On the Third Wave of the Global Financial Crisis; Saturated Fats and Sugar!

From: aditya rana
Date: Sat, Oct 17, 2015 at 2:24 PM


With global markets bouncing back sharply in October, the question investors face going forward is whether this is a bear market rally and therefore be sold aggressively or markets have bottomed out and we can expect the rally to continue for a while longer. To form a view on this, one has to take a close look at emerging markets to see if they are in the midst of a structural downturn which could take a few more years to resolve or they are in the final phase of a cyclical downturn. The portfolio strategy research group at Goldman Sachs wrote an interesting note on this subject which is summarized below.

-One of the most striking features of the financial crisis (at least since 2010) has been the trend towards product price disinflation combined with rapid financial asset inflation (see chart below). The divergence reflects both weak growth (allowing interest rates to fall) and the shift towards unconventional monetary easing policies (QE) which have boosted financial assets.

-With policy interest rates close to zero, concerns are heightened about the sustainability of returns on financial assets, particularly if deflationary forces take hold. These fears have been further stoked by the weakness in EMs, China and the fall in commodity prices.

-The weakness in global growth, particularly in EMs, is a direct result of the responses to the financial crisis and the consequent deleveraging in the US and Europe. The gobal financial crisis can therefore be seen as a cascading wave of problems which are all linked to each other.

-Wave 1 was the US housing and credit crisis , which ended with the collapse of Lehman and the start of the Troubled Asset Relief Program (TARP) and QE.

-Wave 2 was the European bank and sovereign crisis leading to fears of the sustainability of the Euro. This ended with the Outright Monetary Transactions (OMT), “do whatever it takes” and finally QE.

-Wave 3 is EM rebalancing which started with the collapse in commodity prices and fears about a US rate rise during the “taper tantrum of 2013”. The impact of the fall in commodity prices and the high levels of debt has negatively impacted some EMs and is now threatening global growth. See chart below.

-The current EM wave is linked to the US wave through low interest rates which have fuelled credit growth and increased leverage, particularly in China. Fixed capital formation has surged in China while it has declined in the US and Europe (see chart below), and partly explains the current weakness in China and other EMs.

-The unfolding of the financial crisis in three waves has disrupted the typical path of equity market recovery. Most historical equity cycles follow four distinct phases: “Despair”, “Hope”, Growth”, “Optimism”. While all markets underwent a “Despair” phase in 2009, and they all began a strong “Optimism” phase in response to QE, Europe was derailed by the onset of the bank and sovereign crisis. And as Europe finally entered a growth phase in 2012 supported by aggressive policy easing, EMs were just entering their “Despair” phase (see charts below)

-Global markets are now at an inflection point with two very different outcomes: 1) either the world faces “Secular Stagnation” as the bond (and credit) markets seem to fear, or, 2) the slowdown in EM can be viewed as the final stage of the financial crisis. This stage, like the US and European stages which preceded it, is forcing balance sheet adjustments and rebalancing of economies setting the stage for a gradual normalization of economic activity, profits and interest rates.

-The outlook for markets differ widely under the above two scenarios – with secular stagnation implying that interest rates remain permanently low and equity returns decline as profit growth fades , while the second scenario implies that equities outperform bonds as the equity risk premium declines. Secular stagnation fears are currently being driven by the earnings downgrades and weakness in EMs.

-However, weakness in EMs and China most likely reflects rebalancing of economic growth rather than structural weakness. This should set a solid base for future growth. Also, the low capex spending by corporations likely reflects the fall in commodity prices and a structural shift towards technology which should result in higher ROEs in the future. Lastly, falling commodity prices should create benefits for some economies, while penalizing others and the risk of a global recession remain low.

In conclusion: 1) equities should resume their outperformance over bonds over the coming 12 – 24 months; 2) equity returns are likely to be lower in the coming years as the support from rising valuations and QE fades; 3) a likely shift in relative performance away from EM to DM, from producers (and capex beneficiaries) towards consumers (though tactical reversals are likely).

-A fascinating analysis which is contrary to the currently prevailing consensus view that EMs (and China) are in a structural slump which is likely to last several years. What the analysis above highlights is the key role played by aggressive monetary easing policies in ending economic and market downturns. However, what the report ignores is the critical role played by the massive stimulus policies in China (and other EMs) in the aftermath of the financial crisis, stimulating both economic growth and asset prices in EMs as well as DMs. And the commencement of the winding down of the “Great Chinese Stimulus” in early 2011, leading to a prolonged slump in economic growth and markets across most of the EM world (with the DM world escaping the slowdown due to QE policies).

-Therefore, the key financial variable to watch closely going forward is the monthly China M2 growth (which captures the impact of stimulus policies and credit growth in a simple and reliable real time number), having clearly bottomed out at a historical low of 10.1% in April of this year, is now back to a healthy level of 13.1% (see graph below-lower trend GDP growth in China requires lower levels of M2 growth that in the past). China’s money supply matters – at $22 trillion versus $12 trillion for the US and $67 trillion for the world! This bodes well for Chinese GDP growth in the coming months and next year, which should provide support for EM economies and markets going forward and ending their “Despair” phase (which actually began in 2011 rather than 2013).

-However, as I have argued in my previous letter, given the uncertainty surrounding the Fed’s rate hike timing (further exacerbated by unprecedented statements from two Fed board members – who in the past have toed the line drawn by the Fed chair – asking for a delay in hiking rates) it would be prudent to raise some cash in portfolios as the current rally continues, so as to invest again as and when we do get a downdraft.

Sugar and Saturated Fat:

Yet another great piece from David Katz, Director, Yale Prevention Research Center, clarifying some popular myths pertaining to saturated fats and sugar.

Huff Post: 10/01/2015

-First things first: science does not deal in absolutes . Famously, everything is relative. Even relativity. Einstein’s groundbreaking theory has been subject to on-going revisions in the minds and machinations of his successors ever since he passed the baton.

-Second, saturated fat is neither satan, not saint. It is not the scapegoat some were seeking or perhaps believed it to be, nor any kind of silver bullet- in coffee, or elsewhere. It is not the one thing wrong with our diets, any more than it is the one thing to fix them.

-Which saturated fatty acids are most decisively innocuous? Stearic acid, predominant in dark chocolate; and lauric acid, predominant in coconut. This begs the question: do Americans (or most people eating in industrialized countries) get their saturated fat principally from chunks of raw coconut coated in pure dark chocolate? Of course not.

-In the real world, when saturated fat intake is high, it is from the customary sources: pepperoni pizza; pastrami sandwiches; and ice cream sandwiches for that matter. It is from meat, much of it processed; dairy, much of it processed as well; and food both fast, and fried. Since that is where saturated fat is coming from for the most part, the health effects of saturated fat at varying levels pertain mostly to variations in the intake of, as a shorthand, "meat, butter, and cheese," noting that much of the intake is actually processed and fast food incorporating these.

-Therefore, population-level studies looking at variation in saturated fat intake in the U.S. are not studies about eating more or less dark-chocolate covered coconut; they are studies looking at variations in meat, butter, and cheese, and the foods with which folks replace these.

-That’s exactly what a new study in the Journal of the American College of Cardiology did. Harvard researchers looked at change in saturated fat intake over time in a large cohort of Americans. They then addressed the key issue missing in prior, and much over-hyped studies on this general topic: with what did they replace saturated fat when they ate less of it?

-The results turned out exactly as I would have predicted. The study showed that if saturated fat calories were replaced with sugar and/or refined starches (which tend to go together, as in a donut), the risk for cardiovascular disease was equally high both times. Let’s pause there a moment: equally high both times.

-This means that those inclined to argue that saturated fat is the only concern when it comes to coronary disease are just as wrong as those inclined to suggest that sugar is the root of all dietary evil, and vice versa. Neither camp of absolute advocacy- it’s all about saturated fat; it’s all about sugar- finds any comfort, or cover, in this study.

-Moving on, the study also showed, predictably to some of us, that when saturated fat was replaced with whole grains, polyunsaturated fats, and/or monounsaturated fats, cardiovascular risk went down significantly- with the largest benefit associated with polyunsaturated fats. What are the food sources of such calories apt to be? In the case of whole grains, whole grains, obviously. In the case of PUFAs and MUFAs, they would be the usual suspects: nuts, seeds, olive oil and other cooking oils, avocado, seafood and fish.

-So, this study is potentially a nice antidote to the overcooked rhetoric about meat, butter and cheese; and related excesses regarding saturated fat and sugar. But, of course, the study is flawed. This is not much of a concession, and certainly not an epiphany. Every study is flawed.

-How do I know? It’s my job to know. I am formally trained in epidemiology, have written textbooks on research methods and the interface of evidence and clinical decisions, and have run a clinical research lab for nearly 20 years. It’s my job to know; all studies are flawed.

We may note generally that the more internally valid a study tends to be (i.e., the more reliably and precisely it generates a true answer to a narrow question), the less generalizable it tends to be to real people in the real world. Randomized, controlled trials are considered a very high standard of evidence, but in fact they often suffer from quite poor external validity, or real-world relevance. In contrast, studies that are less strictly controlled may offer up more realistic findings, but with less precision and more uncertainty. There are trade-offs, these and many others.

-Does this mean that we are consigned to be forever clueless and confused about the basic care and feeding of Homo sapiens? Of course not. It means that no one study, nor one kind of study, can be the basis for what we know. We must, rather, acknowledge both the strengths and weaknesses of every study, aggregate the evidence, and lean with the weight of it. And if it begins to tip in a new direction, so must we, if we are honest.

-So, what happens is this: when people like the results of a study, they highlight the results with recourse to every New Age megaphone at their disposal, and mums the word about methods. When they don’t like the results, they highlight the methods, with emphasis on the (inevitable) flaws, and mums the word about any strengths. Often, when methods are being criticized this way, the concerns are hypothetical- maybe there was a bias, maybe there wasn’t- but they are propounded as established fact.

-So it is that the camp currently advocating for the canonization of saturated fat and a shift to more meat, butter, and cheese will talk only about the flaws of this new study. That would be fine if they did the same with studies that supported their platform, but we don’t roll that way.

As noted, when one likes the results, mums the word about methodologic limitations. For instance? The much over-hyped meta-analysis that allegedly (but not really) told us that saturated fat is "good" now suffers at least all of the same limitations as the current study. What’s good for the goose is good for the gander, or really ought to be.

-Regarding that overhyped meta-analysis, the senior author was Dr. Dariush Mozaffarian, who has made quite clear that he does not take the results to mean we should be adding saturated fat to our diets. Commenting on the new study, Dr. Mozaffarian had a quibble: the study didn’t differentiate among the various saturated fatty acids. That’s true, but the study didn’t compare different varieties of sugar or fiber, or polyunsaturated fats, either. It was asking a question from altitude, and generated a clear answer. While it’s true that health effects of saturated fatty acids vary, that is not germane to the question: what happens when NET saturated fat calories are replaced by this, that, or the other thing? That’s the question this study asked, and answered with considerable clarity.

-Among the clear answers was this, as noted: when net saturated fat calories were replaced with sugar, things got no better, but they got no worse either. In other words, the net effect of saturated fat calories on health was just about equivalent to the net effect of net sugar calories. This doesn’t say that all saturated fatty acids are the same. But it does say what happens when diets are higher overall in saturated fats from the usual sources, namely processed meat and dairy.

-Much of this has seemed quite clear to me for quite some time, because it’s exactly how the aggregate weight of evidence has been tipping. It is clear to most real experts, too.

Unfortunately, in this age of cyberspatial echo chambers and accelerating news cycles, the true consensus of genuine scientists is overwhelmed by a clamor in the service of notoriety and profiteering. Every study is a hyperbolic headline, and an invitation for some faction or other to hoist their victory flag. And then along comes the next hyperbolic headline, refuting the first, and another faction claims the high ground.

Science doesn’t work this way; it is about the incremental additions of each new study to what we knew before. It requires uncertainty, and allows for mistakes- even as it allows for us to know enough. We can act based on what we know about nutrition, and despite our doubts, to do enormous good.

Here’s to sticking with the simple dietary mantra of “eat whole foods, a bit less, mainly vegetables”.




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