The shift from the age of abundance to the age of scarcity requires different equity allocations and a focus on profits and cash flows in investing.
The capital cycle framework analyzes investment flows and competition dynamics, using metrics like capex to assets and ROIC to identify potential winners or losers.
Real estate can serve as an inflation hedge and offers opportunities in the homebuilding industry, with location and scarcity being important factors in valuing assets.
Deep dives
Shift towards the age of scarcity and the impact on investments
Tian Yang discusses the shift from the age of abundance to the age of scarcity, where cheap labor, commodities, and money are no longer readily available. This will require different equity allocations and a focus on profits and cash flows. Companies may engage in vertical consolidation to maintain profit margins amidst rising costs. Additionally, the need for housing and the potential for inflation hedge make real estate an interesting investment. Tian also emphasizes the importance of taking a long-term view and considering both the fundamentals and playing the game in investing.
Capital cycle framework and applying quantitative techniques
The conversation covers the capital cycle framework, which involves analyzing investment flows and competition dynamics in various industries. Tian explains how they quantify the capital cycle using metrics like capex to assets, depreciation to assets, and ROIC. This helps identify potential secular winners or losers. He also highlights the importance of taking a multi-time horizon approach, combining structural, business cycle, and tactical views. By marrying these insights with data science techniques, they aim to filter investment ideas and make better decisions.
Key insights on the housing market and real estate
Tian discusses the need for more housing supply, especially in the US, and the potential opportunities in the homebuilding industry. He notes that real estate can serve as an inflation hedge and highlights the importance of location and scarcity in valuing real estate assets. The conversation also touches on the challenges of vertical consolidation in the housing industry and the role of government policies in influencing real estate markets.
The impact of the age of scarcity on technology
Tian explains that in the age of scarcity, technology businesses focused solely on software and lacking pricing power may face challenges. Instead, there may be a shift towards hardware and the need for technological innovation in areas like material science and energy. He highlights that both secular and cyclical factors need to be considered when evaluating technology investments.
The role of historical insights and recommended reading
Tian emphasizes the importance of studying economic and financial market history to gain insights into how the world works and avoid repeating past mistakes. He recommends books like 'The Volatility Machine' by Michael Pettis and various works by Joel Greenblatt, which provide practical perspectives on investing and capital allocation.
Tian Yang was a fascinating guest and we covered a wide range of subjects. He explains why ChatGPT may be useful in solving accounting problems, but it produces gibberish when asked about investing. We talk about his work on the commodity super cycle, looking at rubber, whaling and fur.
He explains how he applies quantitative techniques to the capital cycle framework championed by Marathon Asset Management and featured by Edward Chancellor.
His work encompasses 3 different timeframes – the long term fundamental, the 6-12 month business cycle and the shorter term tactical trades – Tian is unusual in that he understands fundamentals but also what he calls playing the game, the tactical business of quarterly earnings and similar.
We discuss the new environment which he terms the age of scarcity -investors need to understand the implications of the end of age of abundance which rested on the availability of cheap labour, cheap commodities and cheap money. All this now changes, which means different equity allocations are necessary.
