Good Morning,

Stocks closed flat Friday as investors parsed through a mixed employment report, a U.S. airstrike in Syria and comments from a top Federal Reserve official.

The 10-year Treasury yield topped 2.35 percent after falling as low as 2.28 percent amid a weaker than expected jobs report and the first military strike undertaken by President Donald Trump’s administration.

On the data front, the U.S. economy added 98,000 jobs last month, well below the expected gain of 180,000. The unemployment rate fell to 4.5 percent from 4.7 percent. Wage growth was not as strong either, with average hourly earnings up by 2.7 percent on an annualized basis. Nevertheless, the report masked a key problem: The number of open jobs hit a record 5.8 million last April and hasn't dipped below 5.4 million ever since. Sure job creation is important but it appears Americans are not equipped to perform the jobs that exist in a rapidly changing economy.

Also of note was the retreat in the auto sector reported Monday which mirrored lackluster broader consumer spending data released last Friday. Both readings fly in the face of the two most-followed gauges of consumer sentiment, now at 17- and 11-year highs. It also contrasts with an index of optimism among small businesses -- local car dealers among them -- holding near levels unseen since the mid-2000s.

On the Canadian front, the two-faced nature of Canada’s labor market was on full display this week as employers continued to hire but resisted raising wages.

Canada added 19,400 jobs in March, for an employment gain of 276,400 over the past 12 months, Statistics Canada said Friday from Ottawa. Yet, the pace of annual wage rate increases fell to 1.1 percent, the lowest since the 1990s.

The weakness in wage gains seems to be an Ontario phenomenon. The province, which has led employment increases over the past year, recorded an annual 0.1 percent increase in wages in March, also the lowest on record.

Our Take

Investors may be getting ahead of themselves on their confidence in the economy, with the chance of a short-term sell-off increasing as such hard data measures are contrasting with the more positive soft data but one must remember that short-term sell offs aren’t unusual. The VIX tallied its 103rd session Friday below 15, the longest streak since February 2007, according to Bloomberg data. Thus, a 10-15% correction is looking more and more likely. Nevertheless, we maintain (as outlined in previous letters) that while it may be a struggle to find reasons to get enter this market, the reasons to sell are limited and uncompelling

Do bull markets die of old age?

LPL Research compares the best bull markets in history for us:

At the same stage of the 1990s bull market, the S&P 500 was up 255%, before powering to a 417% gain at its peak about 18 months later.

This bull market is up about 250%. Of course there are no guarantees, but given the fact that after six consecutive monthly gains, the U.S. Leading Economic Index (LEI) is at its highest level in over a decade, the haters need to come forth with some pretty solid evidence of a deteriorating economic picture to convince that the bull market ends here….

Musings

Came across a wonderful article this week by James Clear entitled “The 1 Percent Rule: Why a Few People Get Most of the Rewards” which reminds us of Vilfredo Pareto’s 80/20 rule. The majority of output or rewards tend to flow to a minority of producers or people.

Inequality is everywhere. It is perhaps the “natural” state of the world.

Clear states that: “For example, through the 2015-2016 season in the National Basketball Association, 20 percent of franchises have won 75.3 percent of the championships. Furthermore, just two franchises—the Boston Celtics and the Los Angeles Lakers—have won nearly half of all the championships in NBA history. Like Pareto's pea pods, a few teams account for the majority of the rewards.

The numbers are even more extreme in soccer. While 77 different nations have competed in the World Cup, just three countries—Brazil, Germany, and Italy—have won 13 of the first 20 World Cup tournaments.

Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups. In the 1950s, three percent of Guatemalans owned 70 percent of the land in Guatemala. In 2013, 8.4 percent of the world population controlled 83.3 percent of the world's wealth. In 2015, one search engine, Google, received 64 percent of search queries.”

But why?

Accumulative advantage: What begins as a small advantage gets bigger over time. One plant only needs a slight edge in the beginning to crowd out the competition and take over the entire forest.

This principle applies to our lives. We compete for a variety of things: a job, a resource, a distinction, another human’s affection or love etc.

The difference between these options can be razor thin, but the winners enjoy massively outsized rewards.

Clear reminds us that “Not everything is winner take all but nearly every area of life is at least partially affected by limited resources.” Anytime resources are limited a winner take all situation will emerge.

Winner-Take-All Effects in individual competitions can lead to Winner-Take-Most Effects in the larger game of life.

From this advantageous position—with the gold medal in hand or with cash in the bank or from the chair of the Oval Office—the winner begins the process of accumulating advantages that make it easier for them to win the next time around. What began as a small margin is starting to trend toward the 80/20 Rule.”

Should we be so surprised that we were so close to having 2 US Presidents with the same Clinton last name? 2 Presidents with the last name Bush? Or 2 Prime Ministers with the last name Trudeau?

Winning one reward increases your chances of winning the next one. Each additional win cements the position of those at the top. Over time they end up with the majority of the rewards.

What does this mean for us?

The key takeaway here is that small differences in performance (even 1% better: The 1% Rule) that are consistent can lead to VERY unequal distributions when repeated over time. Think compound interest.

Thus, to pull away you need only to focus on being “slightly” better than your competition. But doing so once isn’t enough. You need to develop a process which enables you to maintain this slight edge over and over again. Simple but never easy...

Thought of the Week

"There's a certain consistency to who I am and what I do, and I think people have finally said, "well you know I kinda get her now." I've actually had people say that to me." - Hilary Clinton

Articles and Ideas of Interest

Did Trump’s Syria air strikes accomplish anything? Piece in the Guardian
suggesting that the US bombing of a Syrian airfield is a flip-floppery at its worst. And it signals to America’s foes that Trump can be easily dragged into military quagmires.

Europe in crisis? Despite everything, its citizens have never had it so good. Contrarian piece in the Guardian suggesting that despite the media’s constant coverage of populist sentiment, the EU’s achievements are huge. As Brexit begins, don’t forget that hundreds of millions still want to be part of it. “It is easy to take what we have for granted. It has become easy to criticise the European project for its many insufficiencies and its repeated unpreparedness when crises arise. But it is perhaps harder to step back and take stock of what the EU has accomplished and what many, outside the region, continue to admire and yearn for.”

The myth of shrinking asset managers. It's easy to assume that the recent upheaval among asset managers would result in a much smaller industry. But that's far from certain. Some big investment firms have certainly shrunk, but many have remained roughly the same size over the past few years. Going forward, the amount of net job reductions will depend in large part how well firms adapt to changing technology and trends. The number of employees in asset management has stayed surprisingly stable in many corners.

How moats make a difference. An important element of our investment approach is focusing on companies that that have or more ideally that appear to be building a wide competitive moat. Usually when people talk about different kinds of moats, they are referring to the elements of the business model that give rise to the company’s competitive advantages. Fun piece here from intrinsic investing on identifying different types of moats.

Which tech CEO would make the best supervillain? Funny piece in the Ringer considering tech’s greatest minds gone bad. Jeff Bezos’s doomsday device: “On next year’s Prime Day, he will offer all products for 50 percent off. After customers irrationally empty their bank accounts in the pursuit of deals, he will fulfill zero orders as he makes off with the entirety of the United States GDP.”

Luxury is an addictive drug. Great piece from a man who was a multi-millionaire at age 27. Few of his lessons: 1) Money doesn’t make you happy 2) You can only help people to help themselves 3) There will always be someone richer than you 4) Luxury is an addictive drug 5) Some people are very shallow 6) Everyone respects wealth 7) Most financial advisors know nothing 8) Banks rip wealthy people off too More zeros are just more zeros 9) The biggest issue people have with money is limiting beliefs 10) F--- you money is overrated 11) Being wealthy is a full time job.

America’s unhealthy obsession with productivity is driving its biggest new reading trend. Audiobooks are the latest trend in book publishing. But why? Audiobook listening is growing rapidly specifically with 25- to 34-year-olds, thanks to a pernicious “sleep when you’re dead” mindset reflective of the young, aspirational, educated American: We are fearful of mono-tasking, find downtime distasteful, and feel anxious around idleness. Even when picking socks from a drawer, young workers feel better if information’s somehow flowing into their brains. And this is exactly the restless market that book publishers need. They’re a cure to widespread restless mind syndrome, with its daily self-imposed nagging to make progress: Be more effective, says your productivity tracker. Do and learn more, says your to-do list. Optimize your to-do list, says your faddish new notebook. Yawn…...The Buddha is surely turning in his grave...

The nine to five is barbaric. Generation X author on the future of work and how we’ve all turned into millennials. Are there smart and creative young people out there that are better than their bosses, but unable to thrive in the corporate world? “The nine to five is barbaric. I really believe that. I think one day we will look back at nine-to-five employment in a similar way to how we see child labour in the 19th century,” he says. “The future will not have the nine till five. Instead, the whole day will be interspersed with other parts of your life. Scheduling will become freeform.”

What are the 50 best restaurants in the world? On Wednesday this week the list was released and Eleven Madison park in NYC became the first U.S. establishment to win the top spot since 2004.

Our best wishes for a fulfilling week,

Logos LP