Stop Making Sense

22 May

Was struck by the comments of a large quant group when complaining that his stock selection factors were no longer working,  leading to recent sub-par performance. “Join the club”  is probably the refrain from almost every corner of the investing world. We have been pondering the question of correlation and causation lately and I think I’ve come to the conclusion that in a post QE world, we are finally seeing the detritus of years of capital mis-allocation. Bitcoin is not an anomaly in this environment, but rather is indicative of the kind of excesses that masquerade as technological “breakthroughs”.  As we have talked about previously, (admittedly to excess)  governmental overreach, under the guise of targeted Central Bank Policy,  has skewed and permanently altered economic relationships in a very profound way. These disconnects are too numerous to list: inflation/unemployment, low and even negative rates/economic growth, Treasury rates/deficit spend. One has to begin to wonder whether the resultant mis-allocation of resources has permanently unmoored reality from its own fundamental underpinnings, and if so is this new reality to be taken as the norm; Modern Monetary Theory is one perfect example of such skewed perspective.

Negative Energy

8 Apr

The tremendous growth in shale production here in the U.S. has led to some unintended consequences, negative natural gas prices. While some may question whether you can actually have negative prices for a physical commodity, the fact is that natural gas must be piped out(if not flared) and in the absence of a strong incentive for pipeline infrastructure i.e. prices that cover transport costs to a willing end market, prices can swing negative. While it is estimated  that over 600MMcfd will be flared during this quarter, a new record, the negative price action we see here is indicative of what it would cost producers to pay for transportation of the product out of the permian. Producing a product for which you pay others to take it away, seems like the negative rate mentality is leaking into other parts of the real economy.sg2019040812716

TINA’s a Liar

1 Mar

There may not be many time-tested investment maxims but “return of principal is more important than return on principal” may be one of them. However, looking over the global government bond market landscape one might think that this philosophy has been stood on its head, to say the least. Currently, $11Trillion dollars of sovereign government debt yields less than zero, up some 21% since October alone. What this means is that there is $11 Trillion of capital investing for the sole purpose of losing money. Granted, the large majority of this money is driven by non-investment considerations such as asset/liability matching and indexing, but the fact remains that people are opting for a diminution in capital versus simply putting it under their proverbial mattress. TINA (there is no alternative) has always been used by asset allocators to justify the inclusion of assets whose returns have seen better days.  But with this much capital chasing negative yields TINA is not only arguing that there is no alternative she is arguing that losing money is the better alternative.  With a clear slowdown in global growth, Central Bankers can only look at this rate environment with concern regarding their future course of action should situations deteriorate further.

AOC Declares Victory

26 Feb

If you think I’m referring to the popular barista/legislator/socialist rockstar you can stop reading right now. My AOC instead refers to All Outta Consequences. We have written before about the popularity of modern monetary theory which suggests that governmental deficit spending is seemingly inconsequential. The amazing thing is that this type of mindset is percolating down to the state and local level, where  even states such as Illinois elect officials content to ignore the obvious and elevate can kicking to new heights. In fact, of all the mayoral candidates for The City of Chicago, only one is advocating a property tax hike to shore up funding for the multi-billion dollar pension gap( a portion of which needs to be funded by 2020). The others have instead chosen to follow a long line of Illinois politicians who  have looked to creative financing (i.e. borrowing more to fund the borrowing you already can’t afford) and other stop- gaps such as casino gambling.  When asked about how to finance the ludicrous New Green Deal initiative AOC (the barista) stated that ” The Federal Reserve can extend credit to fund these new initiatives….” If however you think that this type of free lunch thinking is limited to the uninformed socialist realm, I heard a well known economist remark recently that the imposition of negative rates of interest here in the U.S. in the aftermath of the financial crisis in 2008 would have really “done the trick”. From one AOC to another.

X Factor

7 Feb

The one global geo-political constant you could count on up until around 2000 was that there was a general move towards the  political center. In country after country, and even countries where democracy was not predominant such as China, we saw a basic softening of hard left and hard right ideologies towards some level of general compromise. However, in the aftermath of a global financial system that was pushed to the brink, ostensibly with very little long term after affects for those that both precipitated and facilitated the ensuing bailout, the center no longer exists.  The situation as it stands now appears to be a complete polarization of the electorate in all of the G7 countries and seemingly everywhere else that holds “free” elections. While the battle between haves and have nots is nothing new, this new battle seems to be solely driven by punitive and retributive measures. If the election of The Donald is symbolic of a permanent shift in the electorate (as we suspect it is) then the battleground will look much different going forward with the associated investment implications therein.  In short, don’t discount the ground swell of support that is occurring for socialist and “socialist lite” type movements in this country and elsewhere. The reason for concern is that the “kick the can” issues such as the Federal deficit and entitlement spending become much more problematic with a torch carrying electorate. I have attached a link to a speech that famed investor Seth Klarman gave at Harvard in which he address the pitfalls of capitalism, seems really timely given some of the discussions lately about corporate governance, etc..

https://www.alumni.hbs.edu/stories/Pages/story-bulletin.aspx?num=6818

Performance Art

24 Jan

I stand simply astonished at the most recent talk regarding the run off in the Federal Reserves Balance sheet, ostensibly chapter one in the cessation of the decade long monetary science experiment known as QE. What is most amazing is that the talk generally assumes that there is some path forward for Central Bankers to follow, some historical north star that might guide them in this multi-trillion dollar diet program. What seems apparent to almost no one, is that there is no precedent for QT, primarily because there have been almost no historical examples of QE (Japan is an obvious example, but instead really represents a situation of almost perennial QE). There has never been in the history of Central Banking a situation whereby a Central Bank has attempted to offload private and public assets(of this magnitude) in a measured, communicated way. The Fed undertaking can’t be called science because science assumes some direct cause and effect, it can’t be called art because that would imply that there is some nuanced behavior on the part of Central Bankers that can be shifted based on real time economic variables. Perhaps, we can term the balance sheet experiment performance art. In performance art there are lots of movements most of which don’t make sense, you never know where things are going to go next, and generally even though you are praying for it to end, the ending is both unexpected and unexplainable.

Moats

17 Jan

Warren Buffett famously looks for businesses that possess what he terms economic moats; barriers to entry that often involve long term established brand loyalty. His philosophy has shifted somewhat in later years, but the concept of moats has long been the aspiration of high margin businesses, particularly tech. However, this concept has been challenged recently, particularly as it relates to the businesses that Mr. Buffett currently owns; namely high profile, well established brands such as Coca Cola, Disney, etc.. An article in the FT however, astutely points out that it’s “not that someone works out how to cross the moat…. Its that the castle becomes irrelevant”. This really struck me in that it seems like there are so many “castles” that are becoming irrelevant: retail, dining, transport, etc.. In fact, technology and big data are combining to lay siege to a number of industries previously protected by anti-competitive constraints like never before.  These tensions will  have major implications for relative valuations and ultimately for the economic survival of established players versus upstart competition.