His August 2017 Commentary focuses on two key issues, productivity and liquidity. I’ve always thought that following capital flow is just as important if not more so than good old fashion company analysis because the majority of one’s returns are determined by the asset class/market/sector etc that one’s investment holding is in. Here’s my favourite snippet and the link to the rest of the commentary

One aspect of the productivity issue is reflected dramatically in the U.S. equity market. Through the middle of June the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google, along with Microsoft) represented 13% of the capitalization of the Standard & Poor’s 500, but accounted for 33% of the appreciation. These companies were in the 90th percentile of all companies in the index, based on return on invested capital (close to a 100% return). The median was 20%. Investing in the companies with the highest return on invested capital and with the highest margins has paid off. It helps if they are in a dominant position in their respective industries and can maintain their market share. Looked at another way, Amazon and Walmart stocks were selling at about the same price in 2008. Since then, Amazon has soared and Walmart has stayed roughly flat. Today, Amazon has a market cap of $476 billion and Walmart’s is $230 billion. Amazon has 351,000 employees and Walmart has 2.3 million. Technology enables some businesses to build profits with a minimum of human capital and enjoy high margins as a result. That will be the shape of the future, with serious implications for the economy and the market.

As for central bank liquidity, it has increased 13% year-on-year for the four major industrial regions – the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan. The total of the balance sheets of those four is $12.8 trillion today compared with $3 trillion in 2008 before the financial crisis. We know, however, that the Federal Reserve is tightening its posture, having increased short-term rates twice this year with the promise of further increases to come later. The Fed is also planning to slowly shrink its $4.5 trillion balance sheet by letting maturing bonds be redeemed without buying replacements in the open market. This has the effect of reducing the supply of money in the economic system with bearish implications. The European Central Bank under Mario Draghi is also considering switching to a less accommodative stance. Draghi is going to the Jackson Hole economic conference at the end of the summer where he may announce a change in European Central Bank policy. If the Fed chooses to become more aggressive in its tightening process, Janet Yellen may use Jackson Hole as an opportunity to announce that change to the world as well. 

Source: Blackstone