The key chart
Lesson #1
I started 2020 by arguing that the true value in analysing developments in the financial sector lies less in considering investments in developed market banks and more in understanding the wider implications of the relationship between the banking sector and the wider economy for corporate strategy, investment decisions and asset allocation. Banks have underperformed again (c20% YTD in Europe) but the messages from the money sector have been as important as ever.
First, a quantitative, objective and logical analytical framework developed from an understanding of basic banking services (payments, credit and savings) has demystified confused economic/political debate (MMT?), explained the need for major policy reboots and highlighted the flawed assumptions in recent official forecasts.
Second, monetary developments have continued to provide reliable leading indicators of economic activity (that link directly into asset allocation models), key insights into the behaviour of households and corporates over time and between regions, and warnings of hidden risks in emerging economies. Third, the mechanical link between money supply and inflation has been challenged and replaced by an explanation of what will be required for LT secular trends (eg, growth vs value) to be reversed in a sustainable fashion.
And all from the simple observation that, “everyone has a balance sheet” (see Lesson #2).