finding a place to stand

It has always seemed to me that there are two relatively distinct kinds of analysis that an equity investor should do:

–one is to understand the inner workings of individual companies and (as a growth investor) to own stock in firms that are well-managed, have industry-leading products and are growing profits quickly.

–the second is to understand how the overall world economic winds are blowing and to position holdings where they are likely to be helped the most by economic tailwinds and hurt the least by economic headwinds.

On the second point, it seems to me we’re in an unusually complex situation today. Here are what I think are the most important considerations:


For large parts of the past half-century, during periods of cyclical economic expansion, growth in emerging economies, and stock markets, has been significantly faster than in mature markets like the US and Europe. Not so over the past 15 years or so, however. Two reasons, I think: everything that can be offshored has long ago been–and as robots replace manual labor, reshoring has become a thing; and what offshoring there continues to be is movement into markets that are simply not investable. For example, early in my investing career I saw textile machinery in Taiwan that had originally been used in the US and Japan–and which was in the process of being shipped off to Thailand. Those machines are likely still around, but now scattered in places like Bangladesh or Cambodia or Peru, where they’re not important enough to move the economic needle.

invasion of Ukraine

The biggest stock market issues I see are: agriculture, metals mining, oil, natural gas and contract software engineering. There are two aspects to each–the loss of production in Ukraine and boycotting Russian products to deny that country hard currency.

My uninformed guess is that increased wheat planting in Canada, the US, South America (?) + substitution of other grains will make this a non-issue by 2023. Similarly, I think skilled/cheap software engineers from Ukraine and Russia will relocate to other parts of Europe and reemerge as workers for US multinationals. As for mining of things like lithium, I have no idea.

Oil is playing out more or less as I’d thought. The actual loss to worldwide oil production appears to be much less than pessimists had expected. The Middle East is unwilling to up production enough to depress prices, however, but it is clearly not in their own best interest to do so. And having lost their shirts so recently by imprudent lending to shale oil drillers, junk bond funds aren’t rushing to do so again. The ultimate result: today’s higher oil prices will remain and will likely lead to sharply accelerating the development and widespread use of electric vehicles.

Natural gas is a somewhat different issue, since it requires very expensive transmission facilities. The ultimate result here will likely be that the EU limits purchases of natural gas from Russia and switches to imported LNG as quickly as possible (which means several years, I think).

more tomorrow

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