Market Cycles


Good Morning,

Bit behind on this July update but better late than never!

Stocks fell on Friday for the fourth straight day, capping off a volatile week for investors as rising trade fears and a tech sell-off led to broad weekly losses. The Nasdaq Composite fell 0.3 percent to 7,902.54, led by declines in Apple, Amazon and Alphabet. The tech-heavy index posted its fourth straight loss — its first since April — and is worst start to September since 2008.


The S&P 500 pulled back 0.2 percent to close at 2,871.68 as utilities and real estate both dropped more than 1 percent.


President Donald Trump, speaking from Air Force One, said Friday the U.S. is ready to slap tariffs on an additional $267 billion worth in Chinese goods. His remarks come after a deadline for comments regarding tariffs on another $200 billion in Chinese goods had passed last night.

"The $200 billion we're talking about could take place very soon, depending on what happens with them," Trump said. "I hate to say this, but behind that, there's another $267 billion ready to go on short notice if I want." (targeting a sum of goods equal to virtually all imports from China)

The selloff pummeling emerging market currencies shifted to stocks as contagion concerns weighed on risk assets. MSCI Inc.’s EM equities gauge entered a bear market on Sept. 6 and had its worst week since mid-August.


The fear also comes after the Wall Street Journal reported, citing U.S. officials, that the possibility of the U.S. and China reaching a trade deal are fading as the Trump administration tries to revamp the North America Free Trade Agreement (NAFTA). Meanwhile, Bloomberg News reports that the U.S. and Canada will likely end the week with no trade deal in place.


Wall Street was also under pressure after strong wage data stoked fears of tighter monetary policy in the U.S. Average hourly earnings rose 2.9 percent for the month on an annualized basis, marking the largest jump since 2009. The U.S. economy added 201,000 jobs in August, more than the expected increase of 191,000.


Treasury yields jumped to their highs of the session following the jobs report release, while the dollar also rose. The Fed has already raised rates twice this year and is largely expected to hike two more times before year-end.

Our Take

There is little doubt that the U.S. economy is in a boom. The Conference Board is reporting the highest levels of job satisfaction in more than a decade given a tight labor market — the ratio between the unemployment level and the number of job vacancies is at its lowest level in a half-century. A broader measure, the prime-age employment-to-population ratio, is back to 2006 levels. Meanwhile, real gross domestic product growth for the second quarter was just revised up to 4.2 percent. Corporate profits are rising strongly. And investment as a percentage of the economy is at about the level of the mid-2000s boom.


Wages are still lagging. But all other indicators show the U.S. economy performing as strongly as at any time since the mid-2000s — and possibly even since the late 1990s.


Why? A few reasons present themselves as outlined recently by Noah Smith:

  1. Demand Side Explanations:

    1. Low interest rates: lowered borrowing rates for corporations and mortgage borrowers, which tends to juice investment. Fiscal deficits provide an added boost to demand, and deficits have been rising as a result of President Donald Trump’s tax cuts. Typically pumping demand will eventually lead to rising inflation but this hasn’t happened yet.

    2. “Animal spirits” or “sentiment” as small business confidence is at record highs, and consumer/investor confidence also is very strong.

    3. Tail end of the long recovery from the Great Recession — consumers and businesses might finally be purchasing the houses and cars that they waited to buy when the recovery was still in doubt. Housing, traditionally the most important piece of business-cycle investment and consumption, is still looking weak, with housing starts below their 50-year average. But business investment might be experiencing the positive effects of stored-up demand.

  2. Supply Side Explanations:

    1. The Trump tax cuts removed distortions that held back business investment, and that fast growth — and the attendant low unemployment — is the result of the economy’s rapid shift to a higher level of efficiency.

    2. Technology: Information technology advances such as machine learning and cloud computing might be driving the investment boom — perhaps also spurring companies to invest in intangible assets such as brands and workers’ skills.


Which one is responsible? It is difficult to say but determining which are responsible matters as it can give insight into how the boom will end and how it can be prolonged. In our view all these factors have played a role, albeit certain ones have played a more crucial role during different stages in the bull market.  


At the current stage of the bull market we see evidence that the demand-side “animal spirits” or “sentiment” factor is doing a lot of the heavy lifting.


It should be remembered that although of late there has been a minor repricing of high multiple/risk assets, the trend is still firmly in place: investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.


Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.


That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.


Investors are currently keen on “new business models” and are willing to overlook losses. In fact, many are questioning whether “value investing” and classic investing principles even makes sense anymore. The market's euphoria for so-called "growth companies" has even made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.


As Howard Marks reminds us, in investing as in life, there are very few sure things. Very few things move in a straight line. There’s prograss and then there’s deterioration. We must remain attentive to cycles.


The process/cycle is typically the same: 1) the economy moves into a period of prosperity 2) providers of capital thrive, increasing their capital base 3) because bad news is scarce, the risks entailed in lending and investing seem to have shrunk 4) risk aversion disappears 5) financial institutions and investors move to expand their businesses - that is, to provide more capital 6) they compete for market share by lowering demanded returns (e.g. cutting interest rates), lowering credit standards, lowering prudence, disregarding the linkage between price and value, paying less attention to profits or disregarding them all together and providing more capital for a given transaction.


At the extreme, providers of capital finance borrowers and businesses (investments) that aren’t worthy of being financed. This leads to capital destruction -that is, to investment of capital in projects where the cost of capital exceeds the return on capital, and eventually to cases where there is no return of capital.


Is this time any different?


Chart(s) of the Month


JP Morgan shows us that holding cash for too long can be a dangerous proposition. 

Screen Shot 2018-09-08 at 4.03.25 PM.png

Are overall tech valuations overstretched or only certain segments?  Notice the absence of earnings in the dot com bubble years. Valuations do not appear stretched when put into perspective, prices appear to be in line with the underlying earnings picture. The NASDAQ-100’s price to forward earnings ratio is still a little below its longer run average of about 23x. 

Screen Shot 2018-09-08 at 8.25.56 PM.png


What of valuation? What of the relationship between price and value? For an investor (whether a “value” investor or not) price has to be the starting point regardless of where we are in the cycle and especially in the last innings. No asset is so good that it can’t become a bad investment if bought at too high a price.


As an example of the current “animal spirits” climate we should consider the following:


Cannabis : the thesis or “story” here is that cannabis, like alcohol, tobacco and other hedonistic instruments, has now achieved positive momentum with policymakers across the world. As such the fragmented industry will consolidate and a few early movers will reap the profits of this new multi-billion dollar industry. But just like investing in the nascent stages of many industries that in essence were revolutions from a status quo, speculation will initially replace prudent financial analysis of price relative to value.


As Easterly points out in a recent article Cronos' (CRON) current valuation is an outright manifestation of "extraordinary delusions" stemming from the madness of crowds.


Cronos trades at about 17.25 forward price to sales (TTM price to sales of 332.97 and TTM price to earnings of 874.69) compared to its peers. For some further clarity, highly valued SaaS stocks prized for their recurrent revenue stream and high gross margins seldom trade at 17.25 forward P/S ratio. The average P/S ratio for stocks in the software application industry is around 6.8, compared to 2.16 for the S&P 500.


Hence, why does an agricultural commodity producer trade at a higher valuation than Shopify and other?


In Deloitte's "A society in transition, an industry ready to bloom" 2018 cannabis report, they expect legal cannabis sales during 2019, the first full year post-legalization to be [CAD]$4.34 billion. This figure is likely inflated when compared against the results of other markets. Further, the study only surveyed a sample size of 1,500 adult Canadians, which is not significant enough to estimate the Cannabis purchase habit of millions of Canadians.


For some perspective, California, which is regarded as the most important Cannabis market on Earth realized sales of [USD]$339 million or [CAD]$444 million (at current spot USD/CAD) during the first two months post-legalization. Extrapolating this across a full year would infer total sales of [USD]$2.01 billion or [CAD]$2.7 billion. Sure there are other factors to consider like a larger Californian black market and a different set of regulations and taxes. However, the Californian market has also not been as stringent on marketing as Canada will be.


Assuming the Canadian market is at least on par with California, the author models the potential market using an optimistic CAGR of 23.54% from 2019 - 2023 which is more optimistic than some market reports. The author also models Cronos' revenue for the years from 2018 - 2022.


Cronos' current market valuation of [USD]$1.75 billion or [CAD]$2.29 billion is around 84.81% of the total Canadian legal cannabis market in FY2019. (And this does not take into account the fact that the total estimated legal cannabis sales [CAD] $4.34 billion number mentioned above represents a total retail sales projection and that will likely be shared between grower, distributor, retailer, and the government through taxes. Taxes will be large, perhaps even 30%. Retail will be handled by government in a few big provinces like BC -- yet the government will still take a retail margin cut. What will be left for growers could be as low as sub $4 CAD / gram.. half or less of that total [CAD] $4.34 billion number…


At a current market valuation of [CAD]$2.29 billion ($2.79 billion at time of writing) which is around 84.81% of the total estimated Canadian legal cannabis market in FY2019, has the fairness of Cronos’ price been considered? Or have people without disciplined consideration of valuation simply decided that they want to own something because the story is good, risk aversion is low and the future looks bright?


Overall, we see current valuation trends in certain growth stocks (cannabis, select tech.) (not to mention that the ratio of bearish option bets to bullish ones is waning as the S&P 500 keeps churning out records. That implies investors may be loading up on derivatives as way to make up for lost ground should 2018 deliver a year-end rally similar to last year’s, when stocks closed with a 6.1 percent fourth-quarter surge) to be evidence that the demand-side “animal spirits”/“sentiment” factor is doing a large portion of the heavy lifting to prolong the current bull market.

As such, we would advise caution before increasing exposure to these “loved” and therefore richly valued businesses. Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. For our portfolio, given where we are in the present cycle and overall market conditions we are abiding by the following maxim:

“The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price can only go one way: up.” -Howard Marks


Logos LP July 2018 Performance


July 2018 Return: -0.34%


2018 YTD (July) Return: 0.00%


Trailing Twelve Month Return: +12.79%


CAGR since inception March 26, 2014: +18.29%


Thought of the Month


"The polar opposite of conscientious value investing is mindlessly chasing bubbles, in which the relationship between price and value is totally ignored. All bubbles start with some nugget of truth: 1) Tulips are beautiful and rare 2) The internet is going to change the world 3) Real estate can keep up with inflation, and you can always live in a house.” -Howard Marks

Articles and Ideas of Interest


  • After Coltrane, there is nothing left to say. The saxophone virtuoso pushed jazz as far as it could go, and it’s been downhill ever since.            


  • These Fake Islands Could Spell Real Economic Trouble. Glitzy property projects and financial crises tend to go hand-in-hand.


  • U.S. Household wealth is experiencing an unsustainable bubble. Jesse Colombo suggests that Since the dark days of the Great Recession in 2009, America has experienced one of the most powerful household wealth booms in its history. Household wealth has ballooned by approximately $46 trillion or 83% to an all-time high of $100.8 trillion. While most people welcome and applaud a wealth boom like this, research suggests that it is actually another dangerous bubble that is similar to the U.S. housing bubble of the mid-2000s. In this piece, he explains why America's wealth boom is artificial and heading for a devastating bust.


  • Who needs democracy when you have data? Here’s how China rules using data, AI and internet surveillance.


  • How tourists are destroying the places they love. Travel is no longer a luxury good. Airlines like Ryanair and EasyJet have contributed to a form of mass tourism that has made local residents feel like foreigners in cities like Barcelona and Rome. The infrastructure is buckling under the pressure. Great 2 part expose suggesting that travel has almost become a human right yet it has become predatory - devouring all the beautiful places which drive it. Has nature itself come to be viewed as merely one more good to be consumed? ; Have we developed a shallow, modern need to present a life free from the tyranny of a nine-to-five office job in the tight frame of Instagram? No wonder you are not original or creative on instagram. Everyone on Instagram is living the same life.  


  • Peak Valley. The Bay Area’s primacy as a technology hub is on the wane. Don’t celebrate. Although capital is becoming more widely available to bright sparks everywhere yet unfortunately the Valley’s peak looks more like a warning that innovation everywhere is becoming harder.  



Our best wishes for a fulfilling month, 

Logos LP

When To Sell?


Good Morning,

Last week U.S. stocks  posted their first 2-week losing streak as the Treasury yield curve flattened further, raising concerns about economic growth while worries about tax reform percolated. The dollar dropped as the yen and gold gained.


The spread between two- and 10-year Treasury yields hit the tightest level in a decade. The greenback remained linked to political developments in Washington, where the Senate girded for negotiations on its version of tax reform.


Elsewhere, bitcoin hovered under $8000, emerging market shares headed for the highest close in six years and Tesla’s shares jumped after the company unveiled two new vehicles, including Semi truck. Trucking company J.B. Hunt said it has reserved "multiple" Semis.


The odds American firms will get a tax break improved Thursday after the House approved its version of the legislation. The Senate is still debating its own plan, trying to reduce the 10-year debt impact below $1.5 trillion. Adding to the discussion, Federal Reserve Bank of Dallas President Robert Kaplan said Friday the government’s debt-to-GDP is possibly at unsustainable levels.

Our Take

From most vantage points over the last year you've had an almost perfect backdrop for equities with an acceleration in nominal growth, earnings between 10%-15% globally and whatever you look at is pretty much in double digits. Nevertheless, last week investors in a choppy trade appeared to be trying to figure out whether benchmarks will continue to march to all-time highs on strong earnings and faster growth spurred by corporate tax cuts or if they will be pulled down amid lofty valuations, the flattest yield curve in a decade (which often signals an impending recession) and a selloff in junk bonds.


In our view the curve is likely reflecting the fact that the Fed will be raising interest rates at the same time that there is virtually no inflation. The short end has risen on Fed rate hike prospects, the long end is not reflecting the potential for growth. Key word “potential”.


On the other hand, in addition to a flattening of the yield curve and a selloff in junk bonds we’ve noticed a few other interesting data points:


-Restaurant sales growth has been slowing at a pace usually seen in a much weaker or even recessionary economy.

-Amid marijuana boom, costs leave analysts dazed and confused. Producer margins could start to shrink as provinces start to purchase pot wholesale. What the price drop will do to margins is nebulous because there isn’t an industry standard for reporting production costs.

-Appetite for risk has increased among money managers to a new high, according to the latest fund manager survey by Bank of America Merrill Lynch (BoAML)

-America’s ‘retail apocalypse” is really just beginning. And this comes when there’s sky-high consumer confidence, unemployment is historically low and the U.S. economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis. That’s caused an increase in the number of delinquent loan payments by malls and shopping centers.The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. The ripple effect could also be a direct hit to the industry that is the largest employer of Americans at the low end of the income scale. The most recent government statistics show that salespeople and cashiers in the industry total 8 million.

-Millionaire bankers feel sorry for struggling millennials. Credit Suisse’s Global Wealth Report says those who came of age after the turn of the century have had a “run of bad luck,” and that low wealth tend to be disproportionately found among the younger age groups.

-Firms that burn $1B a year are sexy but statistically doomed. Five outliers — Chesapeake Energy, Netflix, Nextera Energy, Tesla and Uber — have collectively lost $100B in the past decade. Firms that burn piles of cash are often lionised in an era when growth is sluggish and few companies reinvest all their profits. But losing a billion dollars or more a year is a wildly risky affair and the odds are that such businesses will fall flat.

-Artemis Capital Management is comparing the current market state to the Ouroboros – the ancient symbol of a snake consuming its own body.


Last week, given the significant move higher in one of our holdings (Luxoft Holding Inc: LXFT) which many had left for dead after its last earnings report, I reflected on the ever so difficult question of when to sell. This year at Logos LP we’ve faced this question on both the upside and the downside as certain holdings have skyrocketed while others have slipped.


Overall, the question of when to sell is typically conceptualized as a complicated one. Do you use a simple trigger? Or like Warren Buffett do you only buy certain high quality businesses at such attractive prices that you never have to sell?


As markets continue to edge higher this question becomes all the more relevant as high valuations reduce our margin for error.


For us, the best approach to selling is buying well enough that you don’t really have to follow the stock.


After all, following the stock market too closely is bad for your returns. Most underestimate just how bad it is. Equity investing is mostly characterized by a great irony: if you knew nothing about the stock market and followed little to no financial news, you would probably make a very handsome return on your investment, but if you tried to be a little bit smarter and overloaded on commentary from experienced managers and analysts you probably would perform poorly.


That fact is apparent in the stats, where the average investor earns a return that is less than 1/3 of what they would have earned if they knew nothing and blindly invested in the stock market.


I’ve quoted these stats in other letters but I will do it again: The fact that the stock market rises in 76% of all years, that it gains an average of 7.5% per year and that annual falls greater than 20% occur less than 5% of the time, are ignored in decision making. Since 1980 the S&P has suffered an annual loss of less than 3% an overwhelming 84% of the time. The mind interprets every 10% correction as the beginning of something much worse, even though a 10% fall is a typical, annual occurrence during bull markets.


In a recent blog post on The Fat Pitch, we are reminded that the human mind has a tendency to assess risk based on prominent events that are easily remembered. The 1987 crash, the tech bubble, the financial crisis and the flash crash in 2010 are all events that are easily recalled. The mind automatically assigns a high probability to prominent (but rare) events. It ignores the more important "base rate" probability that better informs decisions.


Thus, when deciding when to sell, keep in mind the “base rate”: although 10% market falls are a typical annual event, the stock market finishes better than that an overwhelming 87% of the time.


Thus, assuming you have bought well or even “relatively well” absent material and significant changes to your evaluation of the business, the decision to sell should typically be obvious. The long-term holder of an asset reaps the advantages lower tax costs, transaction costs, and the significant long-term compounding benefits offered to those who understand the principle of “base rate” probabilities.

Logos LP October Performance

October 2017 Return: +3.86%


2017 YTD (October) Return: +20.03%


Trailing Twelve Month Return: +24.77%

CAGR since inception March 26, 2014: +18.83%


Thought of the Week


"The place in which I'll fit will not exist until I make it." -James Baldwin

Articles and Ideas of Interest


  • The Future of Online Dating Is Unsexy and Brutally Effective. Dating apps promise to connect us with people we’re supposed to be with—momentarily, or more—allegedly better than we know ourselves. Sometimes it works out, sometimes it doesn’t. But as machine learning algorithms become more accurate and accessible than ever, dating companies will be able to learn more precisely who we are and who we “should” go on dates with. How we date online is about to change. The future is brutal and we’re halfway there.


  • Big data meets Big Brother as China moves to rate its citizens. The Chinese government plans to launch its Social Credit System in 2020. The aim? To judge the trustworthiness – or otherwise – of its 1.3 billion residents. I wonder if North Americans would be into this?


  • Are we on the verge of a new Golden Age? History doesn’t exactly repeat itself, but it does run in cycles. One of the most robust theories of such cycles was articulated by economic historian Carlota Perez, in her influential book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (Edward Elgar, 2002). It suggests that humanity can get through the current period of upheaval and economic malaise and enter a new “golden age” of broad economic growth, if the world’s key decision makers act in concert to help foster one. This may seem far-fetched, but it’s happened four times before. We are in the midst of the fifth great surge (as Perez calls them) of technological and economic change since the Industrial Revolution.


  • The upside of being ruled by the five tech giants. The tech giants are too big. But what if that’s not so bad? For a year and a half — and more urgently for much of the last month — there have been warnings about the growing economic, social and political power held by the five largest American tech companies: Apple, Amazon, Google, Facebook and Microsoft. But another argument suggests the opposite — that it’s better to be ruled by a handful of responsive companies capable of bowing to political and legal pressure. The NYT suggests the 3 best arguments on the bright side: 1) They can be governed 2) They hate each other’s guts 3) They are American grown.


  • Wall Street’s invasion of the legal weed market. Fascinating account of the race to become the Goldman Sachs of ganja and the Blackstone of bongs.


  • FAANG SCHMAANG: Don’t Blame the Over-valuation of the S&P Solely on Information Technology. A small group of technology stocks have recently delivered stellar returns. Facebook, Apple, Amazon, Netflix, and Alphabet (Google), the so-called “FAANG” stocks, are up 36% on average year to date through September. This superlative performance, in such a narrow group of large cap names, has led many to raise questions about the current valuation of the S&P 500, its sector composition, and comparisons to other markets. Interesting report from GMO suggesting that the higher weight in the relatively expensive IT sector is driving some of the expensiveness of the S&P 500, but this does not fully explain the bulk of its high absolute and relative valuation level.


Our best wishes for a fulfilling week, 

Logos LP

The Most Precious Resource Of Our Era: Data

Good Morning,

U.S. equities closed mostly lower on Friday as investors digested a tough week for retailers as well as mixed economic data.


Several retailers, including Macy's and Nordstrom, saw their stocks tank this week after reporting weaker-than-expected quarterly results, putting the sector under pressure.

The dollar fell while Treasuries rallied after tepid data on retail sales and inflation in the U.S. economy rekindled concern that growth won’t accelerate to levels economists project.


Consumer prices rebounded last month, though at a slower pace than expected, while retail sales advanced after an unexpected drop in March. That was enough to support the case for Federal Reserve tightening in June, though not enough to push stocks higher or dislocate bonds. Investors cast a wary eye on Washington, where President Donald Trump escalated his war with fired FBI director James Comey at the same time his cabinet attempted to move forward on trade and regulatory reforms.

While that was a slowdown from March's 2.4 percent increase, the year-on-year gain in the CPI was still larger than the 1.7 percent average annual increase over the past 10 years.


Overall markets were pretty quiet this week as the CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 10 earlier this week, raising concerns about complacency in the market.


In addition, with valuations at record levels many investors and commentators are still actively seeking to identify the next “boogeyman” that will tank markets.


Our Take

In light of fears surrounding the low VIX reading in addition to bearish sentiment I want to highlight two things:


  1. Since September 2001, the S&P has secured 311% of its gains when volatility is as low as it is now.

  2. The first step of a corporate earnings rebound is now in the books with a 13%+ increase in year over year profits being reported in Q1.


Moving to the political front, I’m tired of the attention this man continuously garners, but Donald Trump’s dismissal of FBI Director James Comey on Tuesday merits attention for all the wrong reasons. This is the third time he’s fired someone involved in an investigation of him or his associates.


The bureau has been probing Russian involvement in the U.S. election and possible involvement of Trump associates since the summer. Earlier, former acting U.S. Attorney General Sally Yates was dismissed after she refused to defend Trump’s first travel ban. And former Manhattan U.S. Attorney Preet Bharara was initially asked to stay on in his role before being fired in March.


Bloomberg’s helpful graphic shows how, in each of these cases, the justification for dismissal was inconsistent with prior actions, or immediately followed events related to investigations.


How can we interpret this dismissal? As Timothy L. O’Brien for Bloomberg View opines: self-preservation. There is no point trying to analyze Trump's motives and actions as rational and long-term oriented.  He clearly doesn’t care about policy or process. So searching for "strategy" or "deal-making prowess" in the president is usually a “fool's errand”.


What drives Trump today, and what has always driven him, are twin forces: self-aggrandizement and self-preservation. Most of his public actions can be understood as a reflection of one or both of those needs.


Comey’s firing was a manifestation of the second force: self-preservation. He came for the FBI, what’s next? The rule of law? Nevertheless, while unnerving for world leaders, citizens and investors, at the end of the day the firing is unlikely to lead to previously unforeseen problems in enacting health care and tax reform.


On a more positive note, the election of Emmanuel Macron in France is a clear repudiation of populism as represented by Marine Le Pen. This is a remarkable accomplishment at 39 years old. Macron has managed to triumph over the two parties that have dominated the presidency since 1958 “potentially” heralding in a new era of forward thinking politics.


I say “potentially” as now comes the hard part: turning his political movement into a vehicle capable of winning a majority, or at least garnering enough seats in parliament to govern or form a coalition. We predict that he will win a majority.



More and more buzz is being generated about those who control the most precious resource of our era: data. Like the oil majors of days past when oil was the most precious resource on the planet, the wise are turning their gaze to the giants that deal in data, the oil of the digital era.


And so they should.


These behemoths: Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft- look to be unstoppable. They are (unsurprisingly) the most valuable firms in the world the likes of which even Warren Buffett and Mark Cuban Marvel over. Buffett this week went so far as to say that he was “dumb” not have have recognized their brilliance sooner and Marc Cuban stated that these companies are still undervalued. I would agree.


Few would wish to live without the products/services of any of these companies which underpin both our personal and professional lives. On their face these companies do not appear to transgress antitrust rules yet their control of our data gives them tremendous power.


As data proliferates, those who control it are better able to compete by developing better products, services and experiences thereby creating an even stronger protective moat.


Furthermore as the Economist points out, the possibility of these incumbents being blindsided by a startup in a garage in data age is becoming increasingly slim. They explain that “The giants’ surveillance systems span the entire economy: Google can see what people search for, Facebook what they share, Amazon what they buy. They own app stores and operating systems, and rent out computing power to startups. They have a “God’s eye view” of activities in their own markets and beyond. They can see when a new product or service gains traction, allowing them to copy it or simply buy the upstart before it becomes too great a threat.”


A current and obvious example is Snapchat. If the business does not collapse under its own unprofitability, Facebook will continue to bleed it out by successfully mirroring its most attractive features.


Interestingly, The Economist suggests that antitrust authorities should move into the 21st century by not considering size as the deciding factor in a merger but rather take into account the size of a firm’s “data assets” when assessing the impact of deals. They also suggest that regulators could loosen the grip that providers of online services have over data and give more control to those who supply them with the data aka: consumers. They prescribe more transparency and more data sharing.


These are novel ideas but highly unlikely to be implemented absent significant public outrage. Will that public outrage be forthcoming? I think not.


Perhaps the most underappreciated fact of internet-age capitalism is that we are all in the inescapable clutch of these companies and we like it that way.


We are already living in a world in which our own human “feelings” are no longer the best algorithms in the world. We are developing superior algorithms which use unprecedented computing power and giant databases. The algorithms of these 5 giants not only know exactly how you feel, they also know a million other things you hardly suspect. When a non-human algorithms knows us better than we know ourselves we are likely to stop listening to our “feelings” and defer decision making to these external algorithms instead. I would argue that this is already happening and we adore it. We are coddled by our conveniences, entertained and comforted by our personal echo chambers of self-importance. 


Be honest, if some anti-tech dictator forced you to drop all five companies, how would you do so? In what order? What would your life look like? Strip each away and take a moment to look at your life and how it would change. Is it one you yearn to return to? I doubt it. 


Power has shifted. As both the volume and speed of data increase, classic institutions like elections, parties and parliaments might simply become obsolete - not because they are corrupt but simply because they don’t process data fast enough.


By the time the cumbersome government bureaucracy makes up its mind about regulating data or the big 5 for that matter (it can’t even pin down immigration, tax, healthcare, and trade reform) the internet/digital world will have morphed ten times. As Yuval Harari states: “The government tortoise cannot keep up with the technological hare.”


Thus, it should come as no surprise that In March, Trump’s Treasury secretary, Steve Mnuchin, said the problem of job displacement by robots is “not even on our radar screen” since it will only come “in 50 to 100 more years.” This is a government completely out of touch. The big 5 will continue their supreme control of today’s most powerful resource: data.

*(The above is inspired from a conference I am giving this weekend at MENSA about the societal effects of AI and emerging technologies. Contact me if you wish to see the slides)


Logos LP April Performance

April 2017 Return: 4.57%

2017 YTD (April) Return: 18.98%

Trailing Twelve Month Return: 38.16%

Annualized Return Since Inception March 26, 2014: 27.06%

Cumulative Return Since Inception March 26, 2014: 85.70%


Thought of the Week

"What will happen to society, politics and daily life when non-conscious but highly intelligent algorithms know us better than we know ourselves?- Yuval Harari


Articles and Ideas of Interest


  • Populism is great for stock returns. If the last two decades of anti-establishment rule are any guide, the world may be on the brink of some monster stock rallies as it takes a turn toward populism. A look at 10 of the 21st century’s most recognized populist leaders shows that in the three years after their election, local equities soared an average of 155 percent in dollar terms. And the rallies often continued as long as a decade after the vote.


  • Why you should have (at least) two careers. It’s not uncommon to meet a lawyer who’d like to work in renewable energy, or an app developer who’d like to write a novel, or an editor who fantasizes about becoming a landscape designer. Maybe you also dream about switching to a career that’s drastically different from your current job. But in my experience, it’s rare for such people to actually make the leap. The costs of switching seem too high, and the possibility of success seems too remote. Harvard Business Review suggests that the answer isn’t to plug away in your current job, unfulfilled and slowly burning out. I think the answer is to do both. Two careers are better than one. And by committing to two careers, you will produce benefits for both.


  • There’s no Canadian crisis in sight despite downgrade hitting assets. Moody’s downgrade of Canada’s biggest banks beat down assets in a market already rattled by woes of mortgage lender Home Capital Group Inc. Yet analysts say this isn’t evidence of an impending crisis. We would agree. Sentiment will help to cool an overheated housing market but do not expect any kind of 2007 style housing bust.


  • How homeownership became the engine of American inequality. Interesting piece in the NY Times looking at the perverse effects of the mortgage interest deduction (MID). Important in light of the current real estate situation in Toronto. Poverty and homelessness are political creations. Their amelioration is within American grasp and budget. But those Americans most likely to vote and contribute to political campaigns are least likely to support (MID) reform — either because it wouldn’t affect their lives or because it would, by asking them to take less so that millions of Americans could be given the opportunity to climb out of poverty.


  • A roadmap to investing for the next 100 years. The University of California looks at where we have been and how we can invest for the long-term. What will work: Less is more, risk rules, concentrate, creativity pays, build knowledge, team up,


Our best wishes for a fulfilling week, 

Logos LP