general stuff

One of the big mysteries/dirty secrets of Wall Street is that there are virtually no professionals with a public record of, say, a decade that shows their ability to beat the US stock market, even before fees and expenses, on a consistent basis. Hence, the attraction of index funds.

I spent a quarter century as a professional manager. As my style evolved, I began to realize that every year, in a portfolio of 50-100 names (the number shrank as I gained more experience), all the outperformance came from three or four. Usually, and luckily for me, these tended to be my highest-conviction ideas as well as the largest position sizes. I began to realize that I had to watch, say, my favorite ten like a hawk and pay enough attention to the rest in case their earnings were better than I’d imagined, and also to ensure that they didn’t punch a hole in the bottom of the boat.

Nowadays, 80% or so of my wife and my money is in index funds, with the rest in 5-10 names that I pay close attention to. That’s the current version of my former A team (the ten)/B team (the rest).

In general, though, I think it’s more important to have a few things you know (hopefully, a lot of stuff) more than the consensus does, rather than being able to make cocktail party conversation about everything.

where I think the world is now, from a stock market point of view.

–I think the continuing decline of the dollar is a very important variable. Why this is happening is ultimately an important issue, but for now the key factor, I think, is that it is happening.

Go back to Japan in the 1980s, when the country experienced a massive appreciation of its currency. Yes, this is the reverse of what’s happening now in the US, but I think the phenomenon is instructive.

Global investors had been focused for many years on that country’s export-oriented manufacturing industries. So they were up to their ears in auto, chemical, steel, shipbuilding and similar companies that benefitted from the wide spread between weak yen costs and high dollar revenues. The rise in the yen was devastating for these companies, for two reasons: in yen terms, their revenues were substantially lower than they’d been; and rival offerings from firms based in the US, the EU and in emerging economies were all suddenly much more price competitive. Domestic-oriented companies went through the roof; exporters were extremely lucky to go sideways.

Today in the US, we’re in the reverse situation with the dollar weakening. Companies that have costs in dollars and revenues in, say, euros, or even sterling or the yen, are now have revenues, translated back into dollars, that are 5%-10% higher than they were before the inauguration.

The reasons for the two cases of currency weakness are different: in the case of Japan, the world told that country that it was strong enough that it no longer warranted the currency subsidy the OECD had previously allowed. So it had to allow the yen to appreciate. In the case of the US today, there’s no formal agreement. Three very prominent worries about Washington, though:

–holders of Treasury bonds–the big international banks and foreign central banks–seem to perceive that the budget that has come out of Congress will increase the size of Federal debt, inching the country closer to possible default. This isn’t a tomorrow thing, but the risk today is higher than it was six months ago. So they’re at least hedging their currency exposure, pushing the dollar down

–the aging of the domestic US population (sort of like Japan circa 1990, though not as severe) means that the country is increasingly depending on immigrants to grow the workforce–and therefore GDP. The huge amount of federal funds allocated in the budget to deporting workers threatens to damage domestic economic growth, adding to the already considerable risk of long-term inability of Washington to repay borrowings

–the scary way ICE is acting in finding and arresting immigrants conjures up images, both here and abroad of Germany/Italy/Japan in the 1930s, or Mao, or Lenin or the Kim family. Not a good look for the USA brand. Foreign tourism already seems to be falling off considerably.

more tomorrow