happiness

These Halcyon Days

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Good Morning,
 

Stocks closed lower on Friday after it was reported that trade talks between China and the U.S. had stalled and tit-for-tat tariffs soured the process. The late-day sell-off underscored the fragile mood in financial markets destabilized by concerns that the escalating trade war will undermine global growth.

President Donald Trump took steps toward calming nerves by postponing any tariffs on Japanese and European cars, while agreeing to end levies on Canadian steel and aluminum imports. But the status of talks with China remained unclear as investors headed into the weekend.

It was also the fourth straight weekly drop for the Dow.

Earlier this week, under the banner of a threat to the “national security” of the U.S., the administration made it harder for U.S. companies to do business with Huawei, a giant telecommunications company in China. U.S. firms that want to do business with Huawei must now have a license.

On the positive side, U.S. consumer confidence sentiment gauge reached a 15-year high with stocks near records and A Wells Fargo/Gallup survey found small business confidence rebounded strongly in the second quarter, matching a record, as current conditions posted a new high and recession concerns diminished. Top worries were attracting customers and new business, followed by hiring and retaining staff.


Our Take


Take a deep breath, these are halcyon days. Enjoy. The data coming out of the U.S. is for the most part still supportive of the view that things are pretty good (For a nice overview see here). Let's remember that the S&P 500 is still up about 14% YTD.

With stocks struggling to find direction amid heightened volatility over increased tariffs and threats of new ones as the White House and China battle over trade, many investors are overreacting and trading headline noise. *(Interestingly Trump’s China fight/tariffs has enjoyed broad support from American business, the Democrats and the Republicans)

They would be better served if they recalibrated their expectations on the outcome and timing of any future agreement on the China/U.S. tariff issue.
 

We’ve heard murmings that this is a Trump powerplay: a mastery of the art of timing. A sniffing out of the right moment to strike a deal with China to save the day just as Americans head to the polls. Vanquishing a saviour who has adroitly played on what voters hold dear and what they fear would certainly be a difficult task for the Democrats...

The above narrative may or may not be accurate but regardless, to expect a quick deal is to completely misunderstand the deep differences in the two countries economic models (state capitalism vs. free-market capitalism). These differences ensure that their trading relations will likely be unstable for years to come.

It should be remembered that the Chinese government allocates capital through a state-run banking system with $38trn of assets. Attempts to bind China by requiring it to enact market-friendly legislation are unlikely to work given that the Communist Party is above the law.

These are issues that have been around for decades. Stable trade relations between countries require them to have much in common such as how commerce should work, what role the state should have and a commitment to the enforcement of rules. Look no further than the (for the most part successful) renegotiation of NAFTA (Mexico, USA, Canada).

Compounding the friction between these competing economic visions is that fact that many in the U.S. are suffering from a lack of self-confidence (“bullying behaviour”) as they witness China’s rise.

The problem with this administration's heavy handed approach is that it has made it difficult for China’s leadership to frame the trade spat domestically as anything other than an effort to undermine China’s rise. The shift toward a nationalist tone coincides with Beijing’s hardened trade negotiating position.

The problem is that an intensified conflict over trade and nationalism that results in harm to U.S. interests will make China less appealing to foreign investors, something Beijing can ill afford at a time when its economy is already slowing. Moreover, previous protests have shown that promoting nationalism can boomerang on the Chinese state and lead to unwanted social disruptions.

As such, the probability of some kind of a resolution is high.

For the investor, it is important to come to terms with any pervasive “fear” of “losing money” and  corresponding unwillingness to take a long-term view. Making rash decisions each time there is a change in the short-term trend due to a headline is a recipe for the investor to realize low returns on capital or worse: no return on capital.


Musings


This month we were featured/interviewed by two wonderful organizations.

ValueWalk: https://valuewalkpremium.com/2019/05/eter-mantas-and-matthew-castel-general-partners-of-logos-lp-talk-small-cap-investing/

MOI Global: https://moiglobal.com/peter-mantas-2019/

Only a short note this week on portfolio concentration. This month we fielded several questions regarding the concentration of our portfolio and thought it may be useful to explain our view that concentration as a strategy is more attractive than diversification.

Why?

  1. Better information increases the probability of superior returns, so a concentrated fund allows the investor to conduct thorough research and understand the intricacies of the business in order to take advantage of mispricings in the market. Instead, lack of concentration leads to making investment decisions based on superficial reasons or worse: emotion.

  2. If the target range of holdings is narrow, the investor is setting a higher hurdle rate for investment quality and return. Investors can be more discriminating, avoiding stocks or sectors that are not high quality and focus on a smaller group of companies that meet their strict metrics.

  3. There is also the issue of cost. With low to no-cost ETFs, there is simply no justification for an active investor/manager to construct a portfolio with a large number of holdings that mimics the benchmark. Better to own the benchmark in a low cost way.



Charts of the Month


According to a new survey by Charles Schwab, almost half of millennials (49%) say their spending habits are driven by their friends bragging about their purchases on social media vs. around one-third of Americans in general. link

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Tech bubble all over again?

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Logos LP April 2019 Performance
 


April 2019 Return: 10.08%
 

2019 YTD (April) Return: 23.87%
 

Trailing Twelve Month Return: 6.60%
 

Compound Annual Growth Rate (CAGR) since inception March 26, 2014:+15.58%


 

Thought of the Month

"Knowledge is learning something new every day. Wisdom is letting go of something every day.”-Zen Proverb


Articles and Ideas of Interest 

 

  • Why we’ll never be happy again. Ben Carlson suggests that there are two things people need to understand about humanity:(1) Things are unquestionably getting better over time. (2) People assume things are unquestionably getting worse over time. Is there a silver lining?

 

  • Inflated credit scores leave investors in the dark on real risks. Consumer credit scores have been artificially inflated over the past decade and are masking the real danger the riskiest borrowers pose to hundreds of billions of dollars of debt. That’s the alarm bell being rung by analysts and economists at both Goldman Sachs Group Inc. and Moody’s Analytics, and supported by Federal Reserve research, who say the steady rise of credit scores as the economy expanded over the past decade has led to “grade inflation.”

 

  • What makes a great business? Great article by Travis Wiedower regarding what makes a great business. In summary, there’s no getting around that businesses have to invest capital at high rates of return to be successful. To do so, they probably need several strong competitive advantages that keep potential competitors away. Finally, organic growth of new products usually outperforms other types of growth, especially large acquisitions. Those are the base rates of what makes a great business.

 

  • Putting your phone down may help you live longer. By raising levels of the stress-related hormone cortisol, our phone time may also be threatening our long-term health.

 

  • If this is a tech bubble in stocks, it’s the expansionary phase. Is this the tech bubble part two? It’s fair to ask, given how big that index is getting versus the rest of the market. At about 36 percent of the S&P 500, it’s creeping up on 1999-style dominance. Arguing against the comparison is the share of overall earnings its companies generate. Going by the quarter they just reported, it’s four times as much as 20 years ago. 

 

  • The Age of the influencer has peaked. It’s time for the slacker to rise again. It’s hard to remember a time when scrolling through Instagram was anything but a thoroughly exhausting experience. Where once the social network was basically lunch and sunsets, it’s now a parade of strategically-crafted life updates, career achievements, and public vows to spend less time online (usually made by people who earn money from social media)—all framed with the carefully selected language of a press release. Everyone is striving, so very hard- #nevernotworking. And great for them....But sometimes one might pine for a less aspirational time, when the cool kids were smoking weed, eating junk food, and… you know, just chillin’. Quartzy suggests that the slackers are back…

 

  • Getting rich vs. Staying rich. Fantastic article by Morgan Housel in which he explores the following pattern: Getting rich can be the biggest impediment to staying rich. It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time. There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.

 

  • Private equity’s allure poses big risks for the stock market and its investors in the next recession. Private equity is becoming the go-to for active investors — a trend which AllianceBernstein expects to continue for the next decade. The shift, which is well underway, could have implications for the stock market and its investors, especially in a recession. “It throws a spotlight on the resilience of the liquidity of public markets and even questions the point of a public stock market,” Bernstein senior analyst Inigo Fraser-Jenkins says. No wonder Buffett has also sounded the alarm suggesting that private equity returns have been inflated and bondholder covenants have “really deteriorated”.

 

  • Is CBD the cure-all it’s touted to be? The cannabis derivative is being tested as a treatment for everything from brain cancer to opioid addiction to autism-spectrum disorders. Whether it can live up to the hype is still an open question, writes Moises Velasquez-Manoff in the New York Times Magazine. Meanwhile Americans can expect to bombarded by ever more CBD-infused products as Green Growth Brands Inc. is partnering with Abercrombie & Fitch Co. to sell its CBD-infused bath bonds and other body care products in a limited number of stores.


Our best wishes for a fulfilling May,

Logos LP

Everything Has Been Done Before

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Good Morning,
 

U.S. stocks rocketed higher on Friday, seeing the Nasdaq composite hit a new record, after February jobs growth far exceeded expectations.

 

The Dow Jones industrial average rose 440.53 points to close at 25,335.74, with Goldman Sachs among the biggest contributors of gains to the index. The 30-stock index also closed above its 50-day moving average, a key technical level.

 

The S&P 500 gained 1.7 percent to end at 2,786.57, with financials as the best-performing sector. It also closed above its 50-day moving average.

 

The jobs report which came out Friday was nothing short of extraordinary. The U.S. economy added 313,000 jobs in February, according to the Bureau of Labor Statistics. Economists polled by Reuters expected a gain of 200,000.

 

Wages, meanwhile, grew less than expected, rising 2.6 percent on an annualized basis. Stronger-than-expected wage growth helped spark a market correction in the previous month.


 

Our Take
 

The jobs report was impressive. For all that can be said about Trump’s unconventional decision making (his big deficits may actually make sense by spurring productivity and his “tariffs” may in fact be good for free trade) this report confirmed the underlying strength of the economy, and also diminished some of those inflationary concerns and the potential that there could be more than three rate hikes this year.

 

Many question how you can create this many jobs and not have wages go up more but we maintain that this phenomenon is due to a unique interplay of several factors: demographics, labour force participation and technology.

 

The basic formula is as follows: as labor becomes more scarce based on demographics, it constrains supply, triggering inflation. But labor scarcity, in turn, should speed the adoption of automation and trigger an investment boom. Automation investments are likely to generate supply growth just as demographics and investment both spur demand growth, creating a reasonable balance (despite rising inequality). Once the investment boom ends, however, the negative effects of automation will become more visible—namely, high levels of unemployment, wage suppression and slowing demand.
 

We may have progressed further along this matrix than some may think. Regardless, we are a long ways from the sort of wage inflation of the 1990s . . .

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Musings


I shared an interesting chart in the Economist with some friends this week which sparked a spirited discussion:

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The debate focused on whether or not such historical data offers the investor anything of value. Certain friends suggested that the world in 1900 was vastly different than the world today and thus such data was of limited use.

 

What struck me most about the discussion wasn’t the comparison between what the world looks like today vs. what it looked like over 100 years ago, it was the ease with which we are able to overlook history in an effort to justify the perceived novelty and uniqueness of whatever appears to be relevant in the moment.

 

Think cannabis, blockchain, bitcoin, AI, cryptocurrency and whatever else is hot right now. This isn’t to say that these “new” things aren’t relevant.

 

But it is to say that broadly speaking everything has been done before as human nature hasn’t changed all that much. As Morgan Housel reminds us: The scenes change but the behaviours and outcomes don’t.

 

"Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.”

 

The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying today. The details were different, but they tried to outwit entrenched competition. They swung from optimism to pessimism at the worst times. They battled unsuccessfully against reversion to the mean.

 

They learned that popular things seem safe because so many people are involved, but they’re most dangerous because they’re most competitive.

 

Same stuff that guides today, and will guide tomorrow. History is abused when specific events are used as a guide to the future. It’s way more useful as a benchmark for how people react to risk and incentives, which is pretty stable over time.”


 

Logos LP February 2018 Performance



February 2018 Return: -3.75%

2018 YTD (February) Return: -2.24%

Trailing Twelve Month Return: +21.02%

CAGR since inception March 26, 2014: +19.72%


 

Thought of the Month


 

"The way to outperform over the long haul typically isn’t done by being the top performer in your category every single year. That’s an unrealistic goal. A better approach is to simply avoid making any huge errors and trying to be more consistent. The top performers garner the headlines in the short-term but those headlines work both ways. The top performers over the long-term understand that’s not how you stay in the game over the long haul.” -Ben Carlson




Articles and Ideas of Interest
 

  • When value goes global. Interesting piece in Research Affiliates magazine suggesting that the value premium that is traditionally associated with stock selection and market timing works just as well when applied globally across major asset classes. The alternative value portfolios studied are typically uncorrelated with their underlying asset classes, traditional value approaches, and each other, thereby offering meaningful diversification benefits alongside attractive excess return potential. The success of global value portfolios hinges on their design, which allows investors to gain better exposure to desired risk premia not easily available when investing in a single market.

           

  • Rational Irrational Exuberance. We tend to be uncomfortable with the notion that an economy’s fundamentals do not determine its asset prices, so we look for causal links between the two. But needing or wanting those links does not make them valid or true.

 

  • If you’re so smart, why aren’t you rich? Turns out it’s just chance. The most successful people are not the most talented, just the luckiest, a new computer model of wealth creation confirms. Taking that into account can maximize return on many kinds of investment.

 

  • Why doesn’t more money make us happy? Dan Gilbert, social psychologist and author of Stumbling on Happiness showed that people who recently became paraplegics are just as happy one year later as people who won the lottery. Relative to where we thought our happiness would be after winning the lottery, we adjust downward, and relative to where we thought our happiness would be after losing our legs, we adjust upward….Interesting piece from Michael Batnick that suggests that this concept makes sense in theory, but not in practice. Like many things in life, it’s an idea that is hard to truly believe until we experience it for ourselves.

 

  • The town that has found a potent cure for illness- community. What a new study appears to show is that when isolated people who have health problems are supported by community groups and volunteers, the number of emergency admissions to hospital falls spectacularly. While across the whole of Somerset emergency hospital admissions rose by 29% during the three years of the study, in Frome they fell by 17%. Julian Abel, a consultant physician in palliative care and lead author of the draft paper, remarks: “No other interventions on record have reduced emergency admissions across a population.” No wonder what causes depression most of all is a lack of what we need to be happy, including the need to belong in a group, the need to be valued by other people, the need to feel like we’re good at something, and the need to feel like our future is secure.

 

  • Could capitalism without growth build a more stable economy?New research that suggests – that a post-growth economy could actually be more stable and even bring higher wages. It begins with an acceptance that capitalism is unstable and prone to crisis even during a period of strong and stable growth – as the great financial crash of 2007-08 demonstrated.

 

  • Is it time to say it? That retirement is dead? What will take its place? The numbers are startling: Thirty-four percent of workers have no savings whatsoever; another 35 percent have less than $1,000; of the remaining 31 percent, less than half have more than $10,000. Among older workers between 50 and 55, the median savings is $8,000. And this is total savings, including retirement accounts. Contrast that with the fact that experts say you should have eight times your preretirement annual salary saved in order to retire by 65 and continue a reasonable quality of life, commensurate with what you have become accustomed to.  

 

  • Blockchain is meaningless. People keep saying that word but does it really mean?

 

Our best wishes for a fulfilling month, 

Logos LP

Market Meltdown: Correction or Destruction?

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Good Morning,
 

Oh how fast things can change. After a big January, U.S. equities ended their worst week in two years as rate-hike fears pushed markets into a correction.

 

The recent turmoil in equities began last Friday, when the Dow fell 666 points after a better-than-expected jobs report ignited inflation fears. That fall was exacerbated Monday after the yield on the benchmark 10-year Treasury note hit a 4-year high, sending the Dow tumbling another 1,175 points as investors grew more nervous about an overheating economy.

 

Trouble with securities called exchange-traded notes that decline in value when volatility increases likely helped create more turmoil in the markets this week. The Cboe Volatility index (VIX) — the market's best fear gauge — shot above 40 again Friday after jumping as high as 50 earlier in the week. At the end of January, the VIX was below 14.

 

Traders are now focusing on next week’s U.S. consumer-price data after a week in which the 10-year yield pushed as high as 2.88 percent. Equity investors took the signal to mean interest rates will rise as inflation gathers pace, denting earnings and consumers’ spending power.

 

In only a week the S&P 500 has tumbled 5.2 percent, its steepest slide since January 2016. At one point yesterday before a furious rally, stocks had fallen as low as 12 percent from their latest highs. The volatility Friday was impressive: the Dow jumped 349 points in morning trading, fell 500 points later in the session, before closing 330 points higher.

 

Still, the selloff has wiped out gains for the year and signs have mounted which suggest that  jitters have spread to other assets, with measures of market unrest pushing higher in junk bonds, emerging-market equities and Treasuries.
 

Our Take
 

Hindsight being 20/20 it was easy to see this coming: record high valuations, record high returns (the S&P’s risk adjusted return was close to the world’s best in 2017), a strengthening economy, synchronized global growth, signs that inflation is picking up, risk-on behaviour gaining ground, massive equity inflows, monetary policy normalization, the shift from a monetary driven economy to a fiscal driven economy...the list goes on.

 

U.S. stocks have enjoyed a nearly uninterrupted bull market since late 2009. Two factors have helped create a Goldilocks scenario driving this surge. First, the shock administered by the 2008-2009 financial crisis left stocks significantly undervalued, creating plenty of room for equity prices to recover. Second, U.S. inflation has consistently held below the Federal Reserve’s 2 percent target, leaving the central bank with little reason to tighten monetary policy.

 

Finally conditions are now changing.

 

Stocks are richly valued and at the same time, inflation looks set to overshoot the Fed's target in the medium term. The overshoot won't be large, but it could ultimately trigger faster rate hikes than presently are being priced by the market. That could cause the bond market's yield curve to invert, as short-term rates rise above those for longer-term maturities. Fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy.

 

This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right. As Ray Dalio has pointed out, this is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.

 

A yield curve inversion is normally a clear signal the economy is heading for a recession. We're not there yet, but the risks are rising.

 

Caution is warranted and longer term return expectations should be lower. Nevertheless, what so far looks like a purge of sorts, will likely be long-term positive; flushing out the excess and re-calibrating investor psychology. For now we see this pullback a potential opportunity to dollar cost down in existing positions as well as to initiate new positions at more attractive multiples. Nevertheless, a watchful eye should be set on volatility as measured by the VIX. For if the VIX continues to rise sustainably as the stock market rallies and retests its lows, more meaningful trouble may lie ahead.

 

Some things to consider:

 

The S&P 500 would have to fall an additional 52 percent to reach its long-term average valuation. Bulls have nothing to panic about yet, and bears have not been vindicated.

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The return of major volatility is unpleasant for many, but does give some much-needed negotiating power to investors in IPOs and stock sales. As stock volatility jumps -- as in recent days -- so the risk of loss rises and discounts should widen. The problem is that US startups don’t want to go public anymore and that's bad news for investors.

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The current market rout -- which is occurring smack dab in the middle of a nice earnings season -- may put a damper on the recent trend towards record-high takeover valuation.

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Musings


After a year of abnormally low volatility, this past week has been particularly gut wrenching. But these types of selloffs should be expected in the stock market from time to time. Let's remember that although the raging bull of the 1980s and 1990s which is likely the greatest of all time in U.S. stocks, investors were forced to deal with the 1987 crash, when stocks fell more than 33 percent in the span of a week. In addition, most investors forget there was an emerging-markets crisis in 1997 and 1998 that caused the S&P 500 to fall just shy of 20 percent. Stocks still charged afterward, reaching highs in 1999 and early 2000 before crashing after the tech bubble popped.

 

The stock market should not be mistaken for the economy. Fundamentals are still solid and while double-digit losses should be expected when investing in equities, investors must also realize that human beings tend to panic more often when money evaporates before their eyes. In the short-term, emotion rules. In the long-term, fundamentals prevail.

 

Bull markets end when economies go into recession, not because of high valuations or old-age. At present, there appears to be little on the horizon to suggest the economy is on anything but stable ground as the best-known recession triggers -- asset bubbles, oil-price spikes and interest-rate hikes -- all look reasonably unlikely.

 

Continue to buy and hold quality at a discount, shut off the screens, get some air and be grateful.


 

Logos LP January 2018 Performance



January 2018 Return: 1.57%

2018 YTD (January) Return: +1.57%

Trailing Twelve Month Return: +39.19%

CAGR since inception March 26, 2014: +21.33%

 

Thought of the Month


 

"Then the flood came upon the earth for forty days, and the water increased and lifted up the ark, so that it rose above the earth.” -Genesis 7:17-20




Articles and Ideas of Interest

 

  • Investors may want to calm down since history shows rising rates have been good for stocks. Using Kensho, a hedge fund analytics tool, CNBC looked at what happens during major periods of rising interest rates. The findings show there were six periods with major rises in interest rates in the last three decades. The market rose big during five of those instances and only fell slightly during the one lagging period.

          

  • 35 steps to a market bottom by Michael Batnick. Where are we and where are you?

    -1% Mock the permabears

    -2% Meh

    -3% Yawn

    -4% Off the highs

    -5% Pullback

    -6% Healthy correction

    -7% Buying opportunity

    -8% Stay the course

    -9% This too shall pass

    -10% Correction territory

    -11% I’m a long-term investor

    -12% Stocks always come back

    -13% Don’t panic

    -14% Draw lines on a chart

    -15% Look for attractive valuations

    -16% I knew this was coming

    -17% Blame Cramer

    -18% This sucks

    -19% I should buy some downside protection

    -20% Bear market

    -21% I should have listened to my gut

    -22% Buy when there’s blood in the streets

    -23% I was early

    -24% Is this the bottom?

    -25% This sucks

    -26% Uggggh

    -27% I can’t take this much longer

    -28% I sold my stocks

    -29% I’m never buying stocks again

    -30% Good thing I sold

    -31% I should buy gold

    -32% And silver

    -33% I don’t even care anymore

    -34% Glad I stopped looking

    -35% Bottom


     
  • President Trump’s first year in 14 metrics. A year ago, we chose benchmarks for his administration's progress. The results are in.

 

  • Gene editing - and what it really means to rewrite the code of life. We now have a precise way to correct, replace or even delete faulty DNA. Ian Sample explains the science, the risks and what the future may hold.

 

  • Post-work: the radical idea of a world without jobs. Work has ruled our lives for centuries, and it does so today more than ever. But a new generation of thinkers insists there is an alternative.

 

  • It’s the (democracy-poisoning) golden age of free speech. Here’s how this golden age of speech actually works: In the 21st century, the capacity to spread ideas and reach an audience is no longer limited by access to expensive, centralized broadcasting infrastructure. It’s limited instead by one’s ability to garner and distribute attention. And right now, the flow of the world’s attention is structured, to a vast and overwhelming degree, by just a few digital platforms: Facebook, Google (which owns YouTube), and, to a lesser extent, Twitter. Yes, mass discourse has become far easier for everyone to participate in—but it has simultaneously become a set of private conversations happening behind your back. Behind everyone’s backs. Not to put too fine a point on it, but all of this invalidates much of what we think about free speech—conceptually, legally, and ethically. The most effective forms of censorship today involve meddling with trust and attention, not muzzling speech itself. As a result, they don’t look much like the old forms of censorship at all. No wonder our political future is hackable.

 

  • Most unhappy people are unhappy for the exact same reason. In other words, every activity that didn’t involve a screen was linked to more happiness, and every activity that involved a screen was linked to less happiness. Perhaps the formula for phone addiction might double as a cure. Happiness is a skill you can build with consistent practice.

 

  • The driverless revolution isn’t coming anytime soon. Self-driving cars have come a long way, but still have a long way to go. We’ve all heard the story at some point in the past few years. The tech and auto industries are on the cusp of rolling out vehicles that can drive themselves and will forever transform the way we move. We’ll be able to summon driverless pods that will whisk us to our destinations, making personal vehicles unnecessary and freeing up all the space wasted on parking to be used for parks and public gathering spaces — or so they tell us.

 

Our best wishes for a fulfilling month, 

Logos LP

Can Sci-Fi Help Us Become Better Investors?

Good Morning,
 

U.S. equities fell along with the dollar (which has dropped to an 11-month low as measured by the Bloomberg Dollar Spot Index) on Friday as investors assessed an investigation into U.S. President Donald Trump that may stall his economic agenda. Nevertheless, the three major indexes notched record highs this week as quarterly earnings from S&P 500 companies largely outperform expectations. Microsoft, Honeywell and Morgan Stanley are just a few of the companies that reported earlier this week.

 

Next week will be the busiest one this earnings season, with about 170 S&P 500 components scheduled to report.This remains an earnings-driven market and there have not been any major surprises yet. If earnings continue to grow, stocks should keep going higher.

 

Calendar second-quarter earnings have mostly exceeded expectations this far. With 20 percent of S&P 500 companies having reported, 73 percent have beaten expectations and 77 percent have beaten on sales, according to John Butters, senior equity analyst at FactSet.

 

Our Take
 

Interestingly, for all the fear associated with the gridlock and incompetence in Washington research actually suggests that stocks may like government gridlock as much as they like potential tax reform. Investment research firm Ned Davis Research found that when the Philadelphia Federal Reserve's Partisan Conflict Index — a measure of political disagreement in the United States — rises above 100, the S&P 500 has risen at a 11.7 percent annual rate. In contrast, the S&P rises just 5.8 percent when the index is below 100, according to analysis published on June 27.

 

On Wednesday, the Philly Fed said the index reached 201.15 in June, one of only seven times it has been above 200, and close to March's record of 271.29. In this case, traders may actually like the Trump-Russia headlines causing D.C. gridlock because they don't want politicians to mess up a good thing. Earnings are growing at a record pace, and economic growth is steady — two things markets like. New legislation could force businesses to change, potentially hurting their growth...

 

Last week the Bank of Canada embarked on what may be the slowest cycle of interest rate increases in more than three decades as it awaits evidence that consumer prices are picking up.

 

Surprisingly the median forecast of 16 economists in a Bloomberg survey suggest that the central bank will raise borrowing costs in October, and then twice in 2018 to bring its benchmark interest rate to 1.5 percent.

 

Governor Stephen Poloz flagged the risk of higher inflation as one reason the central bank hiked for the first time in seven years last week. Yet rapid inflation is among the least of Poloz’s concerns, according to the survey. Asked to rank five risks to monetary policy in order of importance, economists put “inflation overshoots” last.

 

Instead the biggest risk is the opposite one, they said: that inflation remains below target. They flagged a housing correction and U.S. policies that hurt Canada’s economic growth as the second-biggest. Despite these concerns, this Friday Canada’s core consumer prices and retail sales came in higher than expected, signaling that overall inflation may turn around to clear the way for another rate increase this year...

 

Nevertheless, this fear is and should be shared by monetary policy watchers worldwide. As we have mentioned before, global inflation is far from target and in fact appears to be decreasing rather than increasing as expected/modeled…

 

Just this week The Bank of Japan kept monetary policy steady, but pushed back the timing for achieving its 2% inflation target to 2020. "Risks to the economy and price outlook are skewed to the downside," the BOJ said in a statement. Inflation targets have been pushed back six times since the central bank launched its massive stimulus program in 2013. Foreshadowing what comes next for the rest of the developed world or isolated case?
 

Musings
 

Read an interesting piece this week in Harvard Business Review which suggested that business leaders should read more science fiction. Typically the genre is associated with spaceships, aliens and distant worlds, but it offers far more than escapism. By presenting plausible alternatively realities, science fiction encourages us to confront what we think but also how we think and why we think it. Science fiction tales reveal how fragile the status quo is and how malleable the future can be.

 

As Eliot Peper points out, William Gibson famously coined the term “cyberspace” in his 1984 masterpiece Neuromancer. Neal Stephenson’s The Diamond Age inspired Jeff Bezos to create the Kindle; Sergey Brin mines Stephenson’s even more famous Snow Crash for insights into virtual reality and the Star Trek communicator spurred the invention of the cell phone. Just last week researchers in China successfully teleported the first object from earth into orbit...

 

Nevertheless, to understand the real value of science fiction it is best to view it as useful not because it may be predictive, but rather because it reframes our perspective of the world.

 

We can think of “science fiction” as a “mental model” in the sense used by Charlie Munger on the path to building what he terms “worldly wisdom”. Worldly wisdom is an approach to business, investing and life which is based upon using a range of different models from a range of different disciplines to produce something that has more value than the sum of its parts.

 

As Robert Hagstrom wrote in his book on worldly wisdom entitled Investing: The Last Liberal Art: “each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine and produce a cohesive understanding.”

 

Although it may be a stretch to call science fiction a “discipline” it is useful to consider it a mental model which helps us to question our assumptions.

 

Assumptions which lead us to follow the herd. Assumptions which lead us to make decisions which are merely average and at times assumptions which can cause disaster.

 

As such, “science fiction” can increase the power of a latticework of such mental models which extends far beyond narrow questions. Such a latticework can lead to rich and unique understanding of the full range of market forces- new business opportunities and trends, emerging markets, the flow of money, international shifts, the economy in general and the actions/behaviour of humans in society and markets.

 

Assumptions can be useful as they help us with the cognitive shortcuts we need for navigating an increasingly complex and noisy world.  Nevertheless, they can also be detrimental as they fail to update as the world changes and condition us to be trend followers.

 

Superior decision makers, businesess people and investors train themselves to do the exact opposite. They train themselves to think in a way that is different than others, more complex and more insightful. By definition, most of the crowd can’t share such a way of thinking.

 

Thus, the judgements, ideas and assumptions of the crowd can’t hold the keys to success. Instead to free your mind from its false constraints and assumptions and connect with the intellectual explorer within, consider some science fiction this summer and your investment returns may just improve...

 

I recommend The Dispossessed by Ursula K. Le Guin and for a list of the top 25 works click here.

 

Let the mind bending begin...


Thought of the Week

 

"The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” - Warren Buffett



Articles and Ideas of Interest
 

  • Americans agree on the best way to invest their money - but they’re wrong. A new survey by Bankrate.com through Princeton Survey Research Associates International asked more than 1,000 Americans what they consider the best way to invest money they won't need for 10 or more years. The most popular answer, chosen by 28 percent of respondents, is to use it to buy real estate. Zero-risk cash investments, such as high-yield savings accounts, came in second with 23 percent of respondents, while the stock market took third place, with 17 percent of respondents. Yikes….does this support the thesis that US stocks find themselves in a bubble? (full article in CNBC here).
  • Just because something is popular doesn't mean it's wise. Bankrate cites a study from London Business School and Credit Suisse, which found that after adjusting for inflation, housing offered returns around 1.3 percent per year from 1900 to 2011, while stocks performed more than four times better. If you believe the story that everyone else believes you will get what everyone else always got. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t...The ultimately most profitable investment actions are by definition contrarian: you’re buying what everyone else is selling (and thus the price is low) or you’re selling when everyone else is buying (and the price is high). These actions are lonely and uncomfortable because most people don’t believe them or do them...Next time you look at your “investments” consider how comfortable you are…

 

 

  • Focus on the future. Keep your eyes on the prize
  • What we should be saying: Live (or work) in the moment   

 

  • Stress is inevitable - keep pushing yourself
  • What we should say: Learn to chill out

 

  • Stay Busy
  • What we should say: Have fun doing nothing

 

  • Play to your strengths
  • What we should say: Make mistakes and learn to fail

 

  • Know your weaknesses, and don’t be soft
  • What we should say: Treat yourself well

 

  • It’s a dog eat dog world
  • What we should say: show compassion to others

 

  • Why Canada is able to do things better. Interesting perspective in the Atlantic suggesting that most Canadians understand that when it comes to government, you pay for what you get. Since the election of Donald Trump, there’s been no shortage of theories as to why America’s social contract no longer seems to work—why the United States feels so divided and dysfunctional. Hyper-partisanship, racist tendencies, secular politics of race and nationalism? The author suggests something more mundane: “The United States is falling apart because—unlike Canada and other wealthy countries—the American public sector simply doesn’t have the funds required to keep the nation stitched together. A country where impoverished citizens rely on crowdfunding to finance medical operations isn’t a country that can protect the health of its citizens. A country that can’t ensure the daily operation of Penn Station isn’t a country that can prevent transportation gridlock. A country that contracts out the operations of prisons to the lowest private bidder isn’t a country that can rehabilitate its criminals.”

 

  • Earth’s sixth mass extinction event is underway. Researchers talk of “biological annihilation” as this new study reveals billions of populations of animals have been lost in recent decades. There hasn’t been much talk of the effects of climate change of late but this piece does a great job of highlighting new research which analysed both common and rare species and found billions of regional or local populations have been lost. The researches blame human overpopulation and overconsumption for the crisis and warn that it threatens the survival of human civilisation, with just a short window of time in which to act.                    

 

  • There are two kinds of popularity and we are choosing the wrong one. Which kind of popularity you pursue matters, says Mitch Prinstein, a professor and director of clinical psychology at the University of North Carolina. He recently published Popular: The Power of Likability In A Status-Obsessed World. Prinstein delves into reams of research about what popularity is, and what effects it has on us. He shows that people who seek to be likable tend to end up healthier, in better relationships, with more fulfilling work, and even live longer. Status-seekers, on the other hand, often end up anxious, depressed, and with addiction problems. In the age of Instagram, it’s no surprise that most of us are gravitating to the wrong kind...Getting lost in the pursuit of status will likely come with sacrificing of the only relationships that matter..No wonder we are living in the golden age of “bailing”. David Brooks for the NYT suggests that “There was a time, not long ago, when a social commitment was not regarded as a disposable Post-it note, when people took it as a matter of course that reliability is a core element of treating people well, that how you spend your time is how you spend your life, and that if you don’t flake on people who matter you have a chance to build deeper and better friendships and live in a better and more respectful way. Of course, all that went away with the smartphone.”

 

  • Machines taking over hedge funds despite lack of evidence they outperform humans. Data science is a big part of the comeback story as Credit Suisse’s mid-year survey says 81% of investors likely to put money in hedge funds during the second half of 2017. About 60% of those investors are planning to increase allocations to quantitatively focused strategies over the next 5 years. To be sure, just because a hedge fund has a quantitative strategy does not guarantee returns. A recent Barclays report showed that while investors perceive quant strategies outperform those that are less technology-driven, there's no research that would indicate that is actually the case. In the first half of the year, so-called systematic diversified strategies, or those that have investment processes managed almost entirely by computers and have very little human influence over portfolio management, underperformed other strategies, according to new data by Hedge Fund Research Inc. The HFRI Macro: Systematic Diversified Index declined 2.8 percent during the first half of 2017, while the broader industry gained 3.7 percent. While the headcount, assets and interest appear to be growing, it doesn't appear that the returns are following suit. Interestingly, human brains are able to do useful things that machine brains currently cannot: forget. What does it mean to be human in a world filled with robots anyway? Quartz inquires.

 

  • Lots of talk about bubbles these past few weeks. Justified? Recently for Fox News Greg Ip wrote that: “If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm. In other words, it would look a lot like the present.” In another recent piece Scott Galloway convincingly paints a picture of the “full-monty bubble” we are nearing. As evidence, he mentions some hard metrics but focuses on a few interesting soft ones:
     

    -Mediocrity + two years tech experience = six figures

    -Bidding wars for commercial real estate

    -Gross idolatry of youth

    -You can’t get a table at average restaurants

    -There’s an Uber for private jets

    -Jay Z and Jared Leto are considered thoughtful startup investors

    -The food at your company is … good

    -A lot of articles explaining why “this time is different” (here, here, and here)

    -You’re introduced to remarkably uninteresting tech people at Cannes, who people think are “fascinating”

    -Tech CEOs are on the cover of fashion magazines and marrying supermodels

    -Founders of tech firms believe it’s their responsibility to put a man on Mars and cure death because … you know, they’re awesome

    -Billionaires with undergraduate and graduate degrees pay kids to drop out of college#negligent

    -Currencies mined by machines are … currency (I have a better understanding of the chemical underpinnings of a Leonid Meteor Shower than Bitcoin or Ethereum #huh)

    -There are CEOs of two firms at once

     

    This list I must say is convincing but it should be remembered that calling a market top is incredibly difficult as the only thing we can predict is the inevitability of market cycles. Why? Primarily because the future is unknown. Thus, as the calls of a market top multiply (which at present they are) the best response is simple: try to figure out what is going on around you, and try and use that to guide your actions. Is the pendulum oscillating at its peak ready to swing back to the opposite extreme? Or is it just passing its midpoint? Or as Barry Ritholtz teases, you can join the crowded landscape of pundits predicting the next crash by following his guide: 1) pick a bogeyman 2) cite household authority figures 3) always be confident 4) pay attention to non-financial events 5) pick a favoured asset class 6) charts, plenty of charts 7) claim vindication early and often 8) don’t forget the esoteric technical indicators 9) ignore contradictory data 10) don’t manage money...

 

Our best wishes for a fulfilling week, 
 

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