Virtue-signalling can be thought of as publicly expressing opinions or sentiments intended to demonstrate one’s superiority. The implication is that a person or entity engaged in virtue signalling does not really believe what they are saying. Rather, they seek to be admired for ‘doing the right thing’. Celebrities who identify with more fashionable or liberal political causes such as feminism, gay rights, racial diversity or concern about climate change are sometimes accused of virtue signalling.
In the summer of 2017, consumer packaged good giant Procter & Gamble said that it had cut more than US dollars 100 million in digital marketing spend in the June quarter. The eye-catching part of the announcement was the claim that the spending cut had little impact on Procter & Gamble’s business — “proving” that those digital ads were largely ineffective.
The chart of Facebook’s worldwide advertising revenue suggests that P&G’s decision to cut Facebook ad spending did not have a meaningful impact on the social network’s revenue.
Back in 2017, we wrote (emphasis added):
“If digital advertising platforms have been so effective at disrupting traditional advertising channels, how does one reconcile that Procter & Gamble cut digital spending and it had minimal impact on their business? Firstly, the company has long been the largest spender on advertising in US and the cut represents less than 5% of their total annual ad spend. Secondly, and more importantly, the company has spent billions year in and year out for decades in building brand identities for its product. Consumer behaviour patterns suffer from inertia. Brand loyalties and affinities will not be wiped out immediately but are likely to gradually fade away. Somewhat akin to the explanation on how one goes bankrupt in Ernest Hemingway’s The Sun Also Rises:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
Lastly, digital advertising platforms’ major strength is targeting specific consumer groups based on precisely defined criterion. Such platforms are best suited to products that have a great deal of appeal to a select group of consumers. In such instances, the return on investment will tend to be high. In contrast, household consumer brands have been built upon creating mass awareness and offering acceptable levels of quality – traits that are unlikely to garner much consumer enthusiasm and therefore likely to result in a low return on investment on digital media spend.”
From The Washington Post:
“Unilever, the company behind brands such as Dove, Lipton and Hellmann’s, is pulling advertising from Facebook and Twitter in the U.S. for the rest of the year, adding to a growing list of companies protesting the social media site’s handling of hate speech online.
[…]
Unilever joins Patagonia, The North Face and others in announcing a temporary advertising boycott on Facebook in the last week. Unilever’s ice cream brand Ben & Jerry’s had joined the boycott earlier in the week, before its parent company. The Hershey Company also said it would halt advertising on Facebook during July and cut it’s advertising on the site by one-third for the rest of this year.”
Unilever was formed in 1929 by a merger of the operations of Dutch Margarine Unie and British soap maker Lever Brothers.
The Hershey Company was founded in 1894.
Patagonia was founded in 1973.
The North Face began operations in 1966.
Each of the Company’s mentioned by The Washington Post is a pre-Internet business predicated on building brand identity and distribution. These are the very businesses that niche brands built on top of Shopify using targeted ads on Google and Facebook are disrupting.
The decision to stop advertising on Facebook is nothing more than tightening belts in a difficult business environment disguised as virtue signalling.
The market snuffed this out in under 2 market sessions.
Commodities Charts
The above is a 20-year weekly chart. The magenta line is the ratio of the MSCI All World ex. USA Index to the S&P 500 Index. A rising magenta line corresponds to the rest-of-the-world outperforming the US and vice versa.
The black line in the chart is the S&P GSCI Commodity Index (Total Return).
Being long the rest-of-the-world relative to the US has for the last 2 decades been akin to being long commodities.
The next chart is of the producer price index for commodities plotted against the 10-year breakeven inflation rate for the US.
Since the Global Financial Crisis, commodities have largely traded in lock-step with US inflation expectations.
As we have said on more than one occasion, the last twenty plus year, especially the last 10, have been a golden period for risk parity and 60/40 allocation strategies.
Fighting the Last War
It is often said that generals are always prepared to fight the last war. Similarly, investors tend to optimise their investment styles to the prevailing market regime and not the next one. And this is what makes turns in market regime so difficult to trade and so painful for the vast majority of market participants.
As this golden period of equities hedged with bonds reaches what appear to be rational limits, the question is how should investors adjust allocations to the next market regime.
Should the overweight to US equities be sacrificed for increased allocations to international equity markets? Or developed market bonds be replaced with selective commodities? Or should one continue to hold on to what has worked?
There are no easy answers and impossible to know the right one ex ante.
There are, however, unintended consequences to the wrong allocations.
Overweight both international equities and commodities is a leveraged bet on the same outcome — higher commodity prices.
Overweight developed market bonds and underweight commodities is a levered bet on inflation.
Long US equities and developed market bonds is a levered momentum trade.
There is nothing inherently wrong with a levered investment. Just that the risk of something going wrong is magnified manifold.
We think either international equities or commodities should increasingly start to feature in investors’ portfolios.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.