I can prove anything
I’ll make you admit again and again
That I can prove anything
The way that it’s read again and again…
We are the angry mob
We read the papers everyday
We like who we like, we hate who we hate
But we’re also easily swayed
“The Angry Mob” lyrics, by artist Kaiser Chiefs; Release date 8-20-2007
January 6, 2021 was an event that brought historic violence. The angry mob was as busy posting selfies, a blessing that likely stopped them from harming more people. I thought of the lyrics to the The Angry Mob as I have reflected on recent events. Violence in DC is nothing new and generally has little to show for the fury on display. Aside from terrible harm and death, the lasting impact of what occurred seems limited as those involved are studied and revealed to be largely miscreants that represent little threat beyond their far-flung conspiracy theories.
Our constitutional democratic system has and is continuing to be tested. It seems to be holding together as the recent turbulence seems to be proving shallow and lacking in staying power. We now embark on a new Biden presidency with a slim progressive majority. Initial indications promise for large scale federal action. This creates new uncertainty as the pendulum swings. There is hope for a little more political quiet for now.
Amateurs talk about tactics, but professionals study logistics.”
– Gen. Robert H. Barrow, USMC (Commandant of the Marine Corps) noted in 1980
Establishing a federal agency of Natural Security is a logical step as hopes rise in the battle against COVID-19. Society is often fortifying resources for the recent challenges (terrorism and military conflict) while overlooked threats to life render new challenges that require adaptation and response.
The USA had shortcomings for PPE and basic resources for our precious nurses and doctors, but there were ample supplies of Anthrax vaccine that has been stockpiled since the post 9-11 scares. We now know that those sending anthrax via the US mail twenty years ago were microscopic threats in comparison to mother nature.
Contractors continue to profit off the post 9-11 defense contracting with the US government remains a sad legacy of that terrible event. The NYT documented our medical stockpile deficiencies on 3-6-21.
“…as Covid-19 spread unchecked, sending thousands of dying people to the hospital, desperate pleas for protective masks and other medical supplies went unanswered.”
“Government purchases for the Strategic National Stockpile, the country’s emergency medical reserve where such equipment is kept, have largely been driven by the demands and financial interests of a handful of biotech firms that have specialized in products that address terrorist threats rather than infectious disease.”
How One Firm Put an ‘Extraordinary Burden’ on the U.S.’s Troubled Stockpile
My great friend Maury insightfully crystalized bureaucratic systems when he exclaimed; “David, it’s not their money.” One must always remember that when large complex institutions seek to provide solutions, often, there is less passion than what we see in the private sector. Fortunately, the US government has provided game changing resources via fiscal and monetary actions during the past year.
Actions that have allowed biotech to create a vaccine so rapidly began in 1976. As noted in The Economist cover story from 3-27-21, “The first virus to have its genome read was an obscure little creature called ms2; the 3,569 rna letters it contained were published in 1976, the hard-won product of some ten years’ work in a well-staffed Belgian laboratory. The sars-cov-2 genome, almost nine times longer, was published just weeks after doctors in Wuhan first became concerned about a new pneumonia.”
It is striking to consider the hooligans in DC on 1-6-21 or the fringe criminals that were plotting to kidnap the Michigan governor as the scientists were practicing their craft in order to push society forward. Ranting about the personal right to decline a mask in public is unlikely to be viewed as virtuous by those who look back upon this period of upheaval. Forty-five years of genetic science is what will route us past this pandemic. Being “angry” was of little help.
Q1 21 has revealed volatile markets with modest progress. Ronald Shink used to say, “this is the pause that refreshes”. The crucial “pause” was a reference to markets that see increased selling or simply get stuck at a certain level. It was also a reference to the difficult graceful motion at the top of a golf swing… (I gave the game up based on my minimal amounts of “grace”). The pause may be a reflection that there are few buyers who have not already put their money into the market. Another way of expressing this phenomenon is to wonder if “the last little old lady in Iowa just bought in”.
Buyers are being fortified by continued $120B per month in QE continued low interest rates and the new $1.9T American Rescue Plan Act of 2021.
Treasury Securities Operational Details
What’s in the Senate’s $1.9 Trillion Stimulus Bill
Eventually the market reaches a state referred to as “overbought”. This is one of many dynamics that can plateau progress, initiate downswings and all manner of tests that lie ahead for investors. It is counter-intuitive that as the economy resumes growing and unemployment trends down, markets may turn negative. The initial concern during the post Covid recovery for equities will be rising interest rates as economic activity heats up.
Markets have had such a positive run that current investor tactics are akin to the voting machine in the Benjamin Graham quote, “in the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company.”
The Voting Machine mechanism of the 2021 market will ultimately run into the harsh reality of companies that sustainably make profits and pay dividends, and those that don’t. Shiny investment objects may attract a lot of attention, but trading in digital art, collectable sneakers and crypto are likely to lead to disappointment and loss.
The proclamations of the Federal Reserve can often result in a receding tide that reveals buying manias to be cut off from the fuel that propels them. Jerome Powell will be the lead, along with key reserve board members and their public statements. Low interest rate policy has been reality for over 12 years with 2020 taking rates and QE to extreme levels. Currently, traders are reacting with lightning speed to any sign of inflation or other catalysts for rising interest rates.
Inflation concerns are likely to be met with rising rates as the Fed is not going any lower than zero rates, so this is really a one-way street. Traders and investors will need to accept that the world is unlikely to end if mortgages hit 4 or even 6 percent. The price of money is fluid and evolving as the global dollar-based system is a huge advantage for the US. Perseverance of business and economic cycles eventually will seek some equilibrium at historically “normal” mortgage rates somewhere between 4-7%.
Getting back to these rates will illicit market tantrums and volatility until business shrugs and gets down to work. Getting to rate levels that are higher than zero is inevitable. The uncertainty will drive lots of noise signifying little.
Uncertainty drives investors to all types of suboptimal thinking and decision making. Can there be comfort with the randomness that is our reality? Recognition that uncertainty is like gravity, it is how physical existence works…you just do not know how this complex, brutal and amazing world will reveal itself. The statement, “Things are really uncertain now”, belies the pull of randomness, yet we are caught in moments without perspective that the great unknown is ongoing and never lets up. It may be that the most fundamental trait of successful investors is acceptance of the surprises, scares, and shocks.
Knowing one’s own weaknesses is a pillar to success in many areas. There may even be residual muscle memory from habits developed through focus on strengths rather than awareness of deficit. Proclamations that, “I’m not good at math” or “I don’t do well with money” are defense mechanisms that shield us from pressure of decision making. We do not need to master complex economic or finance principles to improve our investing skills. The beauty of buy and hold investing is that we can commit to the process and the skill most required is patience.
Basic knowledge that markets overreact and we can ignore daily, quarter-to-quarter and even annual noise is the recipe for success. The temptation to “figure things out” leads many astray as they develop theories that are unlikely to be accurate over time. Hysterical proclamations for global trade were suggesting that the tanker named Ever Given could remain stuck in the Suez Canal for “weeks or more” and it was rescued in 6 days. Those days were disruptive yet will soon be forgotten and is just another fleeting example of worry and overreaction to the complexities of our global trading system.
Investor temptation draws attention towards areas in the markets that offer intuitive attraction. Rising prices draw amateurs into areas that they do not have any expertise in. These current areas would include electric vehicles, crypto currencies, and cannabis.
The story of “day traders” collaborating via message boards online to share their investing ideas transcended the financial media in Q1. A narrative developed that small independent traders chatting on message boards were exploiting hedge funds and other institutional market participants. This story became the thing that “everyone was talking about”. The voting machine is working over-time in these situations. Ultimately, money losing businesses like Gamestop or AMC will be weighed for their profits. Nothing to see here but hype and the consequences of cheap money flowing towards shiny objects. The narrative of the “little guy” figuring out solid ideas and targeting hedge funds and other big market participants will be soon forgotten.
The crowd will lurch from one exciting story to the next and the likely outcome for these participants is mediocre results or worse. The idea that people can sit home on a personal computer and go up against professionals trading as their life’s work is ludicrous.
Tempting sector ideas such as electric vehicles can seem very alluring. The difficulty is in the challenges of volatility and relentless uncertainty that is a primary risk to investing in emerging businesses. Is it better to own TSLA or TM? GIS or BYND? MSFT or ZOOM? These are the questions that investors in cutting edge companies must resolve. A bias towards the more established companies is less exciting, but it may create a process that can be sustainable. A hypothetical portfolio of TM, GIS and MSFT is something that may be less volatile and thus we can stay with it for the middle and long run. These established companies will attract less excitement but are more likely to be around showing profits and rewarding investors.
The question may be just how many “concept” products ultimately turn out to be profitable businesses that can sustain their profitability and reward shareholders? This is likely to be a small percentage of the upstart players raising money and attracting investors. One could compare investors in hot new ideas like gold miners, they may strike it rich, but a significant portion of these players is likely to suffer disappointing results.
Stories of innovation do not mean that chasing new ideas will be profitable. Yet, they can be crucial to fortify our optimism. The worries of the world can be balanced by embracing the breakthroughs and appreciating the innovation that will ultimately solve problems in the future.
The link above offers a view of the largest greenhouse in the USA, 60 acres of indoor tomato cultivation. This company was recently featured by Eating Well magazine in a piece titled “What’s Next.” The article notes that emerging greenhouse technology has the potential to meet the challenges of water usage and pesticides in our food supply and run off.
The article notes that hydroponic tomatoes require 90% less water to produce and this facility has employed a process to eliminate nutrient runoff into the surrounding water table. This is what the future of agriculture looks like. Visit the site and you may experience the awe of innovation that is happening now.
More inspiring stories to cheer and energize…
The new era of innovation –
Why a dawn of technological optimism is breaking
The Battery is Ready to Power the World
The optimism of what lies ahead may bear fruit as the power of tech, medical innovation and society rising to the challenge of the pandemic has fostered an air of hope. The fundamental power of productivity has been reflected in the adaptive nature of the 2020 battle between man and nature. The consequences of these events are impossible to asses in real time. What the next decade and beyond can reveal about agricultural, energy and transportation innovation is likely to be beyond anything that we can imagine or anticipate today.
As I have stated repeatedly, every effort is taken in these compositions to avoid ideology and partisanship. We were warned about political party competition and conflict by the only independent to ever be elected, George Washington. His farewell address, of September 19, 1796, created the basis for the peaceful transfer of power (it is read aloud in the Senate every year). Washington, like a father chiding his children, advised his countrymen, no matter what their political passions, to consider the fundamental bonds that connected them as Americans. The USA succeeded mightily, despite ignoring Washington’s guidance on partisanship.
As the new political era dawns, we will have all manner of policy that is likely to challenge markets and investors. The slim Democratic majority has decided to pursue policy without compromise with the GOP. This strategy is fraught with risk and is part of a seesaw dynamic when the new regime targets its predecessor in effort to dramatically alter recent policy or undo the opposing parties’ latest actions. It is difficult to predict where this leads markets and the economy. It is interesting to consider GOP policy of opposition with little negotiation. Developed in 2008 in an effort to diminish the Obama agenda, the strategy has produced 12 of 16 years with a democratic president.
We are now witness to progressive actions that run the risk of government overreach. The recent $1.9T pandemic emergency spending action will have significant consequences. The Democrats are busy passing legislation with razor thin majorities without any GOP support. The strategy seems to suggest that if each party sees the other as arch enemy, just go for what you can on your own when in power. This is creating volatility where markets must persevere through big swings in the federal agenda. Hopefully compromise will be fostered via pressure from big business or new leaders that emerge and point out that shredding your predecessors’ actions may be counterproductive.
Stimulus checks direct to citizens during this unique time are justified, unfortunately the political cycle created incentives for the new administration to “go big” when $900m had just been sent out in late 2020. Credit for “doing something” carries big risks for Biden and the political considerations may override the consequences that will arise long after the presidential term ends.
The next political cycle is likely to contain ample attention to a surge of migrants at the southern border of the US. The economics of this issue are complex and difficult to communicate in the face of overly simplified and often misleading media narratives. One can hope that when people are forming their views on this issue that ask the basic question, “how will we grow”? Who will your children and grandchildren sell products and services to? Who will the customers be?
Covid-19 has turned out to contain no baby boom. There are indicators that it is a baby bust and the fertility rate and domestic population growth is continuing the path of decline. At the same time, we are witness to massive demand for entry into the country. Grave mistakes over the years have been made on this issue. In the early stages of The Depression, President Hoover was compelled to “Do Something”. The result was a mass deportation of Mexican and Hispanics under a theory that this action could open jobs for Americans.
Citizens chanting “build a wall” under the misguided notion that immigrants are a net negative belies the opportunity for growth and dynamism that people desperate to leave their county provide. One Mighty and Irresistible Tide: The Epic Struggle Over American Immigration, 1924-1965 by Jia Yang catalogues numerous instances of this type of populism. Read the material, you may just find that your ancestors were also discriminated against.
The tragedy of these historical events is an insight into what we face today as American citizens. It seems that properly constructed policy is a long way off, but the current crisis could force a reckoning. Legal pathways are likely to make increasing economic sense as the realities of population stagnation are properly broadcast. Take a tour of the neighborhoods of Detroit for a stark illustration of what comes after drastic population decline.
The sequence of aggressive restrictions by the previous administration have now created pent up demand and motivation of getting in while the getting is good…see the piece linked below from the Economist for interesting analysis.
Joe Biden Faces a Humanitarian Crisis at the Southern Border
It is difficult to imagine good outcomes to this stark challenge. It may be much brighter if we see it in the context of other areas that have seen progress such as marijuana legalization and improved regulation of online gaming. Is it possible that one day we could look upon this problem in the same way the Tragedy of Vietnam is perceived? Economics of weed and bookies are now being mainstreamed and taxed. Here is hope that immigrants will ultimately see a properly regulated path to joining this great experiment that is the USA. Maybe they can fund our children’s Social Security?
The long run is not some distant point in the unreachable expanse of our future, it is now and at the same time it is never. It is the 1976 effort to map a virus and the benefits that we now derive from that work. As the NYT noted, “It wasn’t until the late 2000s that drastic improvements in genetic-sequencing machines, aided by huge leaps in computing power, allowed researchers to more easily and quickly read the complete genetic codes of viruses, as well as the genetic blueprint for humans, animals, plants and microbes.”
Genome Sequencing Covid Variants
The endpoint for investors may be more like a transition. A time to begin…to invest, sacrifice and save. The patience required is demanding and never lets up. As we build, the fear of setbacks will be periodically realized and continuously test our resolve. 1987, 9-11 or 2008 to name some of the recent moments that required fortitude and resilience. Later in our process, we transition to creating income, taking dividends or more and nurturing our wealth so we do not run it down. No destination, just process, similar to our health, family and essential humanness.
The word “risk” derives from the early Italian risicare, which means “to dare.” In this sense, risk is a choice rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about. And that story helps define what it means to be a human being.
Bernstein, Peter L., Against the Gods (p. 18). Wiley. Kindle Edition.
Against the Gods was first published in 1996 and continues to intrigue economic thinkers. Here we can find deep discussion about how there is strong evidence that markets overreact both to positive and negative news and events.
Portfolios are increasingly weighted to technology and emerging oligopolists, such as AMZN, MSFT and APPL along with more speculative entities such as TSLA and PYPL. This market dynamic is pressuring portfolio managers to follow or be left behind with potential for underperformance. This is what bubbles are made of as market leads are trading at ever higher valuations.
While institutions reshuffle portfolios or stay concentrated in holdings that have had big run-ups, it will be interesting to see what individuals do with their $1,400 stimulus payments. Some $242 billion was deposited into Americans’ bank accounts on 3-24-21, the biggest “helicopter drop” to date, write Jefferies economists in a research note. At the same time, Bank of America strategists point out, a “staggering” record $68.3 billion flowed into equity funds in the past week. It seems that at least some of the stimulus may be going for speculation, rather than spending.
Bond Vigilantes Are Unlikely to Cause a New Black Monday for Stocks
The value of money is changing. Ownership in quality equities may adjust during periods of inflation and provide a crucial hedge in purchasing power. Portfolio values will be weighed, and the same rules apply for 2021 as they did in 2001 or 1987…patience, resilience and discipline.
The pent-up demand for “normal” life, travel, entertainment and basic social interaction is likely to drive the next leg of this economic cycle. It is not impossible that the United States could embark on real infrastructure development and a new rivalry with China could drive us to win a much different version of previous Cold War battles with the USSR. Imagine a new effort on par with the Federal Aid Highway Act of 1956. Positive thought…tell everybody you know to imagine that future. Love to all, stay positive, get some fresh air and let’s discuss soon.