Knowingly or not, the economic policy of the administration in Washington has been following the path of post-WWII Japan, which has been adopted by most successful emerging economies since then. The general idea is to encourage export-oriented manufacturing, while suppressing local consumption through tariffs and currency weakness. ICE violence and the fact that this growth recipe is being applied to a technologically advanced economy rather than a developing one are the main novelties that I can see.

In a situation like this, the right equity investment strategy is equally clear: own companies with domestic costs and foreign revenues. Tech companies are a prime example. The worst place to be is the opposite situation–foreign firms selling into the domestic economy, or domestic firms using foreign-sourced inputs. Over the past year, this strategy has been almost cartoonishly successful, producing something like double the index return. The prime sectors to be in have been IT-related.

The past short while has brought a reversal of this trend, however. I see several possible causes:

–the valuation difference between leaders and laggards has become so great that the latter have become more attractive to investors than the former. So what we are seeing is a normal rebalancing

–professionals have already exceeded their yearly performance goals by so much that they’ve decided to safeguard their outperformance by shifting to a more index-like positioning. They won’t gain outperformance by doing so, but, more importantly, they won’t lose what they’ve already achieved

–the market is beginning to act on the belief that current administration policies won’t have a long shelf life

–the rotation through AI beneficiaries–from software creators to specialized chip makers, to installation builders and to component and power suppliers–has run its course. So investors are unclear where to go from here.

I don’t have a really strong conviction about which of these, if any, is the most important. My overall sense is that in the US these days the stock market is more focused on rapid reaction to news than about anticipation. So it itself is not the key leading indicator it once was. if I had to guess, I’d go with the first of these, rebalancing, as the main driver. As far as my own portfolio goes, I’m trying to find non-tech names that are able to keep their heads above water in the current anti-growth domestic environment.

I’ve just (belatedly) updated my Keeping Score page for June. The biggest issue I see is how to deal with the IT trade from now through December.

chit clubs

In the mid-1980s, I managed a number of stock portfolios in the Pacific Basin for TIAA-CREF–basically everything except Japan. Mainland China wasn’t yet open to foreigners but could be reached through Hong Kong. The largest market in my area of responsibility was Australia, followed by Hong Kong, Singapore and Thailand. In theory, I was also supposed to cover Indonesia and India. But threats from the head of the BJP and what to me was the dubious nature of financial reporting in both India and Indonesia told me zero weightings for both countries was the best strategy.

Thailand, it turned out, was then a hotspot for a set of Ponzi schemes, known as chit clubs. The most famous was organized by Madam Chamoy, who was reputed to have close ties to the semi-divine royal family. Cub members would come together periodically to meet with Chamoy’s representatives, who would collect deposits and give receipts or “chits,” promising ultra-high interest rates (doubling your money in not much more than a year), to be achieved through investments made via Madam Chamoy’s supposed connections with the royals. The most important proviso: if you ever withdrew money by cashing in a chit, you were banned from making further chit deposits.

Ultimately, some people did redeem, causing the chit clubs to implode. But, for a long time, redemptions were small, and were more than covered by new deposits.

Madoff and the Wilpons

Bernie Madoff is the US equivalent of Madam Chamoy. In fact, in the Madoff case, Harry Markopolos, a financial analyst, tried many times–chronicled in his book No One Would Listen, a True Financial Thriller–to turn Madoff in, but was ignored by the SEC. According to the book, Markopolos had worked for a firm where Madoff made an investment pitch. Afterward, the principals told Markopolos to figure out an investment scheme that would duplicate the Madoff returns. After a lot of work, Markopolos concluded that using public markets there was no way to get the numbers Madoff claimed to have achieved.

Madoff, as I recall from news accounts, said that he screened potential marks very carefully. He would reject anyone he thought might be smart enough to figure out the fraud. …which brings us to the Mets and their plan to pay Bobby Bonilla.

Bobby Bonilla

In 2000, the Wilpons decided to buy out the remaining $5.9 million the Mets owed to Bobby Bonilla. Instead of a cash payment, the parties agreed to pay Bonilla a bit less than $1.2 million, once a year, on July 1, for 25 years, starting in 2011.

The Wilpons had already “passed” the Madoff intelligence test and had become clients. In fact, newspaper reports say the Mets fired the accounting official who insisted Madoff was running a Ponzi scheme and urged the club to withdraw its money. And when the list of Madoff accounts was ultimately published, the Wilpons/Mets figured prominently by number of accounts–not necessarily meaning the most money, however.

How did the Wilpons get the the apparently wacky formula they used to pay Bonilla? Who knows? However,,,,

,,,suppose the Wilpons deposited $4 million with Madoff. At 12% interest, that would rise to about $12 million by 2011, or enough to generate slightly more in interest income from then on than the $1.2 million needed to pay Bonilla. So the Wilpons would put away $4 million for Bonilla instead of $6 million. and would still have the $4 million principal amount (worth maybe $1.3 million in year 2000 dollars) remaining in the account a quarter-century down the road. (Where did I get the 12% interest? It was the smallest number that worked.)

In other words, in the Wilpons’ dream world, they’d be paying a bit less than half in real terms of what the original contract called for.

I’m writing this after seeing the news that Comcast (CMCSA) is reorganizing itself into two separate entities: the cable networks and the entertainment assets. To be clear, I don’t know that much about Comcast, other than being a customer and owning the stock indirectly through index funds, But I imagine the split is a response to the stock price being cut in half over the past handful of years, a period during which the S&P 500 is ahead by about 65%.

There are successful multi-generational family-owned company. Walmart (WMT) is a prime example, in my view (WMT is also the only domestic consumer-oriented stock I own in my actively-managed portfolio). The Walton family owns a bit less than half the company through trusts.

I see three general worries with family-owned companies:

–as people grow wealthier, they tend to become more risk-averse. So they tend to defend the status quo rather than take the risks involved in innovating

–having the family surname may be as important at promotion time as being a strong manager, or even more so. The same coin, but the other side: the company may have as a high-level priority keeping family members employed, no matter what their skill level or work ethic.

–in really bad times, I doubt the company will use Chapter 11 to reorganize, since that would disenfranchise the founding family, as well as put aunts, uncles and cousins on the unemployment like.

It may be that none of this bad stuff will happen. And we certainly don’t want to be holding stock in a company headed for Chapter 11. On the other hand, the market will presumably demand compensation, through a lower PE multiple, for taking the extra risks..

The terms of a preliminary post-war treaty seem to be relatively clear. As former president Obama has put it, they’re similar to the deal he made with Iran in 2015, only a little worse–this even though Trump repudiated the Obama agreement as insufficient during his first term. Put another way, the bombings and killings have most likely put the US in a worse position than before they started.

Iran will apparently also receive $300 billion in, essentially, reparations as the price for opening up the Strait of Hormuz again. The money is reported to be coming from third parties, not the US. While this may be true in some highly technical sense, my guess is that those third parties have been told they’ll be compensated by Washington for their outlays. I can’t imagine they won’t demand to be paid in advance.

How will this affect the US stock market? These are my thoughts:

–any effects will be indirect–through the hit to consumer spending–since the entire oil and gas sector is only about 3% of the index, or 2/5 of the weighting of Nvidia, the S&P 500’s largest member. So there’s no need today to have an opinion. You can neutralize the sector by holding the market weight, or simply have nothing in the sector at all, since a 20% upward move in oil and gas stocks, with everything else flat, would only clip 0.4% from the portfolio’s return.

–the price of crude oil, and ultimately the price of products refined from oil, will drift down to their pre-war levels, or slightly above.

–the fragility of the global oil supply chain that the war illustrates will accelerate the move toward other energy sources, even in the US, where the administration is opposed, in true Luddite style. This will sooner or later (my bet is way sooner) make sources of heavy, tar-like crude no longer economically viable (think, Venezuela, where the US oil majors are not keen at all to develop that country’s reserves).

–presumably, the ease with which Iran shut off a major supply route for crude through the Strait of Hormuz has been a big shot in the arm for alternative energy sources.

–the apparent lack in Washington of effective pre-strike planning, intelligence or logistics is probably not a plus for the US brand. …nor is the culling of women and people of color from the armed services, in support of the administration’s vision of white male culture.

–and the lack of any opposition from Congress, on either side of the aisle, to the administration’s moves is arguably doing the most damage. This implies that the multiple investors are willing to pay for $US earnings should be lower than has been the norm since WWII. And, of course, those profits themselves are weaker than normal, given tariffs and government efforts to shrink the workforce.

In a normal business cycle, investors, US and foreign, portfolio and corporate, would already be rotating away from tech. They’d be rooting through the bargain bin of domestic-oriented consumer firms, in vintage Warren Buffett style. …and in particular, for strong brand names and distribution networks, on the idea that one would be buying at a steep discount intellectual property that took many years–and lots of advertising expense–to establish (a geekish note: except in the case of acquisition, none of this appears only on the income statement as a cost, but nowhere on the balance sheet as an asset). We’re now the country of sub-par growth, ICE, murdered protesters, foreign prison camps, however. So it’s no longer clear what those brands are worth.

As a result, we continue to be in a stock market that favors industry rather than consumer, firms with $US costs and foreign currency revenues, and intellectual property that can be quickly shifted outside the US. This continues to be so, even though this idea is already pretty long in the tooth. Valuation spreads would in most other circumstances have already prompted, I think, rotation away from the AI names.

I think the question of how long the current situation can last is the most important one in today’s US stock market. For what it’s worth, I think the mid-term election in November is the next possible trigger for a change in portfolio strategy.

PS: In my investing career, which began in late 1978, shockingly long ago, I can think of three periods when political developments made a difference for financial markets:

–the revaluation of the Japanese yen in the 1980s,

–the formation of the EU in the 1990s, and

–Brexit, which occurred in 2020, after a vote in favor in 2016.

So thinking of the rise of Trumpism as a market-moving event isn’t without precedent.