Category Archives: administration economic strategy

it’s mostly about interest rates

June 8, 2020 By in administration economic strategy, economics, stocks vs. bonds, Strategy Tags: , Leave a comment

There are three big categories of liquid investments: stocks, bonds and cash. Typically, the progression for individuals as they begin to save is: cash first, then bonds, then stocks.

There’s also an age-related progression, generally from riskier stocks to the steadier returns of government bonds. The old-fashioned formulation is that your age in years is the percentage of savings that should be in bonds, the remainder in stocks. A 30-year old, for example, would have 70% of savings in stocks, the rest in fixed income.

A strong tailwind has been aiding bond returns in the US since the early 1980s, since after the Fed raised short-term interest rates to 20%+ to choke off an inflation spiral spawned by too-loose money policy during the Seventies. The financial collapse of 2008 required another huge dose of money policy stimulus. Recently, Trump has been badgering the Federal Reserve to push short rates below zero to cover up the damage he has done to the domestic economy since being elected, in addition to the big hole he punched in the bottom of the boat this year by his pandemic denial.

No matter how we got here, however, and no matter how bad the negative long-term consequences of Trump’s bungling, the main thing to deal with, here and now, is that one-month T-bills yield 0.13%. 10-year notes yield 0.91%. That’s because during times of stress investors almost always shrink their horizons very substantially. They’re no longer interested in what may happen next year. They just want to get through today.

My sense is that we’re bouncing along the bottom for both short and long rates–and that we’re going to stay this way for a long time. If so, not only is income from Treasures of all maturities substantially below the 1.9% yield on stocks, a rise in interest rates toward a more normal 3% will result in a loss for today’s holders of any fixed income other than cash.

So for now at least, for investors it’s all stocks, all day long.

Looked at this another traditional way, the inverse of the yield on the long Treasury should be the PE on the stock market. If we take the 10-year as the benchmark, the PE on the stock market should be 111; if we take the 30-year (at 1.68%), the PE should be 59.5.

We have to go back to the gigantic bubble of 1980s Japan to see anything similar. If the comparison is valid, then bonds are already in full bubble mode; stocks are halfway there.

the current market: apps vs. features

May 12, 2020 By in administration economic strategy, internet bubble, Strategy, Uncategorized Tags: , 2 Comments

sizing up the market

In some ways, current trading in tech stocks reminds me of the internet boom of 1999.  To be clear, I don’t think we are at anything near the crazy valuation levels we reached back twenty+ years ago.  On the other hand, I’m not willing to believe we’ll reach last-century crazy, mostly because nothing in the stock market is ever exactly the same.

On the (sort-of) plus side, three-month Treasury bills back then were just below to 5% vs. 1.5% today and 10-year Treasury notes were 4.7% vs 1.9% now.  If we were to assume that the note yield and the earnings yield on stocks should be roughly equivalent (old school would have been the 30-year bond), the current PE supported by Treasuries is 50+, the 1999 equivalent was 21 or so.   This is another way of saying that today’s market is being buoyed far more than in 1999 by accomodative government policy.

On the other, the economic policy goal of the Trump administration, wittingly or not, seems to be to follow ever further down the trail blazed by Japan during the lost decades starting in the 1990s.  So the post-pandemic future is not as cheery as the turn of the century was.

what to do

I think valuations are high–not nosebleed high, but high.  I also know I’m bad at figuring out what’s too high.  I started edging into cyclicals a few weeks ago but have slowed down my pace because I’m now thinking that cyclicals might get weaker before they get stronger (I bought more MAR yesterday, though).

With that shift on the back burner, what else can I do to make my portfolio better?

features vs. apps

Another thing that’s also very reminiscent of 1999 is today’s proliferation of early-stage loss-making companies, particularly in software.

The 1999 favorites were online retailers (e.g., Cyberian Outpost, Pets.com, eToys) and internet infrastructure (Global Crossing) whose eventual nemesis, dense wave division multiplexing, was also a darling.

The software losers were by and large undone, I think, not because the ideas were so bad but because they weren’t important enough to be stand-alone businesses.  They were perfectly fine as features of someone else’s app.  A number were eventually bought for half-nothing after the mania ended, to become a part of larger entities.

 

One 2020 stock that comes to mind here is Zoom (ZOOM), a name I held for a while but have sold.  The video conferencing product is inexpensive and it’s easy to use.  It’s also now on center stage.  But there are plenty of alternatives that can be polished up and then offered for free by, say, Google or Microsoft.

 

Another group is makers of meat substitutes (I bought a tiny amount of Beyond Meat on  impulse after reading about 19th-century working conditions in meatpacking plants).  Same issue here, though.  Where’s the distribution?  Will BYND end up as a supplier, say, to McDonalds?  …in which case the PE multiple will be very low.  Or will it be able to develop a brand presence that separates it from other meat substitutes and allows it to price at a premium?  Who knows?  My reading is that the market is voting for the latter, although I think chances are greater for the former outcome  …which is why I’m in the process of selling.

 

 

 

 

 

 

serving more bleach: debt default

May 4, 2020 By in administration economic strategy, Strategy, Uncategorized Tags: , , Leave a comment

Two disturbing reports came out of Washington last week.  Both are linked to Donald Trump’s attempt to recast his failure in handling the coronavirus threat as being the result of a sinister plot by China to hurt the US.  I’m not sure that saying you’ve been tricked by China into ignoring world health officials is any better than just having ignored them, but…  Trump is, in his usual 1984 style, spewing disinformation and silencing civil servants who want to tell the truth.

As a human being, the key issue is the many thousands of Americans who have died because of his negligence.  From a near-term stock market point of view, though, what’s more important is the cover-up, being expressed in Trump’s desire to “punish” China for COVID-19.

Two actions are apparently being discussed by the White House.  Both are bad.  The second would be devastatingly so.  They are:

–placing new tariffs on goods imported from China, the main effect of which will be to negate some of the stimulus from Washington and slow economic growth

–defaulting on the national debt–specifically, ceasing either to pay interest on Treasury bonds held by China and/or to refusing to repay principal when Chinese bonds come due.

There has been no reaction so far in the Treasury bond market to leaks from the White House about the (to me) chilling prospect of possible default.  I presume this is because the market thinks no sane person would do something so financially damaging to the US …especially when the country needs to issue tons of new debt to finance the huge deficits the Trump administration is creating.  This, despite the fact that Trump did appear to favor a default strategy, as one he employed in his business dealings (btw, a reason no banks would lend him money), in statements he made during the 2016 election campaign.  

The most obvious consequence of default would be that borrowing costs would go up for the US. The dollar would probably decline. Default would also remove Treasuries from some (most?) clients’ list of permissible investments, putting more upward pressure on rates and downward pressure on the currency.  In theory, foreigners would be quicker to abandon the sovereign debt of a defaulting country than locals.  I’m not sure that would be true in this case.  In 1989, for example, a time of budget and trade deficits and an ineffective administration, domestic bond managers were the first to balk at buying Treasuries.

 

my bottom line:  It seems to me the trial balloons about default being floated by the White House are enough to have shifted the stock market away from the nascent “cyclical recovery” theme back to “flight capital.”

I’m reluctant to raise a large cash balance (hold in what currency?–probably not US$), which would be the right thing to do if I thought there were any chance Trump could carry out default plans.  But I can do some indirect things now. Dollar-denominated variable rate debt (i.e., bank debt instead of bonds) and business models where costs are in foreign currency and revenues in dollars would be toxic in a dollar default, so I’ll get rid of any I have.  I’ve been trimming tech positions recently and buying domestic recovery names.  I’ll stop that for now.  I should also have a list of what I would sell were Trump’s default idea to start to move forward.

depreciating the dollar

March 2, 2020 By in administration economic strategy, currency effects, currency markets, deprecating currency, economics, macroeconomics, reserve currency, Strategy, Trump's economics, Uncategorized Tags: , , Leave a comment

When a country is having economic problems–slow growth, outdated industrial base, weak educational system, balance of payments issues–there are generally speaking two ways to fix things:

–internal adjustment, meaning fixing the domestic problems through domestic government and private sector action, and

–external adjustment, meaning depreciating the currency.

The first approach is the fundamentally correct way.  But it requires skill and demands a shakeup of the status quo.  So it’s politically difficult.

Depreciating the currency, on the other hand, is a quick-fix, sugar-high kind of thing, of basically trying to shift the problem onto a country’s trading partners.  The most common result, however, is a temporary growth spurt, a big loss of national wealth, and resurfacing of the old, unresolved problems a few years down the road–often with a bout of unwanted inflation.  The main “pluses” of depreciation are that it’s politically easy, requires little skill and most people won’t understand who’s at fault for the ultimate unhappy ending.

Examples:

the Great Depression of the 1930s;

the huge depreciation of the yen under PM Abe, which has impoverished the average Japanese citizen, made Japan a big tourist destination (because it’s so cheap) and pumped a little life into the old zaibatsu industrial conglomerates.

 

It’s understandable that Donald Trump is a fan.  It’s not clear he has even a passing acquaintance with economic theory or history.  And in a very real sense depreciation would be a reprise of the disaster he created in Atlantic City, where he freed himself of personal liabilities and paid himself millions but the people who trusted and supported him lost their shirts.

Elizabeth Warren, on the other hand, is harder to fathom.  She appears to be intelligent, thoughtful and a careful planner.  It’s difficult to believe that she doesn’t know what she’s supporting.

 

 

 

Keeping Score, November 2019

December 5, 2019 By in administration economic strategy, Analyzing performance, Current Market Thoughts, Keeping Score, performance attribution, performance measurement, Recent Market Action, Strategy, Uncategorized Tags: , , , , , , 1 Comment

I’ve just updated my Keeping Score page for November.  Given the absence of mutual fund selling in October, not a bad result.