The Economic Time and Your Investing

Tuesday, June 13, 2017 // Written by Enzio von Pfeil

Here are the notes to an investment  speech which I gave on 9th June here in Hong Kong: the Economic Clock®, social unrest, defence and education as investment themes.




  1. By way of introduction,

a.  I  was the Chief Regional Economist for Smith New Court Far East as well as for S G Warburg Securities Far East in the 1980s and 1990s,

b.  And have lived in HK since 1990, and have written three books – two on multinationals and one on currency risk


  1. This background clearly dates me in terms of the average age of today’s audience!

a.  But then, as Churchill quipped, the further you can see in the past, the further you can see into the future….


  1. Now, I represent Odyssey Capital Group.  We are Alternative asset managers, as well as External asset managers

a.  In the ALTERNATIVE asset management space, we co-invest in GLOBAL undervalued opportunities particularly in

                                                  i.     Real estate

                                                ii.     Private equity, and

                                             iii.     Venture capital

b.  In EXTERNAL asset management, I focus on passive opportunities using ETFs once we have got the psychological/structural asset allocation right.



  1. My theme today is to identify four  money-making macro frameworks  with Asian twists. Here are the frameworks  and the key take-aways for you:





  1. The Economic Clock®

Expect 1) a major US slowdown by the middle of next year – straight into the mid-term elections, and 2) China’s slowdown exacerbated by continued monetary and regulatory tightening

  • BUY  US late-cyclicals
  • BUY consumer cyclicals globally, in Europe and Japan
  • SELL China until October, which is when the Party Congress is held
  1. Social unrest

Social unrest is f{maldistribution of income}

  • BUY media
  • BUY building materials
  • BUY security operators
  • BUY health care
  1. Defence

Wars  = f{ maldistribution of income, which sets Thucydides’ Trap }

  • BUY defence
  • BUY technology
  • BUY medical
  1. Education

Just about a panacea for alleviating social unrest and thus war-like emotions.

  • BUY education-related, e.g. teaching tools, entertainment, schools


  1.  As I have only 30 minutes, I’ll give you four sketches - but not paintings.
  2. As this sketch has many data points, feel free to ask me for my speaking notes after our session


  1. Feel free to pose questions at the end, of course!


  1. I am one of Friedrich von Hayek’s last students, when he taught in Germany’s Black Forest.
    1. He taught me that nobody consistently  can be right in their forecasts
    2. Therefore, we – instead - should opt for the much more robust and elegant pattern prediction
    3. So, with the help of some MIT textbooks written by Dornbusch and Fischer, I have developed the Economic Clock® for the past 25 years.
    4. WHAT IT IS: a double-shortcut

                                                   i.     It’s a compass, revealing where we are in the business and thus  profits cycle and

                                                 ii.     It’s a filter, helping us sort and interpret sensibly that plethora of economic data releases

                                               iii.     But I must emphasise that our Economic Clock® does not   incorporate VALUATIONS


                                                   i.     As to be expected, the Economic Clock® has two arms pointing to

  1. The Monetary economy, and
  2. The Real economy








                                                 ii.     Logic of the Economic Clock®: there is either too much or too little of something è

  1. Too much money/too little money: this determines  interest rates, and
  2. Too much output/too little output: this determines profits (via turnover and margins)
  3. There are four combinations of these two factors, four Economic Time® zones[1], thus:




è Current strategy

  1. At the bottom of the cycle, there is an   ESM – too much money

… and an ESG – too much output


  1. This ESM

ð Leads to an EDG

ð Low interest rates spur consumption


  1. èThe EDG creates inflation - ”too much money chasing too few goods” -   so the Central Bank creates an EDM, they tighten

But the EDG still prevails –

nobody major  is in this time zone yet

  1. This  EDM …

èCreates an ESG because the Central Bank have tightented too much – they have overshot the runway

Sell China

                                               iii.     Just like socialism works until you run out of money, markets work until you run out money!

  1. the reason that you BUY when there is an excess supply of money is: there is money in excess to the needs of the real economy, so, by definition, it MUST go into assets markets
  2. Conversely, you SELL when there is an excess demand for money: there is not enough money to fuel markets any more – it’s been gobbled-up by the real economy


    1. Armed with this robust framework of the Economic Clock®: how do you make money off it?
    2. Broadly speaking, we see the Economic Time® of an ESM in most of the world, namely

                                                  i.     America

                                                 ii.     Europe, and

                                             iii.     Japan

è BUY, particularly

  • Consumer cyclicals
  • Foot notes on AMERICA
    • America:
      • There is a very real risk that the Fed will raise rates too much, that it will overshoot by creating an EDM
      • This is because it is driving by looking in to a rear-view mirror – by using that anachronistic model of wage-push inflation.
      • Couple this risk of overshoot with a looming “hot potato” double-header of crises stemming from defaulting mortgages as well as student loans, and
      • You have the makings of a disastrous Economic Time® zone FOUR by next Spring  - one characterised by an EDM and an ESG
      • è markets start discounting this disaster six months ahead, i.e.  around this Christmas…


  1. Meanwhile, China’s Economic Time®  is characterised by this

                                                   i.     Excess demand for money, and an

                                                  ii.     Excess supply of goods

                                                iii.     This means that there is little spare cash that can go into the stock market; besides which, the excess supply of goods means that the profits outlook (low turnover, slim margins) is not good.

                                                iv.     note that there is monetary as well as regulatory[2] tightening going on.

                                                 v.     è SELL, except if you believe in 20th June – on Tuesday next: anyone know what I am referring to?

  1. China’s A-shares may get included in the MSCI’s emerging markets index…which means that passive asset managers have to increase their exposure. This represents a TRADING BUY opportunity

ð THIS CONCLUDES YOUR FIRST KEY TAKE-AWAY: how to make money by telling  the Economic Time®



ð WHAT FOLLOWS are three inter-related investment themes that we have worked on with clients, namely:

  • Social unrest,
  • Defence and
  • Education




  1. History is littered with revolutions caused by social unrest/ social discontentment: the stronger the social discontentment, the more likely the appearance of riots and ultimately, revolution


  1. Invariably, this social unrest has been caused by maldistribution of income: there are too few “haves” amid a swamp of many “have-nots”. As we shall see shortly, part of this maldistribution of income = f{ slower growth caused by worsening demographic dependency ratios}


  1. Here is some insight in to Asia’s intra-regional maldistribution of income, as measured by per capita GDPs in 2015, US$
    1. Laos: $1,070
    2. China: $7,900
    3. Singapore: $41,000


  1. And here are some data concerning Asia’s domestic maldistribution of income:
    1. Highest: China, India and  North Korea
    2. Lowest: South Korea, Taiwan and Japan


  1. Part of this maldistribution arises because of slower growth, which is due to rising elderly dependency ratios (i.e. more people aged 64+/total working population of 15-64 year olds).  Here are some elderly dependency ratios projected for 2050. The higher the percentage, the greater the elderly dependency ratio
    1. Japan: 78%
    2. China: 40%
    3. ALL ASIA: 27%
    4. India: 20%


    1. BUY

                                                   i.     Security services, incl. manufacturers and retailers of firearms

                                                 ii.     Media

                                               iii.     Geriatric health care and related e.g. nursing care and nursing homes:

èdeath is a growth industry!



  1. I hardly need tell you about Asia’s hot spots, specifically :  
    1. Terrorism particularly in the Philippines and in China
    2. About North Korea’s “missle toe”, and
    3. About brewing tension in the China Seas


  1. But moving beyond missiles, navies and air forces, let’s step back and put these hot spots into a more intriguing  context.


  1. We just now refreshed memories: over the centuries, social unrest very much has been fanned by maldistribution of income, so, defence has become a band-aid domestic unifier.


  1. But what does social unrest have to do with defence? Everything!
    1. At its simplest: “foreigners are for free”, as I learned during my years working with Capitol Hill


  1. Here is what I mean:

                                                   i.     A country’s  maldistribution of income worsens

                                                 ii.     This, in turn, fans domestic social unrest

                                               iii.     So, national leaders  feel threatened by their own, domestic constituencies

                                              iv.     In order to deflect from this domestic threat, these “leaders” seek to unite their people  by pointing fingers at “the bad foreigner” and latently picking a fight

                                                v.     At a minimum, a build up of arms ensues; at worst, this arms build up erupts into war


  1. Viewed from this “maldistribution of income” perspective:  does it now surprise you that some of the countries representing Asia’s most egregious domestic income distribution are picking fights abroad namely North Korea and China ?
  2. Let’s briefly discuss two of the three hotspots mentioned above: the Koreas as well as China


A. The first hotspot is the Koreas.  Here are some surprising data comparing South Korea’s with North Korea’s[3] military:




NK as a multiple of SK




  • Personnel



80% more

  • Tanks









  • Personnel



  • Ships



  • Submarines



7x more




Air Force



  • Personnel



  • Combat aircraft


















  1. The second hotspot is the China[4] seas
    1. Who here has heard of “Thucydides’ Trap”?

                                                                                                               i.     Thucydides wrote about the Peloponnesian Wars  around  the same time that Sun Tzu was penning  his trenchant  The Art of War…: around 500 B.C.


  1. “Thucydides’ Trap” is a fashionable term coined by Prof. Graham Allison in his recent, intriguing book, Destined for War: Can America and China escape Thucydides’ Trap?


  1. A Thucydides Trap appears when a rising power rivals a ruling power, for instance

                                                                                                     i.     Athens vs Sparta (Pelop. Wars)

                                                                                                   ii.     Germany vs Britain, (two World Wars), and

                                                                                                 iii.     China vs the USA (China Seas)


  1. What make this a trap is the emotions sparked by

                                                                                                     i.     The rising power’s emerging sense of importance  versus

                                                                                                   ii.     The ruling  power’s determination to maintain its comfort zone, its status quo

èwar tensions must ensue


  1. Bringing this to today: I hardly need remind you of barbs exchanged between China and the US at this week end’s Shangri-La Dialogue in Singapore particularly concerning the South China sea.[5]


  1. In order to widen our “circumference of ignorance”, i.e. establish another set of known unknowns

                                                                                                     i.     First, will America’s pivot to Asia mirror her pivot away from NATO?, and

                                                                                                   ii.     And secondly how will America deal with

  1. Japan’s desire to re-arm offensively;
  2. Korea’s “environmental” misgiving deploying some of that THAAD ordnance;
  3. Taiwan’s arms purchases against China’s protests, and
  4. Viet Nam’s desire for a trade deal with America?


    1. BUY

                                                   i.     Defence and related

                                                 ii.     Telecoms

                                               iii.     Media

                                              iv.     Medical


  1. We have seen over the past two sketches that
    1. Maldistribution of income breeds social unrest, and
    2. Social unrest breeds defence tensions


  1. Of course, unemployment is yet another reason for rising social unrest and thus defence tension


  1. The way out of this: create more job-relevant education!


  1. Currently we are faced with the following global phenomenon:
    1. There are 200 million unemployed, but
    2. Yet, there are about 60 million unfilled job vacancies
    3. è by filling these vacancies, global unemployment would be reduced by 60 million, or by about one third!


  1. These vacancies could be filled more easily if educators started meaningful dialogue with employers
    1. Currently, they don’t talk with one another, representing two parallel chopsticks by way of a simile


  1. That dialogue of “crossed chopsticks” would lead to a change in curriculum
    1. More vocational training, and
    2. For all education, engendering more of a problem-solving attitude via the teaching of

                                                   i.     Greater flexibility  and

                                                 ii.     More holistic thinking


  1. Getting a handle on educational levels in Asia is tricky: after all, we don’t want to be accused of using statistics as a drunk uses a lamp post: more for support than illumination!


  1. Here are some literacy rates within Asia:











*On the face of it Asia looks pretty well-educated!


  1. What about Asian secondary educational levels?





S Korea
















*Clearly there is a wide dispersion of educational achievements  within Asia

c. What we could not get are data on is the really interesting stuff: the low levels of vocational training in Asia. This is the one area where employers speak most with educators – and it is telling that no meaningful data on this demand gap exist!

d. by way of contrast, the benchmark for vocational training has to be Germany.  According to Wikipedia, “In 2001,

                i.          two-thirds of young Germans  aged under 22 began an apprenticeship, and

              ii.          78% of them completed it,

            iii.           meaning that approximately 51% of all Germans  under 22 have completed an apprenticeship.

           iv.          One in three companies offered apprenticeships in 2003;

             v.           in 2004 the government signed a pledge with industrial unions that all companies except very small ones must take on apprentices.

           vi.          èclearly, Asia has a long way in order to establish  vocational training


    1. BUY into education and related

                                                   i.     Hardware, and

                                                 ii.     software

  1. Educational entertainment materials




  1. I have given you four investment frameworks  by the way of presenting sketches with take-aways as well as  over 10 investment opportunities. To recap what I’ve said:




10+ INVESTMENT OPPORTUNITIES in stocks, bonds, private equity and venture capital

  1. The Economic Clock®

Expect a major US slowdown by the middle of next year – straight into the mid-terms; China’s slowdown is exacerbated – at least until after the Party Congress ends this October - by continued monetary and regulatory tightening

  • BUY  US late-cyclicals
  • BUY consumer cyclicals globally, in Europe and Japan
  • SELL China
  1. Social unrest

Social unrest is f{maldistribution of income}

  • BUY media
  • BUY building materials
  • BUY security operators
  • BUY health care
  1. Defence

Wars  = f{Thucydides’ Trap, maldistribution of income}

  • BUY defence
  • BUY technology
  • Buy medical
  1. Education

Just about a panacea – but very little by way of vocational training

  • BUY education-related, e.g. teaching tools, entertainment &  schools

[1] E=excess, S=supply; D=demand, M=money and G = goods

[2] At the end of March and early April, the China Banking Regulatory Commission released 7 documents that revealed tighter financial regulations. In addition, 55 cities have introduced 160 cooling measures to slow the rising cost of housing.

[3] FT, 1st May 2017, p. 3, from: South Korea Min. of Def.for data as of 2016

[4] What is the much bandied-about Thucydides’ Trap? è TGraham Allison’s Destined for War: Can America and China escape Thucydides’ Trap?  WHAT THE TRAP IS: a) pre-war: Ït was the rise of Athens, and the fear that this inspired in incumbent Sparta, that made war inevitable.” Thucydides focused on the inexorable, structural stress caused by a rapid shift in the balance when a rising power – Athens, today’s China - rivals a ruling power –Sparta, today’s America.   There are two key drivers to this dynamic trap: 1) The rising power’s – aka Athens’ and China’s - growing sense of entitlement , a sense of its importance and thus demand for greater say and sway, and the ruling  power’.  – aka Sparta’s and the America’s – fear, insecurity and thus determination to defend the status quo.           b) during the war:  -when countries enter and continue war clouded by emotions like fear, hubris and honour. In a nutshell,then, Thucydides trap is that clash of a rising with a ruling power, fueled by human emotion!  P 237-40: focus on keeping DOMESTIC peace by hoeing one’s own vegetable garden!.(Cervantes).  P. 39f.” As this rivalry lead A and S into successive standoffs, the ost passionate voices in each political system grew louder, their ense of pride stronger, their claims about the threats posed by the adversary more pointed and their challenge to leaders who sought to keep the peae more severe. T identifies three primary drivers fueling this dynamic that led to war: national interests, fear, honor. A)  NATIONAL INTERESTS are plain enough. The survival of the state and its sovereignty in making decisions in its domain free from coercion from others are standard fare in discussions of national security.  As A’s relentless expansion ‘began to encroach upon Sparta’s allies, T explains, S “felt its positon no longer was tolerable and thus had no alternative but war. B) FEAR is T’s one-word reminder that facts about structural realities are not the whole story. Objective conditions have to be perceived by humans – and the lenses through which see them are influenced by emotions. In particular, ruling powers’ fears often fuel misperceptions and exaggerate dangers such as rising powers ’self-confidence  stimulates unrealistic expectations about what is possible and encourages risk-taking.  But beyond interests and perceptions lies a third ingredient  T calls ‘honor’…T’s concept encompasses what we now think a state’s sense of self-worth – along with its other activities …

[5] A third Thucydides’Trap is about how the Southeast Asians are unconfortable piggies in the middle” between China and the USA. These  “piggies”  are seeking to play the US off against China, but China, increasingly, will have none of this SEA game-playing…

[6] In AMERICA, by way of contrast, the National Institute of Literacy reckons that

  • 14%, or 32 million Americans, cannot read, and  that
  • a further 21% of all American adults can read only below a fifth grade level….

[7] This gross enrolment ratio can exceed 100% because some enrolled students may fall outside the official age range.[

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