Buy What Governments Are Buying
Adapted from The New Rules of Investing: Essential Wealth Strategies for Turbulent Times by Mark Haefele and Richard C. Morais
Rewire and rethink your investment strategy in a world where free markets are out, and government intervention is in. That starts with unlearning how Wall Street has traditionally taught you to think about the world of investing: by regions, industry sectors, and companies. The successful investment strategy today is built on an understanding that the greatest opportunities of the future are lurking in those corners of the global economy where Big Money is trying to solve Big Problems.
To actively invest in markets today, it’s a necessity to understand what governments are buying. If the US government is 35 percent to 40 percent of the nation’s economy, it is arguably the single most important player in the markets, particularly when you consider that government incentives are then leveraged into even larger money flows by spurring related private-sector investments. This investment process starts by understanding how governments are shaping policy in reaction to disruptive forces, and to do that, we are going to—you guessed it— follow the money.
Let me show you what I mean. President Joe Biden signed the Inflation Reduction Act (IRA) in August 2022, providing billions of dollars in subsidies for an Energy Infrastructure Reinvestment Program, a policy meant to spur the nation’s transition to a clean-energy grid. The market responded. The US Infrastructure Development Index is up 46 percent as I write this, twenty-one months after the act was implemented.
Similarly, the Biden administration’s US CHIPS and Science Act of the same year provided $53 billion in incentives to bolster the nation’s domestic semiconductor industry policy that was in response to China’s significant investments in its semiconductor technology. Since the CHIPS and Science Act was signed into law, the iShares Semiconductor ETF (SOXX) has risen 77 percent.
This new investment creed—buy what the government is buying—is relevant not just to the United States or a handful of other developed Western countries. It’s become a global truth.
China is busy reshaping its domestic capital markets according to what is called a whole-nation theory of intervention, with various government entities, according to the press, guiding local investment banks via traffic-light signals on what companies can or cannot go public. As reported in the Financial Times, initial public offerings (IPOs) for beverage makers and restaurants were getting a red light; those the Chinese government considers strategic industries of national importance—such as electric vehicles, battery makers, and solar panels—were getting a green light. Various institutions in China have reportedly been directed from the top down to support these strategically important IPOs, largely ensuring success. It is all part and parcel of China’s grand plan to create an alternative to Western capitalism.
The idea that beasts of burden will respond to incentives is so accepted in our culture, we often refer to using incentives to drive behavior simply as “the carrot and stick.” Yet surprisingly few investors make the study of “carrots and sticks”—in particular those crucial government rewards and cudgels used to impose policies on vast swaths of people and markets—a central part of their investment process.
I would even argue that the beatings from the “sticks”—for resisting these government-incentivized directions of capital—are increasingly difficult to withstand, particularly for businesses determined to follow their own iconoclastic routes. Indeed, the cost of not marching in lockstep in the direction governments want industries to head is becoming so prohibitively expensive that fewer and fewer will dare risk defiance.
The US Justice Department recently sued eBay, potentially seeking $1.9 billion in fines, for merely distributing hundreds of thousands of emission-defeating devices that violated the Clean Air Act. We’re witnessing a growing movement to weaponize the new and existing environment-related laws on the books, and that is creating opportunities for larger and larger suits against perceived transgressors. In fact, we seem to have reached a tipping point where private entities are using punitive-damage suits to further enforce the government’s drive toward the direction it wants society to go. Does this sound like fantasy? In October 2023, Gramercy Funds Management, a US hedge fund, invested $550 million of its assets in a UK law firm, in the form of a secured loan, to finance massive environmental litigation claims against mining firms BHP and Vale, plus fourteen car manufacturers that were involved in so-called Dieselgate. That’s a scandal dating back to 2015, when car companies were found to be secretly using
software to underreport car emissions.
The European Court of Human Rights in Strasbourg, France, recently delivered its ruling in a case brought by more than two thousand Swiss women, the majority of whom are in their seventies, against Switzerland’s government. They argued that heat waves fueled by climate change undermined their health and quality of life, which put them at risk of dying prematurely, and by not doing enough to prevent this from happening, the Swiss government violated their human rights. The Swiss women won their case. This and other cases could open the door to civil liabilities.
Of course, it’s not just the government’s carrots and sticks we must follow. There are more obvious ways government interventions move markets.
Take Russia’s invasion of Ukraine. When Vladimir Putin sent his soldiers over the Ukrainian border on February 24, 2022, the flow of Russian energy to the West was disrupted, and EU natural gas prices per million metric Btu spiked 157 percent over the next several months. This price jump was of course the direct result of Europe’s very public energy choices over the previous decades, which made it vulnerable to such an energy-security chokepoint.
Not to be outdone, Western nations followed Russia’s aggression with a government intervention that no investor can ignore. Virtually overnight, governments declared Russia “un-investable,” forcing Russian assets to become less than worthless to those who faced criminal penalties for holding them.
There’s also more here than meets the eye. If you take a step back, you’ll see that all these events—Biden’s industrial policies, Xi’s economic engineering, the fallout of the Russia-Ukraine war—are in some way related to a key trend, which is the way governments globally have shifted their investment priorities and controls toward what they think are the great competitive needs of the twenty-first century.
Western governments have, for example, radically changed the nature of their energy-industry incentives. They’ve largely withdrawn support from their coal industries, while increasing reliance on sources like natural gas and creating more incentives for the wind and solar industries. That’s an important piece of intelligence for investors to know, and it flows directly from following the money. Big Money has Big Needs.
In fact, the rise in natural gas prices that was a by-product of the Russia-Ukraine war galvanized the EU’s move toward renewable energy at a far faster pace. The EU Commission’s REPowerEU Plan, passed just two months after the invasion of Ukraine, pumped EUR 300 billion in grants and subsidized loans into the continent’s transition away from Russian energy and toward homegrown renewable energy. Going forward, I am convinced we will see even more such government incentives supporting national energy security, which in turn will further shape the direction markets are headed.
Hedge-fund star Ray Dalio was for decades coy about his investment process, until a New York Times exposé and an underlying biography revealed that buying into government intervention was a significant way that Dalio made his wealth at Bridgewater Associates. The Dalio reveal was a big deal when it came out and produced a lot of controversy, but if the reports are right, the Wall Street billionaire was high-level schmoozing to get an edge on what governments were buying, all so his Bridgewater Associates could make money.
But here’s the thing: You don’t have to be a government confidant to use this investment tool. You can buy what the government is buying from the comfort of your own living room, all with information that is publicly available on the internet. As we saw, the indexes for infrastructure builders and semiconductor manufacturers shot up after the Inflation Reduction Act and the CHIPS and Science Act were signed into law. The flow of funds from government spending usually follows after public announcements, and the big trends are simply too large to remain invisible.
And although this is not a foolproof set-it-and-forget-it strategy for the next fifty years, that doesn’t mean returning to value investing—the process that starts with screening for low P/E stocks, which are company shares that are priced cheaply relative to the earnings the company is generating on a per-share basis—is the right answer. The world has changed too much. Since 2015 growth stocks have massively outperformed value stocks, but for the aberrational year of 2022, when tech stocks got hit by a cyclical downdraft. That value-stock rally was short lived. In 2023 large-growth stocks jumped 47.3 percent, according to Morningstar, outperforming large-value stocks by 36 percent, the second-biggest advantage for growth over value in the past twenty-five years.
Of course, shadowing government purchases in the markets, as we recommend, doesn’t eliminate the ability of some people to be great stock pickers, and it certainly is not a risk-free pursuit. If the government stops buying, the market flows can reverse, which means you need to sell before the government sells. Fortunately, that’s going to be easier to deal with than you might think, since government policies often come to an end after they have become a victim of their own success.
The New Rules of Investing
In this playbook for protecting and growing your wealth, Mark Haefele, the chief investment officer of UBS, shares the investing strategies he uses at the world’s largest and only truly global wealth manager and distills his battle-tested philosophy into a set of actionable rules that can guide you into a secure financial future.
The New Rules of Investing is a resource you’ll consult time after time. Whether you’re a novice working with a financial advisor, an experienced investor, or an investment professional, you’ll walk away better equipped to manage your wealth more efficiently, calmly, and successfully.