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