and next. These economies join China in a broad-based EM slow-down, which will increase the supply-side slack in metals generally, and stretch out supply and inventories globally.

Private and public spending is ratcheting lower in EM ex-China markets. Real capital expenditures dipped into negative territory year-on-year as 2014H2 opened, while real private consumption decelerated to ~ 3% y-o-y.

Slowing EM Spending And Capex Will Pressure Industrial Commodities


Coupled with China’s “new, normal growth,” which we discussed last week, this provides another indication commodity price pressure will remain contained for the balance of this year and next. In addition, it raises the odds of a eurozone recession, to which the IMF last week assigned a 40% probability. This would hit commodity prices harder than markets expected earlier this year: EM growthwill no longer offset DM slack.

(Part I) EM Credit Spreads: Unsustainable Divergence

EM sovereign and corporate credit markets have so far defied the selloff in EM equities and foreign exchange markets, but the odds of material spread widening are considerable.


As G7 central banks have crowded out global fixed-income investors from G7 bond markets by depressing yields, investors have rotated into other segments of global fixed-income markets and bid up prices of hard-currency denominated EM sovereign and corporate bonds. Our EM strategists believe the stampede into EM credit markets has gone too far, and that these divergences between EM currencies and stocks on the one hand and EM credit markets on the other will not be sustainable.

Today, EM countries’ private sector foreign debt levels (as a share of GDP) are not lower than at the end of 1996 and early 1997, when the emerging Asian crisis commenced. This is not to argue that the EM world is headed for a similar crisis like what transpired in 1997-’98. The point is that currency depreciation raises foreign debt burdens and as such should lead to a re-pricing of credit risk – i.e., wider corporate spreads.

Although the EM public sectors’ foreign debt burden is very low, most developing nations’ fiscal positions will deteriorate going forward. This will occur because the growth slowdown will drive down corporate profits and consequently governments’ tax intake. In the meantime, political pressure to keep the population happy will lead many EM governments to loosen the fiscal purse. All in all, government debt and budget deficit dynamics will worsen, justifying higher spreads on sovereign credit.

Weaker EM growth and commodity prices also represent a menace to EM credit markets. Please see the next Insight, (Part II) EM Credit Spreads: Unsustainable Divergence.


In a multipolar world countries will have to navigate multiple relationships, some will be difficult to classify as either alliances or rivalries.

I am not entirely sure as to the origin of the term ‘frenemy’ – the wikipedia entry for the word suggests it comes from the TV show Sex and the City – but it is perfect for today’s geopolitical context. Multipolarity is defined as a global system where more than one or two states are capable of pursuing a significant, and independent foreign policy. Great (and significant) powers have multiple foreign policy goals, some regional, some global, and some calibrated for the domestic arena. Out of this necessity to pursue multiple, often competing, strategies simultaneously arises a new type of a relationship between countries, one that is best captured by the pop-culture term frenemy.

Take the following two articles from Reuters:

In the first, a senior Iranian official told the newswire agency that the U.S. had informed Tehran in advance of its intention to attack the Islamic State (IS) militants in Syria and “assured Tehran that it would not target the forces of Syrian President Bashar al-Assad,” an Iranian ally. Another Iranian official, commenting on the U.S.-Iran cooperation against IS, tried their best to dance around the issue of an informal alliance, “This is an intelligence matter and I can assure you geopolitical and intelligence matters will not be shared with Americans… but military and security issues are being shared to fight against IS.” In other words, the U.S. and Iran are cooperating on geopolitical and intelligence matters!

In the second article, Reuters reported that the U.S. is looking to sell Vietnam P-3 Orion surveillance aircraft. The U.S. is upgrading its surveillance fleet with the new P-8 Poseidon aircraft and thus is looking to off-load the older, but still highly capable, P-3 to countries in East Asia that are concerned about China’s rise. To sell Vietnam the aircraft, Washington has to lift its arms embargo on Vietnam and ignore the human rights violations that it had repeatedly criticized Hanoi for in the past. But in the context of a more assertive China, which recently provoked Vietnam by floating a massive oil rig in waters that Hanoi claims as part of its exclusive economic zone, Vietnam and the U.S. are coming closer together.

Clients often ask me why American foreign policy so incoherent, particularly in the Middle East. It comes back to what Henry Kissinger said in the 1980s: “America has no permanent friends or enemies, only interests.” Perhaps the phrase should instead end with, “only frenemies.”

East Asia Blues: South China Sea Is Not Going Away Folks

A poll of BCA Research Investment Conference attendees suggested that most investors are worried about Russia and the Islamic State, but investment-relevant risk remains in East and Southeast Asia.

I just got back to our Montreal HQ after two days at the BCA Research Investment Conference in New York. It is always great to catch up with old friends and make new ones at our annual event. It is also always an honor to share the same stage as our invited guests and my colleagues.

It is a tradition at our conference to ask the audience a few questions before we begin each panel. I began my Geopolitical Update presentation with two simple questions: which geographical region do you expect to produce the most investment-relevant risk in 2015; and do you think geopolitical risk will increase, decrease, or stay the same in 2015?

Unsurprisingly, a majority of the audience expected geopolitical risk to increase in 2015. No arguments there. But when it came to selecting the source of that risk, most of our clients and invitees expected it to come from Russia (first choice) or the Middle East (second choice). Only 14% respondents thought that East Asia would produce market-relevant geopolitical risk next year.

Here I respectfully – and considerably – disagree with our clients. While the probability of more tensions and noise from Russia and the Middle East remains high, the market impact of the two regional crises will likely remain muted. Meanwhile, East Asian geopolitical tensions continue to mount. The more investors ignore this region, the greater the likelihood that the market will be blindsided by a crisis.

Take this New York Times article from September 13 which reported that Malaysia had offered the U.S. a base from which to fly surveillance aircraft over South China Sea. The claim remains unconfirmed by Kuala Lumpur, but fits the pattern we have come to expect in the region where China’s neighbors are increasing military cooperation with the U.S.

The airplane in question, the P-8 Poseidon, is currently flown out of the American Kadena Air Base in Okinawa, Japan. A P-8 was recently ‘buzzed’ by a Chinese Shenyang J-11B Flanker B air-superiority fighter, causing a minor incident. Chinese officials went on the offensive soon after, publically warning the U.S. national security adviser Susan E. Rice, while she was visiting Beijing, that the Obama Administration should stop the “close-in” surveillance flights. The warning is unlikely to alter American planes to deploy (a lot) more P-8s to the region, with Boeing set to produce approximately another 100 planes for the U.S. Navy.

The U.S. uses the P-8 Poseidon aircraft to spy on China, and its submarine fleet in particular, from international waters. Washington’s claim is that its aircraft can operate within international waters beyond the immediate 12-mile territorial line. China, on the other hand, claims that foreign aircraft are not allowed to fly within the 200-mile exclusive economic zone without permission. The difference in views is further accentuated by China’s claim to nearly all of South China Sea.

The reason I am highlighting this news item is because Malaysia is not an obvious candidate to join America’s containment of China. Kuala Lumpur does have a territorial dispute with China – James Shoal, only 22 miles off the coast of Malaysian state of Sarawak (Borneo) – but the issue has not soured relations between Beijing and Kuala Lumpur thus far. Malaysian public also has the most unfavorable views of the U.S. out of the major East Asian countries (Chart 1), suggesting that there could be a domestic political constraint to closer military relations with Washington.


Malaysia: Not An Obvious U.S. Ally


Malaysia is a ‘litmus test’ for our Geopolitical Strategy theme that East Asia geopolitical tensions are rising. In other words, if even Malaysia is joining the anti-China coalition that America is building in East Asia, then our view that things will get worse in the region is probably right. Russia and Iraq are certain to continue to make noise in 2015, but it is difficult to see how either produces major, and global, market-moving risks other than in a few unlikely scenarios. East Asia, on the other hand, could blindside investors precisely because nobody is paying attention to it.