Q3 2019 has been filled with noise and volatility signifying little. The S&P 500 has moved up about 1.2% in the last 90 days. In spite of the instability created by trade threats and rising trade barriers investors are up substantially since 1-1-19. Thru the first three quarters, the market is up nearly 20%. This is quite similar to last year, where gains turned to losses by an historic downswing in December 2018.
https://markets.on.nytimes.com/research/markets/overview/overview.asp
One of the most common questions that I have been hearing over the last few years is regarding investments “in marijuana”. No one is asking about investing in branded farming or agriculture, although that is essentially what the weed business, THC, CBD et al is. This is an example of the Availability heuristic in that people make judgments about the likelihood of an event based on how easily an example, awareness, or vivid imagery comes to mind. The idea of scanning what is popular and then figuring out how to get in on the action is unlikely to be a viable mechanism for increasing wealth.
Aspiring retail operators have entered another new area of medicinal commerce known as “vaping”. Did anyone stop and think that inhaling heated, chemical infused water vapor would be dangerous and bad for your health? Young risk takers and all manner of vape interested individuals jumped into the guinea pig pen and became part of a human experiment. Freedom from the evils of traditional tobacco seemed to be at hand.
A wave of commercial activity followed and now there is a vape shop in most strip malls in the US and around the world. As the health impacts of the users are revealed, we begin to learn that there are likely to be many adverse consequences. The plume merchants must be distraught. I would not want to be in that business! The power of nicotine addiction continues to ravage a significant portion of the world’s population. Entrepreneurs and numerous commercial interests stand ready to invent products to exploit this human vulnerability.
Most activity in the financial product industry begins as an experiment. Products that lag are decommissioned and new ideas are introduced. It is of the utmost importance to invest in mutual funds that have long track records of stable management and quality reputation. This is still no guarantee of positive results, but rather a starting point in the difficult process of growth of wealth for long term investors. Ongoing monitoring, benchmarking and patience are additional key elements of the process that I continuously delineate here in these commentaries.
Central banks around the world seem to think that they can shape our economic future so that economies can be all growth and no downswings. There is a current narrative that the economic cycle can be softened or even eliminated by monetary policy, namely central bank activity that targets the economic cycle via money creation and low and even negative interest rates. The consequences of the 2008 monetary actions continue to shape US central bank policy. The recent posture of The Fed seems to be preoccupied with averting the next downturn. The danger of preventing the economic cycle from the normal cleansing process of downturns may make future recessions more challenging.
Interest rates and the cost of money are seen by many industries as crucial to growth and potential economic expansion. History has countless examples of the persistent worry inherent in this topic…Fifty years ago….
“A senate banking subcommittee was told today disaster faces the housing industry unless more mortgage money is provided quickly at a reasonable interest rate. The Warning came from Eugene A. Gulledge of Greensboro, N. C., president of the National Association of Home Builders. He testified in support of a bill…to relieve the shortage of mortgage funds.” Washington Sept 9, 1969 (AP)
https://timesmachine.nytimes.com/timesmachine/1969/09/10/88862253.pdf
Interest rates globally have entered a twilight zone of extremely low or even negative territory where a government bond investor in Germany will receive less than the original investment when holding a bond to maturity. There are few satisfying explanations for this beyond the dynamic that certain types of pension funds and other investment vehicles are required to hold a percentage of “risk free” assets. The other catalyst is the European Central Bank buying bonds to try to stimulate the European Union economy. There is an argument that these ultra-low interest rates outside the US are creating a disadvantage for US exporters as the Dollar has been rising, causing US exports to be more expensive.
Borrowers in some parts of the world are actually paid to receive money. This is an obvious violation of economic fundamentals and is unlikely to persist. Negative interest rates are likely to cause challenges for the banking system as it inhibits how banks function. There is also a risk for a “race to the bottom” as central banks around the world seek to stimulate their own economies. Low cost of capital and borrowing globally is creating too much of a good thing and the consequences are impossible to contemplate.
The upside for this is that governments globally will be able to lower interest costs on the massive borrowing that is being done. The US is in the midst of a massive upswing in borrowing due to spiraling deficit spending. This borrowing will be done at extremely low cost that could be locked in for many generations.
This endless struggle of macroeconomic manipulation, efforts to foster growth and balancing economic stability will continue to challenge central banks. The cost of money will remain contentious and it will continue to create economic stress, opportunity and challenges for investors as the economic cycle moves along its unpredictable path.
There are fascinating relics of past thinking, such as this from an NYT advertisement on 9-2-1969…The economy seems to be at a crossroad. While some economists are suggesting that we are entering a crisis because of “a run-away” economy, other economists are primarily worrying over the threat of “overkill”. It is our belief that neither of these extremes is likely. Rather, for the first time in recent months, we seem to be entering an adjustment which will take the economy from the dangerous environment of the last three years into a new orderly environment in 1970 and beyond. ~ Burnam and Company advertisement page 61 NYT 9-2-1969 The DJIA closed at 809.20 on 1-2-1970. It stands today at 26,403
It is fascinating to observe past predictions long since forgotten. This example is simply an advertisement aimed at provoking engagement and gathering perspective customers, yet it is a fascinating reflection of thinking 50 years ago and provides a tiny window into the struggle for clarity that never seems to be revealed. These ads are a powerful example of a key principal for long term investors:
No Bell Is Going to Ring
“Time is a sort of river of passing events, and strong is its current; no sooner is a thing brought to sight than it is swept by and another takes its place, and this too will be swept away.” – Marcus Aurelius
The “day of clarity” is never coming. Not in investing. Not in Life. You never really graduate as the ceremonies and achievements of life are often contrived and artificial. As you accomplish goals and persevere through difficulty, the next phase begins. The common notion that things are particularly murky right now is a reflection of human existence. Look to history for a deep understanding of how uncertain things always were and will always be. It is only in looking back that some sort of story emerges that seems to make sense. In real time, there is no story or thread that leads to predictability or clear vision.
The election of 2016 has spawned lots of talk and policy supposedly designed to benefit workers and “bring jobs back”. Revisiting moments of change from the past is very important for creating some context to the current noise.
On Aug 3, 1981, the Professional Air Traffic Controllers Organization (PATCO) members walked out with the idea that they had powerful leverage as a union that could halt air traffic in the US. That is not how the strike played out as President Reagan gave them 48 hours to return to work or be fired. This was a watershed moment for American workers as the mechanism of strikes by organized labor underwent a long-term decline that can be traced back to this historical event.
On 7-2-19 I mentioned that 1978 was the year that China began to compete in the realm of “economic construction”. It is a powerful juxtaposition to note that the turning point in the decline of unions in the USA began just over 37 months later.
The President has staked a claim that trade, and bad “deals” are what decimated the industrial heart of the American economy. There is little talk of unions and the rights of the worker beyond the idea that somehow, we will create new trade agreements that will be helpful. The trade threats and policies that have been implemented so far have seen limited results if not setting back the ideals of American labor. Unemployment remains low and that is commendable, although it is an extension of trends that began back in 2009.
The populist narrative that workers have been victims of trade is likely to do even more damage as barriers are now rising globally with the US setting an example for other countries to follow. The dark genie of protectionism is now out of the bottle as politicians on the left pick up on the theme. Globally we me see a dangerous realm of trade and economic ideas that become even more extreme. There results for domestic agriculture have been dire. Steel markets have been whipsawed by uncertainty. The consequences of protectionist tariffs for other industries take time to work into the system. The results are likely to be slowing growth, rising inflation and reduced investment in plants and equipment as the uncertainty continues to grow. Protectionist policy will likely produce bad outcomes for American workers, it is a matter of time.
Historical events like the air traffic control workers dismissal by President Reagan are rarely discussed in today’s trade policy debates. So much easier for populists to blame immigrants and China. The recap to so many broad federal government actions is adverse outcomes and unintended consequences. The future policy initiatives that will arise are impossible to predict as the blowback and sheer randomness become even more complex and unknowable. Hopefully we will see more rational actors in leadership roles pushing back on these protectionist policies.
A significant component to the populist wave challenging western society is cynicism and lack of trust. Deep knowledge and meticulous study have been relegated to a realm of the “Elites”. Populism devalues knowledge and is disrespectful of complex explanations of the challenges of modern society. The demagogic nonsense offers important lessons for long term investors.
The velocity of information via Twitter, internet news feeds, social media and cable news may have an inverse impact on the understanding of the average citizen. Witness the passion that people express in their views with little study, reading or effort to learn about the complex issues of our day.
Beliefs regarding issues of trade, immigration and environmental policy are empowered by slogans and reinforced by ideological identity. Team donkey (D) and team elephant (R) delineate a list of positions and proceed to fan out into the public consciousness via various media activities. These ideas are then broadcast 24/7 like McDonalds sells cheeseburgers.
Cable news seems to be the fast food of information in that these pundit-based roundtable formats are easy to produce at low cost. The arduous process of journalism is costly and carries little of the appeal of opinions and arguing. The impacts of the industrialization of the food supply are obvious in the obesity and other dire health deteriorations that we see in our society. The “industrialization” of information is having a similar effect. There is tragic similarity between the obese customer at the fast food drive through and the ranting crowd at a populist rally.
Talking head shows are run over and over at minimal cost. People then feel educated and passionate about their level of understanding. This is iconic Dunning Krueger effect – it describes the observation that people who are deficient or unskilled in a given domain tend to believe they are much more competent than they are. Thus, bad drivers believe they’re good drivers, the humorless think they know what’s funny and so on.
How can one become knowledgeable? Is it reading books, listening to lectures, pursuing advanced scholarship? Why bother with all of that when you can just read a social media feed and watch a cable news network. Study and debate, policy review and delineation of complexity is just for “Elites” and you know where that has landed us!
There is now a very distinct, binary or “polarized” environment where friendships and family relations are at risk of estrangement due to these passionate views and beliefs based on little beyond a cable channel or web feed. It is a critical responsibility of enlightened investors to avoid these traps of simplistic knee jerk opinion formation. It is imperative for client and advisor to recognize the complexity of the policy formation process in our views, investment choices and all manner of crucial personal beliefs.
This illogical environment has the feel in the way that a casino is a temple of irrationality. These houses of gambling are tributes to innumeracy and ignorance. They are filled with all manner of gamblers looking busy and serious. It is a certainty that these patrons of corporate gaming are unwilling to conjure a minimal level of understanding that the “games” being offered are unbeatable. Any level of curiosity regarding the mathematical edge possessed by the house will reveal that no one should be interested. These Potemkin parties should be vacant. Yet the casino industry has been a very profitable endeavor. This sad analogy is illustrative to what we are witnessing in that the complexity of our challenges is being overrun by populists and demagogues.
The investment realm is filled with simplistic dynamics the are very much like political populism. Ideas of risk and reward, tactics and strategic maneuvering are marketed in questionable financial products that are perpetually reinvented.
This is the context that we can contemplate the passion that many seem to have regarding complex issues of our day. The hyper speed of infotainment “news” flow seems the have lowered inhibitions and extinguished humility when it comes to world view, economic concepts, government policy and all manner of the most complex issues of our day.
An ongoing theme of these essays is that humility, courage and respect for knowledge and expertise are pillars of what successful investors use to build the future. It is easy to distrust the market, just as it is natural to distrust government, politicians, big business and all manner of actors within our complex world. As investors, we must constantly reinforce the study, work and unshakable beliefs that are required to stay the course of this difficult process.
Gotham Greens’s rooftop greenhouse in Brooklyn, which supplies the Whole Foods Market located downstairs is a stark example of the innovative opportunities of today. The company has built and operates over 170,000 square feet of technologically advanced, urban rooftop greenhouses across 4 facilities in New York City and Chicago.
http://www.gothamgreens.com/our-farms/greenpoint#our-greenhouses
Imagine a future when techno driven, and energy efficient urban farming is integrated into our local communities. Think of all the engineering, design and innovation that will be required to create realities like this at large scale. The jobs and opportunities are endless. In addition, we can also stop blaming China as we will be too busy growing our own economy and quality of food and life. That is the future that I hope we will hear more about, a vision of skills development, education and innovation.
In our investment process, there is often a mistaken notion that there will be a time that the decisions will be obvious or easy. This is unlikely and through historical study we can determine that it is unprecedented. You only have the market that you live in. The option to buy low is a relic of the past. Prices of today may look like bargains at some point in the future.
Position yourself with sustainable allocations combined with a deep commitment to persevere in the face of volatility. Own great companies. Get ready for the long slog. In investing as in life, it will never be easy or finished, but so very worth it.
The myth of clarity is something that investors have grappled with (or not) since the charter of the East India Company on December 31, 1600.
Respect for the lessons of history is but one of many crucial traits that are required for buy and hold investors to grow wealth over time. Patience, courage and humility in the face of the world’s complexity are what our future is built on. Buckle up, the ride is going to be tough.