Equity investors have become conditioned to gains. The post 2008 experience has embedded the idea that investing = gains. This may be true over longer periods, but we have become spoiled. The warning consistently given is to “buckle up” as downswings from the recent run up are likely. In addition to securing your emotional seatbelt, here are a few other coping mechanisms for the corrections that may arrive soon:
Long walks
Cycling
Watercolor painting
Meaningful volunteer engagements
Avoidance of financial news
The concept is clear. Get ready for a cycle that does not present ever higher values for holdings. This is to be expected.
In 2019, an estimated 14.0% (34.1 million) of U.S. adults were current cigarette smokers. Current cigarette smokers were defined as persons who had smoked ≥100 cigarettes during their lifetime and now smoked cigarettes either every day or some days.
With all due respect to those who embrace the Nicotiana Tabacum leaf, it seems to me that the dire health effects are well known. This is a significant number of people that will be difficult to convince of other less personal issues. Witness the messaging of complex issues like climate, global trade, or immigration.
Global Warming? These people are warming their own lungs after decades of dire warnings. How is this possible? If this percentage of our population cannot be convinced about such a significant personal issue, it reflects how difficult a task it is to shape peoples’ beliefs in ways that may benefit the greater good.
Societal challenges like aging infrastructure, public education or Medicare funding are examples of “hyperobjects”. The term can be defined as real event or phenomenon so vast that it is beyond human comprehension. The concept can be traced to the book Hyperobjects: Philosophy and Ecology after the End of the World. The complexity of our world is often overwhelming. Developing understanding is time consuming and pushed aside by a digital media geyser. The hype of internet clickbait reduces all material to a race for attention, while most complexity is lost along the way.
Progressive movements often seek to build support and develop broad solutions for all sorts of societal challenges that are on the horizon. The difficulty of creating urgency and understanding in the mind of John Q Public is monumental. This communication challenge is growing along with the complexity of the problems that challenge society.
The Biden administration is hindered by these communication barriers as they twist in the wind speaking of “transformative legislation” that is known as the Build Back Better bill (BBB). These ideas are continuously mentioned alongside a price tag of 1-2 trillion dollars. The marketers of these initiatives have put forth the concept, “Joe Biden’s Ambitious Agenda” as if it were toothpaste the public should be looking to buy. The details can be found in the proposed (now “Stalled”) H.R. 5376 .
The Build Back Better act contains 2468 pages. The amount is dollars and program delineated are impossible to assess. There are numerous worthy items such as:
Child tax credit
Paid leave
Expanded pre-K
Climate Legislation
Examination of the actual document is a bit overwhelming, for example on page 3
$10,000,000,000 for hazardous fuels reduction projects within the wildland-urban interface;
Or page 77
In addition to amounts otherwise available, there is appropriated to the Department of Education for fiscal year 2022, out of any money in the Treasury not otherwise appropriated, $297,000,000, to remain available until September 30, 2025, for personnel development in section of the Individuals with Disabilities Education Act
There are thousands of pages of items that are worthy of funding and support. Passing new laws and implementing them successfully is politically existential. This is a very difficult thing to do without having majorities in both houses of congress. There is a tradition of resistance to grand federal programs in the United States and it seems more pronounced in the face of complex solutions for the challenges that await us.
The lack of political capital is palatable as a few Democratic senators have “held up” the trillions of spending and tax increases. Just as John McCain gave the thumbs down to the “repeal and replace ACA” legislation, Joe Manchin has stopped the president in the Senate. Democrat poll numbers are looking extremely weak, and the mid-term elections are projected to swing power to the GOP.
Contrast the current state of National politics with eleven months ago when financial pundits were sounding the alarm for the tax increases that were going to be implemented by the new Democratic leadership. Political predictions are as useless as any other forecasts. The current federal leadership is ripe for a charismatic recharge to transition from this generation of leaders that are unable to find ideas that people can understand and support.
The tax code is in the same form that was narrowly passed in 2017and it does not look like changes will be happening anytime soon. Anticipating tax increases or cuts is a pointless exercise. The movement for tax increases will need more federal power, i.e., winning more elections. It seems that democrats are trapped in a belief system that things need to be “paid for” along with notions of wealth redistribution. The GOP wastes little time paying for tax cuts. The US has been in a tax rate reduction cycle since the early 1960s. Reagan institutionalized the idea that all tax cuts are good and that “deficits do not matter”. As long as markets lend to the US Treasury at sub 5%, tax rates may maintain this range.
The Great Disruption of COVID-19 has far-reaching economic consequences beyond the human misery and public health catastrophe. The primary driver has been monetary, while fiscal actions are astounding. According to the General Accounting Office:
In response to the national public health and economic threats caused by COVID-19, four relief laws were enacted as of June 2020, including the CARES Act, in March 2020. These laws have appropriated $2.6 trillion across the government. Six areas—Paycheck Protection Program (PPP); Economic Stabilization and Assistance to Distressed Sectors; unemployment insurance; economic impact payments; Public Health and Social Services Emergency Fund; and Coronavirus Relief Fund—account for 86 percent of the appropriations. Also, the IRS and Treasury made 160.4 million payments worth $269.3 billion to taxpayers.
The pandemic financial relief efforts are one of the largest financial events in our lifetimes and impossible to put into context. It is a certainty that the checks and extended unemployment helped many people. One unintended consequence is a wave of dislocation in the workforce. Expectations of Federal checks may have created disincentive for working. Additionally people are fearful of the virus as the guidance has been confusing and difficult to follow.
One could argue that the disruption to the labor force has been evolving for a long time. As the Baby Boom generation retires, the fertility rate drops and populist anti-immigrant ideas circulate, this toxic decline reduces the labor force. Labor shortages are a powerful economic phenomenon that few predicted or discussed prior to the last eighteen months. The retirement of the Baby Boomers was projected for decades as a watershed event. Now it has been compounded by isolationism and declining birth rates. The adage, “be careful what you wish for” may be appropriate for those that chanted, “build the wall”. Without a growing population, you will see less building in general.
We are living in a convergence of factors that has driven shortage and price spikes. Inflation is a significant threat to the financial system and the consequences of recent Federal Reserve action are now being amplified by shortages and supply chain disruption. Open hostility to global trade spiked after the 2016 election. Hope for a more positive posture towards global trade have been dashed as many protectionist policies have been left in place.
Proposed progressive legislation had all sorts of “Buy American” provisions. On the surface this seems worthy and commonsensical. The laws of economics dictate otherwise. When American goods are subsidized via tax credits and other incentives, there is often a cost that diminishes the benefit. If we could nurture American Manufacturing and services, it would probably be happening by now. Yet the same tired anti capitalistic ideas that are rooted in protectionism are floated. Both of our parties are guilty of this.
Industries that have found protection consistently have raised prices to capitalize on the advantages and the consumer simply pays more. The net effect is that the government is put into a position of picking winners and losers.
The Democratic Party is in an awkward spot on this issue as generations of protectionist tendencies of the left lurk beneath the surface. Progressives exist between a vision of global growth and a legacy of support from the “working man”. The notion that the left was the natural political home of the blue-collar worker has been on a long-term decline as our binary system has taken on an urban / rural schism.
These dynamics place global trade in a very vulnerable position in the current political environment. Bashing the Chinese for the economic woes of workers is not a tough sell. One could hope that the upside to this is a domestic resurgence in manufacturing, yet this may have additional inflationary potential. The presidential statement, “trade wars are good and easy to win” will go down next to “mission accomplished” as gravely misguided.
Decades of economic growth and rising living standards have been based on an American principal of free markets and democratic capitalism. These ideals caused dramatic pain in the manufacturing sector and numerous ghost towns across the “rust belt”. The stunted discourse of populism seeks slogans and villains for these problems. Citizens of stagnant small-town America are not a receptive audience for discussions of the economics of global trade.
Comparative advantage is a foundational concept in economic theory. Defined as an economy’s ability to produce a particular good or service at a lower cost than its trading partners. The concept of letting every country globally do what it is good at is a complex notion for voters to entertain. When workers or sectors of the economy are attacked by lower cost producers, the pain can destroy communities and people’s lives. The economist in the ivory tower can easily suggest retraining or relocation, but many are reluctant to change.
China has unique characteristics that have delivered consumer, manufactured, and heavy goods to the world at competitive rates. This comparative advantage was driven partially by significant environmental and human costs that were obscured behind the willful blindness of global import demand. This low-cost exporting juggernaut is unlikely to persist in the face of an ageing Chinese population and the rising impact of poor environmental protections across Asia. The era of cheap goods flooding into world markets may be giving way to a significant upswing in cost and supply.
This shift will include moves towards other low-cost producers in Asia, yet the model of sourcing from China is unlikely to be easily replaced. The economies of scale that led to massive efficient production are astounding. Think of a place where there are entire cities dedicated to creation of a single category, for instance socks. NYT wrote of these cities on 12-24-2004:
Datang, China – You probably have never heard of this factory town in coastal China, and there is no reason why you should have. But it fills your sock drawer. Datang produces an astounding nine billion pairs of socks each year — more than one set for every person on the planet. People here fondly call it Socks City, and its annual socks festival attracts 100,000 buyers from around the world.
Southeast from here is Shenzhou, which is the world’s necktie capital. To the west is Sweater City and Kid’s Clothing City. To the south, in the low-rent district, is Underwear City. This remarkable specialization, one city for each drawer in your bureau, reflects the economies of scale and intense concentration that have helped turn China into a garment behemoth.
Life in this digital revolution includes a world where nearly any product can be sourced online and delivered to your doorstep. Amazon two-day shipping was a true revelation for those of us that bought from catalogues in the past, paid shipping and handling and waited weeks for items that could not be obtained locally. “One day” shipping placed massive pressure on logistics systems. The pandemic has scrambled the whole premise and revealed the vulnerabilities of this on demand consumerism.
The Detroit Lions VS… Costco? This matchup will never appear on any NFL schedule. The contest here is one of organizational culture that pits a franchise of perennial failure with an American corporate success story.
The Detroit Lions are an icon of failure. They posted a record of 0-16 in 2008 placing the team in the ignominious group of the five NFL teams that have ever gone a season with zero wins. Subsequent seasons have shown little progress. A series of coaching, management and personnel changes have done little to lift the team out of its perennial spot at the bottom of the standings. The data on the franchise historically places the “Honolulu Blue and Silver” near the bottom by most measures.
The NFL is based on a concept of “parity” where successful teams in prime markets like NY or LA must share 50% or more of their revenues. This creates an economic subsidy for teams located in areas with smaller populations. Additionally, there is a draft every year where the least successful teams are granted the first opportunities to select new players emerging from college.
The Lions organization has been owned by William Clay Ford since early 1964 till his death in 2014. The team is now headed by Clay’s daughter, Sheila Ford Hamp. This family ownership is a point to be considered in the long-term failures of the Lions. It is reasonable to speculate that this family ownership dynamic has created a culture that is not capable of the complex task of competition against other more sophisticated organizations.
A family run business can be a very motivated, dynamic and successful structure. As the generations take over from the founders, success can diminish for a variety of factors. Henry Ford is one of the most revered American innovators in modern economic history. Henry’s decedents are another matter. The Ford family are participants that are qualified by birth, not skillset. This can obviously place people in professional roles that they would not otherwise qualify for.
The organizational history of Costco is much different. Federal Employees’ Distributing Company, known as Fedco, was a membership department store chain that operated in Southern California from 1948 to 1999. The chain was unique in that it was a nonprofit consumers’ co-op. It was founded by 800 U.S. Post Office employees who wanted to leverage their buying power by purchasing goods directly from wholesalers and eliminate the markup of a retail purchase.
Sol Price began his career in the mid-1950s, when he worked as an attorney in San Diego. The original FedMart was conceptualized after Price inherited a vacant warehouse and he needed to find a tenant. When price visited an operator called Fedco, Price noticed that its facility was similar to the warehouse he now was looking to utilize. In 1954 Fedmart was opened in the space and the membership club retail was now active with a profit seeking operator competing with the co-op concept of Fedco.
In 1969 Fedmart became a public company. The stock attracted a German retail entrepreneur named Hugo Mann. He purchased a controlling interest in the company and Sol Price left the company in 1975.
Price opened the first “Price Club” warehouse on July 12, 1976, on Morena Boulevard in San Diego, California. James Sinegal and Jeffrey Brotman opened the first Costco warehouse in Seattle on September 15, 1983. Sinegal had started in wholesale distribution by working for Sol Price at FedMart; Brotman, an attorney from a Seattle retailing family, had also been involved in retail distribution from an early age. Company legend notes that Brotman began his retail involvement as a grocery bagger. A second store opened in Portland in October, and a third in Spokane in December 1983.
In 1993, Costco and Price Club agreed to merge operations themselves after Price declined an offer from Walmart to merge Price Club with their warehouse store chain, Sam’s Club. Costco’s business model was similar to those of Price Club and the merger seemed to be good fit.
In 1997, Costco changed its name to Costco Wholesale Corporation, and all remaining Price Club locations were rebranded as Costco.
Warehouse retail is not the most complex business, yet many enter and fail. The secrets are in the logistics, treatment of large work force and numerous financial factors. The personalities of Price, Sinegal and Brotman have likely been a large component of the ongoing success of Costco. The business is highly competitive and the CULTURE of the company may continue to drive it forward.
The laboratory of professional sports has numerous lessons to teach investors. The culture of an organization is a crucial element that will ultimately drive success. Many endeavors are negatively impacted by leadership that may exist for reasons that are not optimal on the battlefield of professional sports, business, and all types of competition.
Contrast a Sunday spent observing another Lions Football humiliation with a shopping trip to Costco. In my personal experience the latter is significantly more satisfying. Yet, this is not a fair comparison, and we should measure the performance of Costco versus a worthy competitor such as Walmart.
In this comparison, there is no scoreboard as valuable as the performance of the company stock. By that measure, Costco has produced substantially more for its shareholders than Walmart and many other retailers. The difference here, may lie in the fact that Walmart was not designed under the membership discount model. Walmart, lacking true commitment to this structure entered based on existing expertise in discount retail with a brand called Sam’s Club. A sampling of Costco Vs Sam’s Club leaves most to retain the Costco membership card. The likely explanation is the difference in the corporate culture.
Organizational culture can have the largest impact on the quality of a business and its viability. One of the most losing NFL teams of the last 20 years is owned by a family that has little inclination towards professional sport success. The culture of the Detroit Lions has proven inept and a perennial failure. As we search for asset managers, we seek stability and long-term quality as a sign that the culture is one that can prove successful.
Seeking mutual funds and ETFs that manage to produce quality is an ongoing challenge. Ideas that worked recently can fall out of favor. Staying broadly diversified, patient, and understanding that investing is difficult is a starting point. Going forward into 2022, I look to seek the best cultures for asset management. It is not an exact science, but staying with large, proven institutions is a good starting point.
Many challenges lie ahead. Political culture that has been turbocharged via toxic social media is busy convincing the masses that the institutions that have been in place post WWII cannot be trusted. We are faced with a cult of personality on the right and an idealistic left that seeks big solutions for challenges large and less so. Those in the middle are left to face the complex decisions that will shape the post Covid 19 era.
Here is hope that our system remains resilient in the search for a middle way. I wish for the moderate influence to lead us to fair, prosperous and fact-based strategies going forward. It may be nearer than it seems as you look past the attention seeking fringes and focus on what is actually happening. Abraham Lincoln, FDR, JFK, Reagan, Obama…these figures of our history emerged out of random complex environments. Here is hoping for a charismatic moderate to emerge and lead us to the fabulous center. Stay healthy. Stay ready. Stay invested. Stay positive and watch for the good to unfold.
Love and happy healthy 22 to all!
can we simplify this? idk how but it doesn’t read very smooth [GU1]