On an Uncertain World, Dalio’s Wisdom and more on Food Combinations!

From Aditya RanaSubject: On an Uncertain World, Dalio’s Wisdom and more on Food Combinations!

Hi!,

Markets have been buoyant since the May downturn, fuelled by expectations of supportive central bank monetary actions. Unprecedented actions by both the ECB and the Fed in recent weeks, promising to provide unlimited (open-ended) monetary stimulus and “do what it takes” to support financial markets and the economy, are likely to underpin (as noted in my previous note from three weeks ago) a cyclical bull market in risk assets over the next 12 to 18 months. However, we are likely to remain in a structural bear market in most developed market risk assets for a while longer, as the process of debt deleveraging in the developed world will continue to subdue economic growth and returns on financial assets. With this backdrop in mind, I present below a summary of a recent note written by the veteran investor and credit manager, Howard Marks, who runs the money management firm Oaktree Capital. The note highlights the risks and uncertainty which continues to prevail in global financial markets:

-“The world seems more uncertain today than any other time in my life”. Or in the words of the John Bogle, the founder of the famed money management firm Vanguard and a 60 year veteran of the market – “It’s urgent that people wake up, the economy has clouds hovering over it and the financial system has been damaged. The risk of a black-swan event – of something unlikely but apocalyptic – is small, but it’s real”.

-The US is likely to see subdued growth for a prolonged period of time, as consumers and borrowers move towards more austerity (reduce excess spending over income) and deleveraging (using the excess income from austerity to pay down debt).

-“Animal spirits” are subdued in the aftermath of the 2008 crisis, and business investment is low as “businesses continue to do more with less”. Psychology plays a significant role in impacting economic growth and poor sentiment will continue to hamper growth.

-In addition, there exist potential black-swan events and landmines out there which could easily derail the economy-i.e.:

Europe continues to present huge risks and endless uncertainty. Forced austerity and deleveraging in the periphery is causing further economic weakness resulting in a vicious cycle – causing the total debt to GDP ratio to actually rise in some countries. Europe is likely to continue to muddle through for a long period, but the risk of it escalating into a global crisis persists.

The US fiscal situation, while not an immediate problem, exists as a longer term issue as a significant portion of the liabilities are back-loaded. The current debt of $16 trillion is dwarfed by the unfunded liabilities from entitlement programs which are estimated to be $50-90 trillion on a present value basis.

Political impasse in the US makes the likelihood of achieving a reasonable solution to the debt problem unlikely, as voters are reluctant to endorse any plan which might reduce their entitlements with self-interest trumping ideology.

-While the Fed is expected to keep interest rates low for a long period of time and/or provide more stimulus, the impact of stimulus is mainly psychological and tend to diminish over time.

-The growing income inequality, exacerbated by the lowering of taxes applied to income on capital relative to taxes on income, and declining ability of the lower income groups to move up the chain, is likely to have negative social ramifications.

-The world today is awash with potential crisis areas – Iraq, Afghanistan, Iran, Israel/Palestine, Syria, Pakistan and North Korea – this is unprecedented compared to previous eras which experienced relative tranquillity.

-The outlook for China is uncertain, with the excess of money leading to bad capital decisions and a real estate bubble. Combined with global economic weakness causing lower demand for Chinese exports, and domestic consumption not being enough to provide the required boost to growth, it remains unclear whether China will experience a hard or soft landing.

-However, there exist several positive factors which could more than offset the above negative factors:

-First, the possibility that things don’t turnout as bad they seem as people’s psychology tends to over emphasise the bad (and the good) at extremes.

-Secondly, asset prices are reasonable in many cases, relative to other investments or on a historical basis:

-The p/e ratio on the S&P500 index is below the post war average, dividends and earnings yields are favourable relative to bond yields.

-Yields on high yield bonds relative to treasuries are at levels which have historically provided superior returns.

-Real estate prices are back to pre-bubble levels of a decade ago.

-Lastly, investor psychology is very subdued compared to pre-crisis levels which bodes well for risk assets in general.

-While investor enthusiasm and risk-blindness maybe low – making it possibly the most attractive feature of the investment environment today– central bank actions to lower interest rates to zero have forced people to take on more risk to seek higher returns.

-In this type of environment, it is even more critical to focus on “completing the long term voyage” and not be swayed by the interim ups and downs.

-While the uncertain environment suggests safety and therefore more government bond investments, given the meagre returns available on them, it would be wiser to more prudently balance risk aversion and the pursuit of return.

-Investments in high yield bonds provides an attractive strategy in uncertain times – historical research has clearly demonstrated that even including uncertain periods like the Great Depression, high yield bonds have provided superior returns.

– A reliable return in the single digits or early teens would be an outstanding result in the current environment. The mantra is “proceed forward, but with caution”.

Sage advice indeed – we do live in an uncertain world, but “doing nothing is doing something in the investing world”. It is therefore critical to construct a well diversified “all weather” portfolio, which has upside exposure to risk assets in the event (as is likely) we do get a cyclical bull markets over the next year or two (equities, EM equities, high yield credit, gold) but also have assets which will outperform in a downturn caused by a deflationary environment (cash, long duration government bonds, high quality bonds) or a period of high inflation resulting from money printing (gold, natural resources and other real assets). It is not going to be easy – but as the famed investor Charlie Munger noted “it’s not supposed to be easy, anyone who finds it easy is stupid”!

I have provided a link below to a fascinating (one hour!) talk recently given by Ray Dalio, who runs the world largest and probably the most successful hedge fund – Bridgewater Associates. Ray explains his basic framework in analysing the economy and financial markets, and explains why we are going through a long period of deleveraging (which typically last 10 to 15 years!) , implying a long period of subdued growth, and why money printing and fiscal stimulus to balance austerity and debt restructuring are critical to avoid a depression. I will cover this in more detail in a subsequent newsletter.

View article…

Lastly, Ray Dalio making the bull case for gold:

“Gold is primarily an alternative to fiat currency and a storehold of wealth. The main advantage that gold has over other currencies is that it can’t be printed. While we have just gone through a period in which the degree of monetary stimulation has ebbed, the ongoing deleveraging means that developed economic will remain highly reliably on continued stimulation for years. By the end of the quarter, central banks were starting to shift back toward renewed stimulation. In addition, one of the primary disadvantages of gold relative to fiat currencies, that it doesn’t pay interest, is mitigated by low rates in the current environment. Real interest rates are likely to remain very low and below real growth rates as a means of combating deleveraging and improving debt sustainability (as described in our “beautiful deleveraging” work). As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets. Gold is also being supported by secularly increasing demand. “

More on food combinations:

Based on popular feedback, I am re-running an article on the “Diet Debacle” by Professor Robert Lustig of the University of California, San Francisco. Professor Lustig points out that the global obesity epidemic is caused primarily by combining fat , carbohydrates and (particularly) excessive sugar in our diets which causes undue strain on the liver (as they are digested by different metabolic pathways) , resulting in a build-up of liver fat, eventually leading to chronic metabolic diseases (heart disease, cancer and diabetes). As guidance, provided below are some common mistakes which are made in our daily diets:

-Combining fruits/juices with meals. It’s interesting to note that Ayurveda also forbids this combination and suggest that fruits should be taken as only a snack in-between meals. This includes adding dried fruits to cereal and eating fruits after a meal as a dessert.

-Adding fats to carbohydrate oriented meals. For example, nuts and seeds (both high sources of fat) to cereal , butter/olive oil with bread, fried rice, fatty meats with rice/bread (!).

-Dairy products (milk, cheese, cottage cheese) with bread, crackers, cereal(have skimmed milk if you must!).

-Processed foods which have synthetic sweeteners added to them (high fructose corn syrup is a particularly prevalent and egregious additive!).

The key to maintaining a diet which adheres to the above parameters is balance – adding a couple of raisins or sprinkling a bit of raw cane sugar to your cereal (with a little skimmed milk if you can’t do without it!) is probably ok but loading it up with dried fruits, nuts and full fat milk is not a good idea!

May. 28, 2012 Project Syndicate

The Diet Debacle

Thank you. You’re human.

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SAN FRANCISCO – Two seemingly benign nutritional maxims are at the root of all dietary evil: A calorie is a calorie, and You are what you eat.Both ideas are now so entrenched in public consciousness that they have become virtually unassailable. As a result, the food industry, aided and abetted by ostensibly well-meaning scientists and politicians, has afflicted humankind with the plague of chronic metabolic disease, which threatens to bankrupt health care worldwide.

The United States currently spends $147 billion on obesity-related health care annually. Previously, one could have argued that these were affluent countries’ diseases, but the United Nations announced last year that chronic metabolic disease (including diabetes, heart disease, cancer, and dementia) is a bigger threat to the developing world than is infectious disease, including HIV.

These two nutritional maxims give credence to the food industry’s self-serving corollaries: If a calorie is a calorie, then any food can be part of a balanced diet; and, if we are what we eat, then everyone chooses what they eat. Again, both are misleading.

If one’s weight really is a matter of personal responsibility, how can we explain toddler obesity? Indeed, the US has an obesity epidemic in six-month-olds. They don’t diet or exercise. Conversely, up to 40% of normal-weight people have chronic metabolic disease. Something else is going on.

Consider the following diets: Atkins (all fat and no carbohydrates); traditional Japanese (all carbohydrates and little fat); and Ornish (even less fat and carbohydrates with lots of fiber). All three help to maintain, and in some cases even improve, metabolic health, because the liver has to deal with only one energy source at a time.

That is how human bodies are designed to metabolize food. Our hunter ancestors ate fat, which was transported to the liver and broken down by the lipolytic pathway to deliver fatty acids to the mitochondria (the subcellular structures that burn food to create energy). On the occasion of a big kill, any excess dietary fatty acids were packaged into low-density lipoproteins and transported out of the liver to be stored in peripheral fat tissue. As a result, our forebears’ livers stayed healthy.

Meanwhile, our gatherer ancestors ate carbohydrates (polymers of glucose), which was also transported to the liver, via the glycolytic pathway, and broken down for energy. Any excess glucose stimulated the pancreas to release insulin, which transported glucose into peripheral fat tissue, and which also caused the liver to store glucose as glycogen (liver starch). So their livers also stayed healthy.

And nature did its part by supplying all naturally occurring foodstuffs with either fat or carbohydrate as the energy source, not both. Even fatty fruits – coconut, olives, avocados – are low in carbohydrate.

Our metabolisms started to malfunction when humans began consuming fat and carbohydrates at the same meal. The liver mitochondria could not keep up with the energy onslaught, and had no choice but to employ a little-used escape valve called “de novo lipogenesis” (new fat-making) to turn excess energy substrate into liver fat.

Liver fat mucks up the workings of the liver. It is the root cause of the phenomenon known as “insulin resistance” and the primary process that drives chronic metabolic disease. In other words, neither fat nor carbohydrates are problematic – until they are combined. The food industry does precisely that, mixing more of both into the Western diet for palatability and shelf life, thereby intensifying insulin resistance and chronic metabolic disease.

But there is one exception to this formulation: sugar. Sucrose and high-fructose corn syrup are comprised of one molecule of glucose (not especially sweet) and one molecule of fructose (very sweet). While glucose is metabolized by the glycolytic pathway, fructose is metabolized by the lipolytic pathway, and is not insulin-regulated. Thus, when sugar is ingested in excess, the liver mitochondria are so overwhelmed that they have no choice but to build liver fat. Today, 33% of Americans have a fatty liver, which causes chronic metabolic disease.

Prior to 1900, Americans consumed less than 30 grams of sugar per day, or about 6% of total calories. In 1977, it was 75 grams/day, and in 1994, up to 110 grams/day. Currently, adolescents average 150 grams/day (roughly 30% of total calories) – a five-fold increase in one century, and a two-fold increase in a generation. In the past 50 years, consumption of sugar has also doubled worldwide. Worse yet, other than the ephemeral pleasure that it provides, there is not a single biochemical process that requires dietary fructose; it is a vestigial nutrient, left over from the evolutionary differentiation between plants and animals.

It is therefore clear that a calorie is not a calorie. Fats, carbohydrates, fructose, and glucose are all metabolized differently in the body. Furthermore, you are what you do with what you eat. Combining fat and carbohydrate places high demands on the metabolic process. And adding sugar is particularly egregious.

Indeed, while food companies would have you believe that sugar can be part of a balanced diet, the bottom line is that they have created an unbalanced one. Of the 600,000 food items available in the US, 80% are laced with added sugar. People cannot be held responsible for what they put in their mouths when their choices have been co-opted.

And this brings us back to those obese toddlers. The fructose content of a soft drink is 5.3%. Of course, many parents might refuse to give soft drinks to their children, but the fructose content of soy formula is 5.1%, and 6% for juice.

We have a long way to go to debunk dangerous nutritional dogmas. Until we do, we will make little headway in reversing an imminent medical and economic disaster.

Apologies for not sending out the newsletter for the last two weekends as I was away to India to attend to an urgent personal matter. I will be also travelling over next weekend (on pleasure!) so the next newsletter will be posted on September 29.

Happy sensible food combining and don’t get too cautious!

Regards

Aditya

On Uncertain Ground 09_11_12.pdf

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