Political Risk and "Expert" Bearishness

Good Morning,

Significant movement for U.S. stocks last Friday closing mixed due to pressure from this year's best-performing sector: technology.


The Nasdaq composite hit a record high at the open before closing 1.8 percent lower. Shares of Apple, Facebook, Amazon, Netflix and Google-parent Alphabet all fell more than 3 percent.

The tech-heavy index also posted its worst weekly performance of the year. The S&P 500 closed 0.1 percent lower, erasing earlier gains, with information technology dropping more than 2.5 percent. Big tech was slammed as investors took profits from the group, which some fear has become a massive market bubble.


These concerns were bolstered by a report released by Goldman Sachs on the top five outperforming mega-cap names in tech with some warnings on valuations and concerns that their volatility has become extraordinarily low. In fact, the stocks had become closely correlated to safe haven plays, like bonds and utilities.


Meanwhile, the Dow Jones industrial average rose about 90 points, notching a record close as out of favor financials and industrials led.


Also this week we saw another unfortunate chapter of Donald Trump’s Presidency unfold. Hiding in plain sight in former FBI Director James Comey’s testimony Thursday before the Senate Intelligence Committee was a potentially major new avenue for special counsel Robert Mueller’s investigation of Russia-related crimes: the possibility that President Donald Trump committed a federal crime by lying to Comey about his connections to Russia and activities on his 2013 visit there.

Our Take

“Big tech” could be vulnerable in the near term as investors rotate into other groups that have lagged such as financials and energy yet the long-term earnings growth story remains intact. If anything this rotation is evidence of a healthy market alive to the issue of valuations supported by sound fundamentals (almost 40 percent of fund managers think that global equity markets are overvalued, the highest level since January of 2000. And 80 percent see U.S. markets as the most overvalued in the world).

Interestingly, looking back at the year 2000, all five companies have eight times more cash than the big tech stocks had in the bubble.


As for the Trump show, this week what became more clear is that the self-inflicted wounds of what appears to be an undisciplined presidency are increasingly likely to blow its chances of passing any of the anticipated economic stimulus measures. The trifecta of tax reform, repatriation and infrastructure investment could put the U.S. on very strong footing for the next several decades but this opportunity seems to be slipping away.


Barry Ritholtz in an interesting piece for Bloomberg, suggests that the president is becoming radioactive. He is having problems hiring outside counsel: four top law firms have reportedly turned him down. Resignations are mounting. Diplomats are revolting. Hundreds of key positions have gone unfilled as people increasingly perceive working for Trump as a career killer.


What now appears increasingly likely is not a dismantling of the Trump administration from the outside. But an implosion from within. Furthermore, although there may be no serious collusion with the Russians, there is now certain to be a wide-ranging independent investigation into all things Trump. This investigation will likely make governing even more difficult than it already is...


But, some may say, stocks are up, so how bad can it be? It’s true that while Wall Street has lost some of its initial excitement about Trumponomics the market is still sitting close to all time record highs as investors and businesses don’t seem to be pricing in the risk of disastrous policy.


Or aren’t they? Interestingly, in a recent research note put out by FactSet the initial excitement does not appear to be translating into stronger performance for most measures of the real economy so far in the first half of 2017. Even the initial surveys suggesting optimism have retreated somewhat as the equity markets have flattened out as progress on reforms has stalled in Washington D.C.


Business and consumer surveys initially reflected optimism, but we have seen small retreats in sentiment measures for both in the second quarter. *Note that the sentiment indicators may have pulled back recently, but they still remain elevated and near longer-term highs.


Perhaps the big money, which classically tends to equate wealth with virtue, is beginning to consider (even Ray Dalio is starting to break a sweat as Trump consistently chooses conflict over cooperation) the potential risks posed by this increasingly self-destructive Presidency….



On a not so unrelated topic, I came across two notable bearish "expert" perspectives on the American economy this week. Good old gurus Bill Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, and Paul Singer, founder of hedge fund Elliott Management Corp. Speaking last week at the Bloomberg Invest New York summit on Wednesday.


They’re message: a crash is coming. Their argument: The Federal Reserve flooded the U.S. economy with cheap money after the 2008 financial crisis by holding interest rates near zero and beefing up its balance sheet. Corporations and individuals responded by bingeing on debt and risk assets -- as the Fed encouraged them to do so.


Now we’ve heard this argument many times before. In fact we’ve basically heard it every year since 2013. Should we be worried as these two investors are considered by many to be two of the greats having both superbly navigated the 2008 financial crisis?


There is no doubt that debt levels should be watched closely yet what is the data telling us?

As shown in the chart above, after over eight years, the nominal outstanding amount of U.S. consumer debt which includes mortgages eclipsed its $12.6 trillion peak from Q4 2008. While the $12.7 trillion current outstanding amount of consumer debt has made a new high, consumer debt has seen zero growth in the last nine years compared to a near doubling of debt in the five or so years that preceded the prior peak.


The consumer loan delinquency rate is at a 30 year low.

And this chart paints a positive picture of where the consumer stands regarding paying off their loans:

Nir Kaissar for Bloomberg reminds us that Gross's and Singer’s investment realms -- high-grade bonds and multistrategy hedge funds, respectively -- have been two the biggest laggards since the financial crisis. The S&P 500 has returned 18 percent annually from March 2009 through May, including dividends. By contrast, the HFRI Fund Weighted Composite Index -- a collection of various hedge fund strategies -- has returned 6.2 percent annually, and the Bloomberg Barclays U.S. Aggregate Bond Index has returned 4.2 percent annually.


Thus, a market meltdown would perhaps be the best thing that could happen to Gross and Singer. Should we therefore brush off such warnings?  


The answer is no. Although the consumer’s balance sheet appears to be healthy, vigilance is necessary as signs are now emerging in the credit markets that leverage is on the rise with a surge in corporate debt issuance that has steadily pushed investment-grade corporate leverage to a new peak for this cycle, as measured by debt-to-equity ratios. The ratio for companies in investment-grade indexes is around 2.8 times and 4.2 times for those on high-yield indexes.

Even though the ratios are near historic highs, market volatility as measured by the VIX is near a record low. Yes, the VIX is often criticized as a good measure of stock market volatility, but the divergence between leverage and VIX isn’t sustainable. We may be looking at a reversion to the mean as volatility is bound to pick up as investors and markets come to realize that low volatility and rising leverage may no longer be a suitable marriage.


Nevertheless, none of this suggests a 2008 style meltdown. What is likely is simply for the market to hang around its current level for years, waiting for earnings to catch up with stock prices as there are compelling reasons that companies will remain incredibly profitable for the foreseeable future. Thus, what vigilance in the face of such warnings should mean is what it has always meant to the prudent long term investor: buy right and hold on. You’re never going to get a perfect all-clear or get-out-now signal from the markets and this time is no different.

Logos LP Updates

May 2017 Return: 3.68%

2017 YTD (May) Return: 23.36%

Trailing Twelve Month Return: 31.01%

Annualized Returns Since Inception March 26, 2014: 28.471%

Cumulative Return Since Inception March 26, 2014: 92.53%

*All returns are reported unlevered

Thought of the Week


"Simplicity is not the goal. It is the by-product of a good idea and modest expectations.” -Paul Rand

Articles and Ideas of Interest

  • 6 Long-Term Economic and Investment Themes. Good list from Gary Shilling. 1) Huge fiscal stimulus, primarily infrastructure and military related 2) Globalization that shifted manufacturing from West to Asia is largely completed 3) Worldwide aging of populations 4) The long-promised Asian Century of global leadership is unlikely to come to pass due to the completion of globalization, the slow shift from export led domestic spending driven economies, government and cultural restraints, aging and falling populations 5) Disinflation with chronic deflation likely, especially as services follow goods in price retreats 6) The bond rally of a lifetime continues


  • Stop being positive and just cultivate neutrality for existential cool. Do we believe in the superiority of optimism? Culturally, we’re obsessed with positivity—our corporations measure worker glee, nations create happiness indices, and the media daily touts the health and social benefits of optimism. Thus, the good answer is to see the glass half full. Otherwise, you risk revealing a bad attitude. But are things so mutually exclusive? Is the glass not in a state of perpetual change? Can neutrality set us free? Can it help us see something more like the truth, what’s happening, instead of experiencing circumstances in relation to expectations and desires? The pressure to succeed—or to define success conventionally—can be subverted with neutrality. Things can go just so or totally awry once you understand that all things are fine, their upsides and downsides to be determined.


  • Mary Meeker’s 2017 internet trends report. In the most anticipated slide deck of the year Kleiner Perkins Caufield & Byers partner Mary Meeker looks at trends in digital and beyond. Of great interest is her coverage of interactive games as the motherlode of tech product innovation + modern learning (slides 113-150). Interesting concepts as we debate whether machines will replace most roles performed by humans. Such research supports that rising engagement in digital games is preparing us for the merger of man with machine.


  • Leverage: Gaining disproportionate strength. Wonderful explanation of the concept of leverage. Anyone who has ever haggled at a market or with a salesperson will understand the principle of using leverage in a negotiation. The trick is to declare their product or service to be so flawed and worthless that you are doing them a favor by buying it. Subsequently, the next step is usually to offer a low price which they counter with a slightly higher one that is still much lower than the asking price.


  • Passive investing is worse than...the misuse of antibiotics. The FT argues that the passive investment industry has become an oligopoly, with three large managers “drawing on seemingly limitless economies of scale” and amassing assets “simply by slashing costs” — both things, surely, that a blue-blooded capitalist would think is a sign of progress. Passive investing erodes competitive forces, because companies in the same sector end up with the same investor base and thus could pricing mechanisms break down?


  • Is the Canadian economy finally smooth sailing? Canada’s labor market continued surprising in May, with a greater-than-expected 54,500 jobs gain that also finally came with signs of a pick-up in wages. The employment gain -- the third biggest one-month increase in the past five years -- was driven by the addition of 77,000 new full-time jobs, which offset falling part-time employment. Economists had forecast a 15,000 increase in employment. The employment gains bode well for the continuation of the country’s expansion, which is the fastest among the Group of Seven, as Canada emerges from the oil price collapse and benefits from a soaring real estate market. It also could raise pressure on the Bank of Canada, which has been citing worries about slack in the economy for being cautious, to increase rates sooner. Certain funds are even becoming bullish on Canadian stocks seeing oil prices recovering. Nevertheless, it is doubtful that the bank of Canada will raise interest rates any time soon. Vulnerabilities remain. What should be watched closely is the impressive growth of Home Equity Lines Of Credit (HELOCs). A recent report from the Financial Consumer Agency of Canada explored this growth and found that “HELOCs offer relatively low interest rates and convenient access to large amounts of revolving credit, which may encourage some consumers to use their home equity to fund a lifestyle they cannot afford.” Keep an eye on the temperature of the market...


Our best wishes for a fulfilling week, 

Logos LP

Are We Living In a "Post-Intelligence" World?

Good Morning,

U.S. equities closed mixed on Friday after the initial fourth-quarter GDP read fell short of estimates, but managed to record weekly gains of around 1 percent.

Economic growth in the U.S. slowed more than expected (slowest since 2011) in the fourth quarter as a plunge in shipments of soybeans weighed on exports, but steady consumer spending and rising business investment suggested the economy would continue to expand.

Gross domestic product increased at a 1.9 percent annual rate, the Commerce Department said on Friday in its first estimate of fourth-quarter GDP. That was a sharp deceleration from the 3.5 percent growth pace logged in the third quarter.


Our Take


The GDP confirms what we already knew. The U.S. economy is stuck in this growth range with the year ending on a mediocre note, but policy is already changing with Trump's actions strongly indicating that he is moving to deliver on many of the biggest and most revolutionary pledges of his campaign,

Lets have a look at what Trump did during his first (whirlwind) week in office: 

1) Affordable Care Act rollback

One of Trump's first acts as president was to sign an executive order aimed at rolling back Obamacare. The order directs agencies to "waive, defer, grant exemptions from or delay implementation of any provision or requirement" of Obamacare that imposes a burden "to the maximum extent permitted by law," and to offer the states as much flexibility as possible in implementing healthcare programs.

2) Immigration

Trump made the biggest splash of his first week in office on Wednesday, when he signed two executive orders codifying two of his major campaign pledges: To build a wall at the southern border and to cut federal funding to "sanctuary" cities, which don't enforce federal immigration laws on undocumented immigrants.

On Friday he also put a four-month hold on allowing refugees into the United States and temporarily barred travelers from Syria and six other Muslim-majority countries, saying the moves would help protect Americans from terrorist attacks.

3) Supreme Court

Trump announced — via tweet — on Wednesday that he would reveal his pick for Supreme Court Justice during his second week in office, on Thursday.

4) Reducing regulations

The Trump Administration has issued two memoranda dealing with regulations so far, taking steps to fulfill the longtime Republican Party pledge to rollback burdensome regulations on small businesses and manufacturing.

Shortly after Trump was sworn in, White House Chief of Staff Reince Priebus issued a memorandum instructing all executive departments and agencies to freeze new or pending regulations. This is a largely standard move for a White House transition to a new party, and is meant to give the incoming administration time to review any new regulations — or halt the implementation of some policies enacted by the previous administration.

5) Expediting infrastructure projects

In a similar vein, Trump issued an order Tuesday declaring the administration's intent to "streamline and expedite … environmental reviews and approvals for all infrastructure projects," particularly those deemed as "high priority" for the country — like updating the nation's electric grid or critical bridges and highways.

6) Abortion

On Monday, Trump's third full day in office, he signed an executive order reinstating the "Mexico City Policy," first implemented under Republican President Ronald Reagan in 1984. It bars taxpayer dollars from being used to fund non-governmental organizations "providing counseling or referrals for abortion or advocating for access to abortion services in their country."

The move won plaudits from anti-abortion rights groups, but was largely unsurprising — while every Democratic president since Reagan has reversed the measure, every Republican president has reinstated it.

7) Voting Rights

During a meeting with Congressional leadership Monday night, Trump again repeated his debunked claim that 3 to 5 million votes were cast illegally, robbing him of an election win. After repeated questions from the media, he on Wednesday announced plans to do something about it.

8) Withdrawing from TPP

Trump made good on one of his major campaign promises Monday when he signed an order withdrawing the U.S. from the Trans-Pacific Partnership Trade Agreement negotiations. It directs the U.S. Trade Representative to instead "begin pursuing, wherever possible, bilateral trade negotiations to promote American industry, protect American workers, and raise American wages."

The order is largely symbolic, as the trade agreement hadn't been signed by the U.S. and was unlikely to be approved by Congress as it faced opposition from members of both parties. But it formalizes U.S. withdrawal from the agreement, essentially erasing it.

9) Federal hiring freeze

On Monday, Trump signed a memorandum telling agencies they can't fill vacant positions or create any new ones — excepting military personnel and critical public safety positions — and directing the Office of Management and Budget to formulate a plan to "reduce the size of the Federal Government's workforce through attrition."

10) Energy production

On Tuesday, Trump signed orders clearing roadblocks for two controversial oil pipelines: The Dakota Access pipeline, which would carry oil from North Dakota, through South Dakota and Iowa to be shipped out of Illinois, and the Keystone XL pipeline, which would bring oil from Canada to Nebraska.

What does it mean? 

Without getting into the merits/demerits of his social/cultural policies Trump may be moving too fast. Interesting article this week in Bloomberg by Margaret Carlson suggesting that the whirling dervish occupying the Oval Office knows the body politic is not designed to absorb so many actions taken so fast with so little thought.

She writes that: "Not Capitol Hill, not the press, not the new president’s critics or friends. And not, it would seem, President Enrique Pena Nieto of Mexico, who cancelled a much ballyhooed one-on-one with Trump that was supposed to be the opportunity to work out a payment plan for the wall along the border. That’s what happens when you can’t wait until you have a secretary of state. If there’s one message coming out of the Republican retreat in Philadelphia where Trump spoke Thursday afternoon, it’s slow down, you’re moving too fast." 

What concerns me most from an economic point of view is the proposed border wall and the idea to use a 20% tax on all Mexican imports to fund it. This measure would likely inflict economic damage on both sides of the border. 

About 40 percent of the content of Mexican exports to its northern neighbor actually originate in the U.S., according to a 2010 National Bureau of Economic Research working paper.

And roughly 5 million American jobs depend on trade with Mexico, according to Christopher Wilson of the Mexico Institute at the Woodrow Wilson International Center for Scholars. 

Furthermore, prices in the USA for consumer goods would surely rise further pinching the pockets of the "forgotten man and woman" who shop at Wal-Mart....


This week my social media/news feeds have been exploding with anger over the above list of changes/ There is no doubt that these are contentious issues with arguments for and against on either side but what is most concerning to me is the unwillingness of many to consider opposing viewpoints. 

We appear to have lost our ability to listen, consider and reason with those who hold opposing viewpoints. This is problematic as one of the hallmarks of a liberal democracy is debate. Where do we head as a society if no one is willing to sit down, face the facts and make an effort to consider (from the other's point of view) an idea that one does not espouse? 

Are we living in an age of contempt in which we deligitimize facts and opinions? Forget a "post truth" world. We may have moved to a "post-intelligence" world.... 

Thought of the Week


"The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. F. Scott Fitzgerald, "The Crack-Up", Esquire Magazine (February 1936).

Stories and Ideas of Interest


  • The stock market doesn’t really care who’s US president. The commander-in-chief has very little to do with the economy’s performance. Great piece from Ben Carlson who looks at historic data on stock market performance. 


  • Stock market participation is still quite low. The Dow hit 20,000 and half of America missed out. Back in April 2016, Gallup conducted its latest annual poll showing that just 52% of American adults owned stocks, via either individual issues, mutual funds, or self-directed 401(k) plans. This matched the lowest ownership level in Gallup’s 19-year tracking of this measure.


  • Warren Buffett says the US will do fine under Trump because we've got the 'secret sauce. "America works," the chairman and CEO of Berkshire Hathaway said. "I've said this before. It'll work wonderfully under Hillary Clinton, and I think it'll work fine under Donald Trump."


  • The super rich are preparing for the end of the world. Some think the end is near. “You just need so many things to actually ride out the apocalypse,” says former Facebook product manager Antonio García Martínez. 


  • Why the elites will always rule. Not exactly a politically correct title but this piece is a must read for anyone trying to make sense of our world and the power structures that have proliferated. History is the story of one elite replacing the other whether fox or lion. This is a very compelling account that transcends left and right, Republican and Democrat.


All the best for a productive week,

Logos LP

The Greatest Wealth Transfer In History Has Begun

Good Morning,

U.S. equities closed higher on Friday, posting weekly gains, as investors monitored retailers during Black Friday as the post-election rally moved forward. The three major indexes were up more than 1 percent for the week ripping to new record highs on optimism that President-elect Donald Trump's proposed policies will stimulate economic growth.

U.S. Treasury yields and the dollar have also risen sharply since the election, with the benchmark 10-year note yield skyrocketing above 2 percent and the greenback trading around levels not seen since 2003, putting euro/dollar parity within reach. Gold prices, in turn, have turned sharply lower, hitting nine-and-a-half month lows.

Also of interest this week was consumer confidence, which rose more than previously reported to a six-month high in November, showing Americans became more optimistic about their finances and the economy after Donald Trump won the presidential election.

Despite this encouraging news, the U.S. is still home to a working class suffering from stagnant incomes and declining job prospects—widespread struggles that helped elect Republican Donald Trump. The relative wealth of Americans in all age groups keeps falling, compared with previous decades.

Nevertheless, 1700 millionaires are minted every day in the US of A…

In fact, today, more than 8 million households have financial assets of $1 million or more, not including homes or luxury goods, according to Boston Consulting Group. Yet before your faith in upward mobility is renewed, consider this: The very oldest Americans hold a disproportionate chunk of all those trillions, and they’re handing it off to their already well-off kids in what is the largest generational transfer of wealth in history.

Fundamentally inheritance is an increasingly significant driver of wealth in America. Be sure to check out this very interesting read in Bloomberg this week exploring the wealth picture in America.

Interestingly, the top 3 factors cited by the richest investors are encouraging:

1)     Hard Work

2)     Education

3)     Smart investing (Does Index Investing Really Count?)

Thought of the Week


"All life demands struggle. Those who have everything given to them become lazy, selfish, and insensitive to the real values of life. The very striving and hard work that we so constantly try to avoid is the major building block in the person we are today.” –Pope Paul VI

Stories and Ideas of Interest


  • Self-control is a myth.  "There’s a strong assumption still that exerting self-control is beneficial…and we’re showing in the long term, it’s not.” Interesting piece here in Vox suggesting that willpower can’t be strengthened, so we should try to avoid situations that call for it…


  • The buybacks aren’t working. Here's a sign it's time for CEOs to stop spending on buybacks and start reinvesting in their business: an index tracking European share buybacks is underperforming the broader market. Time to think seriously about R&D…


  • Working for a big company is the new chic. When he started thinking about leaving Apple Inc. this year, Darren Haas briefly contemplated Uber Technologies Inc., where many friends worked. Instead, the cloud-computing engineer pursued an opportunity he considered more exciting: General Electric Co. Workers are now flocking to older and larger tech firms…Go figure.


  • Don’t just lower corporate tax rates. Abolish them. Enlightening piece in Bloomberg View arguing that corporate tax rates should be done away with altogether.



All the best for a productive week,

Logos LP

What So Many People Get Wrong About The White Working Class

Good Morning,

U.S. equities closed slightly lower on Friday, led by health care, as investors digested Federal Reserve officials' remarks on monetary policy and falling oil prices.
Entering Friday's session, the Dow, S&P 500 and Nasdaq composite were all within half a percent of their previous all-time highs. The Dow had reached a record intraday high of 18,934.05 on Monday — on the back of a sharp post-election rally — while the S&P last set a record high of 2,193.81 on Aug. 15.
Fed Chair Janet Yellen's testimony in Congress on Thursday all but assured the central bank would raise interest rates next month. According to the CME Group's FedWatch tool, market expectations for a rate hike in December were above 90 percent Friday morning.

13Fs came out this week and they shed some light on the incredible rotation we have seen post Trump from tech/utilities/REITS/consumer staples into financials and industrials. Why? Consumer staples and tech were the 2 largest sector weightings amongst the top 50 hedge funds. Easy come easy go on the return chasing band wagon….

Last bit about the election I promise. Read a great article this week in the Harvard Business review that outlines what so many people don’t get about the U.S. working class. As a broad theme the white working class (WWC) resents professionals but admires the rich.
Professional people are viewed as suspect and managers are college kids “who don’t know shit about how to do anything but are full of ideas about how I have to do my job”.
The WWC aspires to be independent and give their own orders and not have to take them from anybody else. Owning one’s own business — that’s the goal. That’s another part of Trump’s appeal.
Joan Williams writes that “Hillary Clinton, by contrast, epitomizes the dorky arrogance and smugness of the professional elite. The dorkiness: the pantsuits. The arrogance: the email server. The smugness: the basket of deplorables. Worse, her mere presence rubs it in that even women from her class can treat working-class men with disrespect. Look at how she condescends to Trump as unfit to hold the office of the presidency and dismisses his supporters as racist, sexist, homophobic, or xenophobic.”
Several other key points she makes are:
Understand that working class means middle class, not poor
Understand working-class resentment of the poor
Understand how class divisions have translated into geography
If you want to connect with white working-class voters, place economics at the center
(My favorite) Avoid the temptation to write off blue-collar resentment as racism
Defending this last one is bold yet perhaps one of the biggest risks facing America today is how out of touch the elite is with the rest of the country. This election has placed the spotlight on the gross amount of class cluelessness that exists today. As Joan indicates: “If we don’t take steps to bridge the class culture gap, when Trump proves unable to bring steel back to Youngstown, Ohio, the consequences could turn dangerous.”

Thought of the Week


" The state is nothing but an instrument of oppression of one class by another - no less so in a democratic republic than in a monarchy." -Friedrich Engels

Stories and Ideas of Interest


  • We just don’t want to face the brutal facts. Came across an interesting piece this week in the Guardian highlighting the “fact” that “post-truth” has been named the word of the year by Oxford Dictionaries. This adjective was popularized as both the US election and EU referendum unfolded to describe a situation ‘in which objective facts are less influential than appeals to emotion”. Despite the incredible increase in data are we in fact living in a “post truth” world?


  • But trust your gut. “Gut reactions” — subtle bodily sensations that result from risky behavior — have long been the stuff of financial market lore. Some successful stock market gurus, billionaire George Soros included, have claimed they pay attention to bodily pains and other sensations to gain valuable insight into how they should trade on the markets. A new paper published in Scientific Reports suggests some truth could be lurking behind these stories. Where can we find the delicate balance between reason and emotion?


  • Don’t fear AI. Humans and AI will be inextricably linked in less than a decade. “Symbiotic autonomy” will forever change the decision making process.


  • Short-term gain for long-term pain? That's the view of economists at Goldman Sachs Group Inc., who argue that while some of President-elect Donald Trump's proposals could boost U.S. economic growth in the near future, his other policies would offset those positive impacts over the long-run. Specifically higher inflation and unemployment?


  • Debt crisis? A group of online consumer loans that were packaged into bonds is going bad faster than lenders and bond underwriters had expected, the latest sign that some startups that aimed to revolutionize the banking industry underestimated the risk they were taking.


  • Renewables? A contrarian buying opportunity? Investors have been selling off companies that specialize in producing renewable energy. Bloomberg suggests that fears of a negative impact of Trump are really overblown. We would agree.


All the best for a productive week,

Logos LP

Is It A Bubble Or Not? Happy Thanksgiving!

Good Morning,

U.S. equities closed lower in choppy trade on Friday as Wall Street digested a weaker-than-expected employment report and kept an eye on falling oil prices. The September jobs report came in yesterday and the U.S. economy added 156,000 jobs last month and the unemployment rate ticked up to 5.0 percent. Economists surveyed by Reuters had expected 176,000 new jobs and the jobless rate to hold at 4.9 percent. The total was a decline from the upwardly revised 167,000 jobs in August (compared to the original number of 151,000).
If you drill down below the headline, did wages go up? Yes. Did hours go up? Yes. Did participation go up? Yes. That's what makes it fine. What would've made it great? A number above 200,000.
Our Take: A blah September jobs report lends no urgency for anything on the economy's to do list: There's no sign of an overheating economy that would justify a rate hike; no acceleration of construction hiring that would finally hint at a return to a normal pace of housing starts; no big wage gains that would give hope for renewed productivity gains. Just a stubbornly average report at a time when the economy is looking for a jolt of the exceptional
Nevertheless, despite the mediocre report, market expectations for a December rate hike stand above 60 percent following its release, according to the CME Group's FedWatch tool. Markets mirrored this rate hike expectation all week with yields rising, gold selling off and rate sensitive stocks getting hammered. We maintain that a small rate hike will occur in December. Consider your portfolio’s sensitivity to a hike but continue to think long term.
This week I’ve been thinking a lot about bubbles. It’s as if everyone I talk to has identified their bubble of choice that “no one” is paying enough attention to. I’ve talked a lot in the past about taking the temperature of the market but also of great importance is the distinction between a bubble and a cycle.  Where do we stand? Well according to various media sources we now have at least 16 bubbles on our hands:
A new real estate bubble
A bond bubble
A tech bubble
A VC bubble
A startup bubble
A stock bubble
A shale oil bubble
A healthcare bubble
A dollar bubble
A college tuition bubble
A social media bubble
A China bubble
A residential real estate bubble (Vancouver or Toronto Canada)
A "find happiness" bubble (See below)
One Economist recently gave up and just said “Everything’s a bubble.”
But before throwing in the towel slow down…Morgen Housel offers a very useful discussion about the difference between a bubble and a cycle which is one of the most fundamental and normal parts of how markets work.
Bubbles should be avoided, as you risk widespread permanent loss of capital. Cycles, by and large, shouldn’t, because all they imply is that you have to be patient and humble to earn long-term returns, which is by and large the path to successful investing.
Could a bubble simply exist if return prospects don’t improve after prices fall? Only when the asset class offers you no hope of return ever?
As Housel suggests: “If you find an asset whose price looks expensive and is probably going to fall, you likely haven’t found a bubble. You’ve found capitalism. Excesses will correct, recover, and life will go on.”
So over Thanksgiving weekend take some time to consider which one you are looking at: A bubble or cycle? And/Or reflect on all that has contributed to the person you are today. The things you have accomplished, the fears you have overcome, the laughter, joy and love you've felt. Focus on gratitude and enjoy the present moment finding contentment in the people and places that surround you.

Thank you all again deeply for your support and trust. We will continue to try our best to add value.


Thought of the Week

  "Gratitude is not only the greatest of virtues, but the parent of all others." -Marcus Tullius Cicero


Stories and Ideas of Interest


  • New housing rules in Canada Released by Ottawa are a big deal. They will likely raise funding costs for lendersand borrowing rates for consumers. Lenders will have to run stress tests on all new insured mortgages to ensure that borrowers can meet their debt obligations even if interest rates rise. But the biggest change is one that is still in the works: Finance Minister Bill Morneau said Ottawa will take a closer look at what is known as “lender risk-sharing” – which is the idea that the banks could have to pay a deductible on mortgage insurance provided by Canada Mortgage and Housing Corp. (CMHC) and its private sector competitors. Such a change would likely force banks to hold additional capital against mortgages, raising their funding costs. The banks would likely pass the new costs to consumers in the form of higher mortgage rates. Looks like our friend the millennial home buyer is getting priced out even further. Perhaps his best bet is to rent for life....Toronto Life Magazine explores...


  • Bloomberg thinks Canadian Assets are expensive. I must say it was easier for us to find value in Canada earlier this year than at present. Bloomberg runs through assets classes and argues Canadians didn’t get the memo about weak global growth. Coming into 2016, many global asset managers highlighted Canada as an attractive place to invest; and combined with the rally in resources, you have a market that’s outperforming S&P TSX up around 15% YTD. If you think Oil is still cheap today (questionable) and gold may continue to rally (very questionable), then I see no reason why Canadian stocks should begin underperforming in the short-term…but this year’s broad market performance may be an outlier…Not that this is anything new but some high profile short sellers are betting heavily against Canadian financials, pharmaceuticals and gaming companies…


  • It’s still possible to build a high growth technology business the old fashioned way. The NYT explores how under the radar, slowly and steadily, and without ever taking a dime in outside funding or spending more than it earned, MailChimp has been building a behemoth


  • How long can a human live? People who play golf could live five years longer than those who don’t according to new research from Scotland. Furthermore, according to new research in the journal Nature presented in the NYT, the longest humans can live is 115…Luckily other heavyweights in the field rejected the study’s findings calling it a “travesty”. Is the best hope for our species not to extend our life spans but instead to lengthen our years of healthy living?


  • Americans are obsessed with happiness. And it is making them miserable. Interesting piece written in VOX from the perspective of a Brit living in America: “It seems as though happiness in America has become the overachiever’s ultimate trophy. A modern trump card, it outranks professional achievement and social success, family, friendship, and even love. Its invocation deftly minimizes others’ achievements (“Well, I suppose she has the perfect job and a gorgeous husband, but is she really happy?”) and takes the shine off our own.” Is it working? As I’ve written before: the more people see happiness as a goal, the less happy they are. Excesses will correct, recover, and life will go on...


All the best for a productive week,

Logos LP