Barry Norris: investing for a post-pandemic world

Barry Norris, manager of the Argonaut absolute return fund, explains what the investment landscape looks like in a post pandemic world, with the end of cheap money and decarbonisation driving a 1970s-style inflationary shock.

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Merryn Somerset Webb: Hello and welcome to the MoneyWeek magazine podcast. It is January 18th and I am Merryn Somerset Webb, editor-in-chief of the magazine. Today, I have with me Barry Norris, who is the manager of the Argonaut Absolute Return Fund. Hello, Barry. Thank you for joining us.

Barry Norris: It’s a pleasure, Merryn. Thank you for having me on.

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Merryn: Now, Barry has been on before and regular listeners may remember the last podcast we did together, in which we talked, at some length, about Covid and about the new vaccines coming out. And one of the things that Barry told me at the time, and I think he might have been the first person to tell me this, was that the vaccines made absolutely no difference whatsoever to the transmission of Covid, and therefore, would not be the beginning of the end of the pandemic, as the rest of us, at the time anyway, certainly believed.

So, given his astonishing brightness over that, Barry, if you don’t mind, the first thing I want to talk about is Covid and the stage that you see we are at in this pandemic. Is it over now?

Barry: It’s over, but it’s not over for the reasons that the government will have us believe, which is that it’s just been a fantastic vaccine success story. It’s over because Covid has morphed into a very virulent virus, but something with relatively mild side effects, which will build up natural immunity in the population. So, if one looks at the data and the studies coming out on Omicron.

The official data should really be a bit more timely and accurate than it actually is, but nevertheless, with the data that we’ve got, it does suggest that the mortality rate of Omicron is significantly below that of seasonal flu, and therefore, unless somehow the virus morphs into something more dangerous, which is unlikely to happen, given the normal path of how viruses evolve, then I think we can probably conclude that, in all probability, the pandemic is over.

And there’s a caveat here because I think there are governments around the world that have invested so much in the fear narrative and have followed zero Covid that there will be outliers that just won’t accept it’s over. China, Australia, New Zealand, perhaps even Scotland.

Merryn: That’s interesting. So, out of embarrassment in that having invested so much in this and done so much to make their populations comply with various regulations, they then find it slightly impossible to say it’s over now, everyone go back to normal?

Barry: Correct. They’re like the Japanese soldier, still holding out in 1955 in some obscure Pacific atoll, believing that World War II is still ongoing.

Merryn: And that would be funny, if it didn’t have so many implications, both for living standards, personal freedoms, and from the point of view of what we’re going to be talking about, things such as supply chains.

Barry: Correct.

Merryn: So, if China continues to lock down every time it finds someone with a mild cold somewhere, the global supply chain is going to be in trouble for some time to come.

Barry: Correct. And I also think there will be a battle over if the war is won, what won it? And I think, obviously, the vaccine industry would like to suggest that the only reason that Omicron is mild is because of the vaccine, and in fact, if you’re unvaccinated or don’t have booster shots every six months, then this virus is still incredibly dangerous.

I think that obviously wasn’t the case in largely unvaccinated South Africa, where hospitalisations were pretty much split, according to population that had been vaccinated or not. There is this ongoing debate, some might call it state propaganda, suggesting that the only people in hospitals are people that have been unvaccinated, which obviously, anybody looking at the statistics that we do get would obviously know that that’s not the case.

But I think there will be, having made so much money out of the mass vaccinations, which I certainly thought were inappropriate, the vaccine companies will try and push for fifth and sixth jabs to the whole of the population. I think we should be aware that this will be a key battleground going forward.

Merryn: And also, it’s going to be extremely difficult for governments to back off the vaccination programmes, when they’ve invested so much in the idea that everyone should be vaccinated, everyone should be boosted, and that this is how we get out of the pandemic. And so much about resources being reallocated from, say, the NHS, in general, and the UK and other medical systeMerryn: globally, away from normal medical procedures and normal treatments towards the vaccinations.

It becomes very hard for a government to say this is over and we don’t need these vaccinations anymore. Or maybe only the extremely vulnerable need these vaccinations, etc. Again, you come back to this thing of how do politicians, how do governments back away from something when it finishes, something this huge?

Barry: Yes. But I also think things can change very quickly. As we’ve seen with views on lockdowns now where those of us that came out against lockdowns in the spring of 2020 were derided as the antichrist. And now both main political parties in the UK are apparently against lockdowns. Those of us that came out and said that vaccines didn’t stop infection, therefore we might not get back to normal as quickly as people thought, were derided as heretics.

But now that’s pretty much accepted by most people, even though the logic of that isn’t followed through with things like vaccine passports, etc. But in general, the cost of the mass vaccination programmes is obviously quite a big issue. It’s billions of pounds, billions of dollars a year. And if we’re going to say we need to have regular boosters for the whole of the population, the cost of this is really going to be pretty extreme,

And of course, we’re already getting studies coming out of Israel saying that the fourth booster didn’t work against Omicron. So, to my mind, Covid vaccines will probably be used much in the way that flu vaccines were used or have been used over the last few decades just for the vulnerable population, which is how they should have been used right from the start, to mitigate against disease progression, which is all that they were good for.

And I think we will get there, but unfortunately, it’s pretty painful where a lot of people have been told get double jabbed, do your thing for the country, and everything will be OK. And they’re now pretty angry about the fact that this seeMerryn: to be they’ve signed up, unsuspectingly, they’ve signed up to be a pincushion for pointless injections for the rest of their lives.

And I think there’s this anger that people are getting to where they’ve realised that maybe it’s not what they were told because I think most people thought this was a polio vaccine, it’s ended up being a flu vaccine. Most people don’t know the difference, sadly, between the two of them and governments have done nothing to educate them about that. And there’s a lot of anger.

And I think there’s a quote that’s been used by others recently, about the madness of crowds. People go mad as a group, but they regain their sanity slowly and individually, and I think that’s what’s happening at the moment.

Merryn: Well, do you know what? That’s a great to move on from Covid to markets, where, in many areas, people have lost their sanity slightly. Let’s talk about where you are long and where you are short this year. I didn’t say at the beginning, but regular listeners know [?], but Barry’s fund is both a long and short fund, so full of interesting ideas, unlike a lot of the market, who can just tell you what they don’t like, Barry gets to follow through with acting on it.

So, let’s talk about what you’re not investing in this year and what you might be going short on. And this, I think, brings us slightly back to the madness of crowds, does it?

Barry: So, the key thing about markets this year is there’s a sucking noise in the background every day, and that’s liquidity being sucked out of financial assets, whether that be bonds, whether that be equities, whether that be property, whether that be crypto. And that sucking noise is caused by the end of the era of cheap money. And if you think about what’s happened since the financial crisis, you’ve had masses amounts of quantitative easing and zero interest rates.

And Covid was the blowoff top in quantitative easing where the Federal Reserve did, in the 18 months following Covid, as much QE as it had done in the previous 12 years. So, the analogy I would use is if you think back to the 90s and the interruption in 1998 to this great decade long bull market in long duration assets, that when we had LTCM in 98, you had this massive Fed stimulus, and that saw a blowoff top in the rest of 98 and 99.

And then the dot com bubble crashed in 2000, when the Fed started hiking rates. So, this is what I see happening now. You’ve had the blowoff top in long duration strategies. You’ve had 2020 where the likes of Cathie Wood and Scottish Mortgage produced fantastic returns. But what’s changed now is that liquidity has peaked, the Fed has become very hawkish, and since they own 40% of the US treasury market, the market that has, essentially, been rigged for the last ten years is no longer going to be rigged and rates have to rise, discount rate has to rise.

So, more than likely, bonds deliver negative returns because rates go up and long duration strategies, i.e., growth managers, people who have told us it’s all about the future, it’s all about where the company’s going to be in the next ten years, it doesn’t matter if this company’s got zero sales now because that just means it can grow faster. These sorts of strategies are most at risk from this new era of the end of cheap money.

Valuations having not mattered for ten years with fund managers like me scratching their heads, wondering why we even bother opening a spreadsheet to try and value a company, because it’s never about valuation, it’s just about a powerful narrative of where the company might be in ten years’ time. We are back in vogue. Valuations matter again.

And everything that is expensive, particularly when it doesn’t make any money, is just going to go down pretty much every day, unless the Federal Reserve come out and completely change their tune and say we’re not hawkish anymore, we are injecting liquidity. But we are a long way from that and therefore, a lot of the selloffs that you’ve seen over the last decade have been short, and ultimately, central banks have reacted to those selloffs by pumping in liquidity.

And therefore, growth stocks, long duration strategies, have been both defensive and offensive. They’ve worked in either market environment. In this market environment we’re in at the moment, you’re not going to see those liquidity injections. There’s not going to be a Fed put, and therefore, we’re going to be, in my view, in a long bear market for growth stocks and for bonds.

Merryn: But, Barry, why are you so certain that the Fed won’t step in again? I’m reading an awful lot of research that tells me, or research commentary that tells me, over and over again, that the Fed will step in. They can’t afford to allow a long bear market because of the wealth effect on the American economy would be so unpleasant that this will never happen again, that the Fed will not step in to save the market. Why are you so certain that it won’t?

Barry: Bear in mind, whilst there might be a bear market in asset prices, there’s not a bear market in wages at the moment. So, for most people in the US, their wages are going up. Whether their real wages are going up is another question. But I think a lot of the answer to this question is really about what is the duration of the inflationary impulse. And it is a logical view and quite a coherent view to have.

And some of my friends who are growth managers will say OK, we’ve got inflation now, but it’s going to peak. And by the end of the year, we’ll be talking about deflation and therefore, the interest rates will be coming down again. And therefore, whilst we might be in a difficult moment now for long duration strategies, this is a short-term sell-off and this is a buying opportunity and long duration strategy.

And of course, by the logic of that argument, a selling opportunity in commodities and things that might benefit from inflation. So, a lot of it comes down to how permanent is inflation and what’s causing inflation. And I think the debate has obviously evolved. Initially, people said it’s transitory or it’s Covid related, either because of lockdown or because of reopening. Supply chains, these are temporary pressures on supply chains and things will normalise.

I disagree with that. I think the biggest driver of inflation is decarbonisation. When you move from reliable fossil fuels to unreliable renewables and you don’t understand why power prices have gone up so much, that it’s not because necessarily the cost of renewables or the incremental cost of renewables, but on the days that the sun doesn’t shine and the wind doesn’t blow, which are quite a few days, they’re more than the days where fossil fuels don’t provide any fuel.

And you have this big publicity announcement that renewables provided 100% of energy or near 100% of energy. On the days that the weather’s not favourable, we have fossil fuels, which are the only reliable providers of a baseload outside nuclear and hydro, which we’ve not invested enough money in. So, if you like, there’s a great statistic on UK power this year that even though gas has only accounted for 10% of time that has been generating overall, it’s actually set the price 60% of the time.

So, essentially, we’ve invested a lot of money promoting an energy source, which is unreliable, and there are no signs that that’s going to change. In fact, it’s probably going to increase. And because of that, reliable energy has been crowded out. So, if I ran a factory and I needed somebody to turn up Monday to Friday nine to five, I might pay more for somebody that will definitely turn up and be reliable.

But unfortunately, what we’ve got is a process whereby we’re incentivising unreliable production, and as a result, that’s highly inflationary, highly unproductive, and will end up in an era of significantly higher inflation. And obviously, if we’re in a bull market for energy, we’re also in a bull market for inflation because energy is the biggest input cost into absolutely everything

Merryn: And then that, as you say, it feeds into absolutely everything, from food prices to everything.

Barry: Correct.

Merryn: So, we end up in a generally inflationary environment. So, what you’re suggesting, Barry, I think is that we end up with a 1970s style inflationary shock, driven by a sharp and long-term rise in the price of energy.

Barry: Absolutely. So, 50 years on from the 1970s, where OPEQ took control of oil production, where most years in the 70s, bonds and equities produced negative real returns, i.e., below the rate of inflation. We have a similar energy shock now where energy prices rise every year, owing to a lack of investment in fossil fuels, owing to over investment in unreliable renewables.

And the politicians have invested so much in this decarbonisation agenda, you’re not allowed to question anything about the decarbonisation agenda, even the pace of decarbonisation, and therefore, a U-turn on this seeMerryn: pretty unlikely. So, how to benefit from this is, frankly, there will be a big bull market in fossil fuel producers, because there is very limited capacity and therefore, the price of the commodity will go up. And therefore, those that carry on investing in fossil fuels will actually see super normal returns over the next few years.

Merryn: The usual answer to this argument, Barry, is that we are just not investing enough in alternative energy and renewables, and we should just build more turbines and more solar farMerryn: and then everything will be fine.

Barry: I find that argument a bit ridiculous, because if the problem is not the days when the wind blows, but the days when it doesn’t blow, then you could have ten times as much renewable energy and you could still have the same problem.

Merryn: And the argument that we just need to improve our storage facilities or storage capacities, and as soon as battery technology takes a leap forward, again, this problem disappears.

Barry: Well, that is a solution. So, if you were able to store wind power reliably and efficiently, so that would be a solution. But the battery technology for that is probably decades away. Equally, hydrogen is a way of storing renewable energy and then converting it, obviously, back into energy. But both of those technologies are really decades away.

So, frankly, in terMerryn: of investment horizons, that’s not a solution either to the energy crisis over the next decade or in terMerryn: of time horizons, something that most investors should necessarily let affect their investment decisions at the moment.

Merryn: Barry, can we just go back to what you said about renewable energy crowding out fossil fuels?

Barry: Sure. So, the way that renewable energy is encouraged in power production is that there could either be direct subsidies, there can be indirect subsidies in the form of the carbon tax, but also, when renewables produce energy, there’s an agreement that the grids will take 100% of what’s produced. So, the flipside of that is, of course, if you’re not producing renewable energy, you’re producing fossil fuels, you don’t know whether you’re… You’ve got no agreement for a utility to take the power you’ve produced.

You’ve got all sorts of taxes, which disincentivise you to use fossil fuels. And you end up with a higher cost of capital because not only does the institutional fund management board not want to invest in fossil fuels, but because there’s no guaranteed purchase agreement, unlike with renewables, you have to fund it with more equity, rather than debt. So, all of this leads to a crowding out of fossil fuels.

And one of the arguments about the crisis at the moment of renewables, people say it’s not about the unreliability of renewable energy, it’s about the cost of gas, as if the two things aren’t linked. And of course, they’re linked. The reason why the gas price is high is that European production of gas has been in perpetual decline for the last decade, and therefore, the cost of gas has gone up.

Merryn: That all makes sense. Here we are, in this position where gas prices are high and energy prices, as a whole, are high. You expect it to lead us into this period of 1970s style inflation, the decarbonisation shock, you call it. Now, how does the ordinary person invest into that? The portfolios that we’ve relied on for the decade [?] or so, as you say, that all the great gains have come from the growth stocks, many of them.

Our readers and listeners, for example, have a lot of Scottish Mortgage in their portfolios now, that’s not going to work anymore. How is it that we invest? Obviously, we’re beginning to go back to the fundamentals, and I know you’re going to suggest fossil fuels, so let’s talk about that a bit, investing in fossil fuels. But where else do we go?

Barry: I think one of the things that people should think about is funds that provide uncorrelated returns. So, if your idea of diversification is you hold Scottish Mortgage, Cathie Wood, Terry Smith, they’ve all done fantastically well. And if interest rates stay low and inflation stay low, I’m sure they’ll do well in the future. But if we’re in a different market environment, then one needs to understand the different style risks in fund managers.

And the fact that all fund managers overestimate their stock picking ability and underestimate their style risk and exposure to different macro factors. So, if we’re in a rising interest rate environment, if we’re in an inflationary environment, if we’re in a long bull market in commodities, then we are going to be in a bear market for long duration assets.

And therefore, being able to invest in funds that can short the market, as well as going long, and funds that, frankly, justify their existence, because you can’t really short, as a DIY investor, particularly effectively or well. Those are the sorts of things that people should be looking at. But if they want to invest in a long only strategy… So, for me, there are two winners, if you like, this year, compared to last year.

One is reopening stocks, because I think, as opposed to last year when we were cautious because we really didn’t believe that the vaccines were the solution. I think Omicron is now becoming the dominant strain, and that being pretty mild, I think we can conclusively invest in reopening stocks again. But also, in energy. And I think energy has been, obviously, in a pretty long bear market. If energy’s going up, then pretty much all commodities will go up as well.

So, for example, gas is the main input into fertiliser. If gas prices are going up, fertiliser prices are going up, and therefore, food prices are going up, so it’s good for the agricultural industry and everything related to that as well. And if energy is going up, typically, we’re in a bull market for metal prices and other commodities as well. So, when the dot com bubble burst in 2000, we did see eight years of the commodities bull market.

And I think something like that will certainly happen again. Again, one of the probleMerryn: with the fund management industry at the moment is pretty much, the whole institutional fund management industry is against fossil fuels and won’t invest in companies that produce fossil fuels. And I think because, if you like, decarbonisation and renewable energy has all been part of this long duration bull market, that hasn’t actually hurt investment returns today.

But I think in this new market dynamic, actually, those sorts of strategies will start to let down investors and produce suboptimal returns. So, if you can’t invest in funds that invest in fossil fuels, frankly, you’re going to have to do it yourself or you’re going to have to find a manager that doesn’t believe in this woke capitalism, which is few and far between at the moment.

Merryn: It’s time, Barry, for you to launch a fund purely based on fossil fuels. One of my readers sent me an email this very morning saying did I know anybody launching a rescue fossil fuel fund or a fossil fuels rescue fund? And I had to say no, but maybe, Barry, that’s one for you.

Barry: Well, I think I’m already regarded as the naughty boy of the industry, so why not double up on that?

Merryn: Double up or double down? Barry, in a nutshell, it’s reopening stock, so hospitality, airlines, etc., commodities, and fossil fuels that will take us through the next few years over this decarbonisation energy shock and inflationary environment? Fair?

Barry: Yes, I think so. I think we’re also pretty bullish on semiconductors still. We like house bills [?], but I think they’re going to be based by rising headwinds in terMerryn: of interest rates and, obviously, affordability with decarbonisation hitting utility bills. It’s going to hit taxes as well, because ultimately, governments are subsidising this. And cost of living is therefore going to be much more difficult, because tax is going up, utility bills are going up, mortgage costs are going up at the same time.

It’s, frankly, not a great outcome. But I think if one thinks about what’s vulnerable and what’s not, what’s vulnerable is going to be all the areas of the market, which have seen the most speculation and have done best because the cost of capital has been zero. So, the poster child for this is obviously crypto that has no valuation support. We’re still waiting for a use case. And it’s obviously just frankly gone up on a wing and a prayer on zero interest rates and a narrative against fiat currency.

Well, if fiat currency starts paying an interest rate, which private fiat in the form of crypto will never do, then that’s obviously an area of the market that will be significantly at risk from this change in Fed policy.

Merryn: That’s interesting. It’s amazing how many people you’ve managed to upset in a mere 33 minutes.

Barry: Well, they say contrarian investors are normally successful investors, so I think that if I came on your programme and just parroted what was consensual group think, then perhaps I wouldn’t offend anyone, but one, it wouldn’t be interesting, and two, you might not necessarily make any money out of it.

Merryn: And we wouldn’t ask you back either, Barry.

Barry: Correct. And nor should you.

Merryn: And on this occasion, we will definitely be asking you back. I think we have to leave it there, but thank you so much for joining us today.

Barry: That’s a pleasure, Merryn.

Merryn: And everybody, that was Barry Norris from the Argonaut Absolute Return Fund. And if it is fossil fuels you would like to invest in, I suspect that you might want to go and look at his website. Otherwise, if you would like to review the podcast, do so at your podcast provider of choice.

And if you’d like to hear more from MoneyWeek and you’re not yet a subscriber, please do go to where you can learn more about us, and of course, sign up for our daily newsletter, written by John Stepek, Money Morning. And if you are interested in more from me, my new book, Share Power, which is about how we can bring back shareholder democracy, is out this week, and you can, of course, buy that at your bookseller of choice. Thank you very much and thank you, Barry.

• We have negotiated a 40% discount for Merryn's book, Share Power, for MoneyWeek readers – although you will have to pay postage. To claim the offer (£6 for Share Power, £3.10 for the postage) please contact Hachette Distribution with the discount code MWJan22 at or phone 01235 759555 Monday to Friday 9am - 5pm UK time. Pending availability, you should receive your order within three to five working days from receipt of payment.