Since becoming president again, Trump has targeted the mineral resources of Canada, Greenland and Ukraine–especially rare earths and battery components–in his suggestions that the US somehow annex all three.

Three thoughts:

–I find it a little odd that Trump should at the same time be touting fossil fuels and wanting to acquire essential materials for EVs

–in 1970, the “hot” mining commodity was lead (because auto batteries would be forever). In 1980, when I added mining to my oil and gas repertoire, it was molybdenum, to make hardened steel. A few year later, it was copper–the main reason being that a prior glut had discouraged new investment in mines and demand had finally caught up with supply.

More generally, given the massive initial investment and long lead times involved in bringing a new mining project on-line, this is a classic boom/bust industry. Chemicals is another that comes to mind; autos, too, and EVs, as well. It’s hard to know how this factors into Trump’s thinking

–it’s not clear, certainly in the case of Ukraine and probably for Greenland, whether their deposits are large enough and concentrated enough for mining projects to actually be commercially viable

Other than the subway mugging vibe behind these demands, I find it hard to deduce the reasoned plan behind making them.

dreaming about future earnings

That’s what growth investors mostly do. There are situations, mostly at market bottoms (and around the low point of the business cycle), where even the best long-term growth companies are trading at a price justified by today’s earnings alone. As the economy recovers ands earnings begin to expand again, growth stocks begin to go up. Two reasons commonly cited: increasing earnings and expansion of the PE multiple–the latter being whatever is not explained by expectations for current earnings growth.

There’s another, more informative, I think, way of looking at PE expansion. As the market turns increasingly bullish, investors (who can no longer justify buying a stock based on current earnings) begin to also factor into today’s price their expectations for next year’s earnings. Sometimes, when the market is feeling extra-bullish–and when stocks seem otherwise too expensive–the market begins to factor into today’s price expectations for earnings two years in the future.

Take Nvidia (NVDA) as an example:

expected 2024 earnings = $3.00, meaning a PE of 47x

expected 2025 earnings = $4.50, meaning a PE of 31x

projected 2026 earnings = $7.00-ish, meaning a PE of 20x.

A simple-minded (though pretty useful, I think) gauge of the value of stocks vs government bonds, is the comparison of the earnings yield on stocks (meaning 1/PE) vs. the interest yield on the 10-year Treasury note–now 4.5%.

a PE of 47 = earnings yield of 2.1%

a PE of 31 = earnings yield of 3.2%

a PE of 20 = earnings yield of 5.0%.

On this measure, NVDA looks expensive based on the assumption of a strong finish to 2024 and 50% yoy earnings growth in 2024 but reasonably priced if we also throw in another 50% eps growth in calendar 2026.

This may well end up as the actual outcome. If so, the stock will likely be considerably higher two Decembers from now than it is today. This may also be the most probable scenario. My point, though, is that the US stock market is usually much more comfortable making bets on what will happen by this December than on what will occur almost two years from now.

So I don’t think there’s a lot of room for many stocks to move higher because investment horizons continue to expand (in the case of NVDA, I’ve sold well over half of the position I’ve held since January 2019).

It’s also possible that horizons will contract, at least partly because they most often do once they get to current heights. In addition, the administration in Washington seems to think that raising the price of imported materials and shrinking the number of workers in the country will somehow end up stimulating economic growth. Let’s hope so, even though conventional wisdom argues the opposite.

My sense is that the typical horizon contraction is already underway. If so, steadier but more pedestrian growers may become more appealing, down-market retailers vs. up-market, as well as down-and-out, you-can’t-fall-off-the-floor value stocks. Intel as a breakup candidate may be another indicator.

There are times when the US economy has a clear direction, from which we can draw conclusions with a relatively high degree of confidence about what effect likely macro developments will have on stock prices.

There are other periods–and the here and now is one of this latter kind–where waters are particularly muddy. The 1970s come to my mind, even though I was in the Army and then in graduate school for most of that period. The Vietnam war, Watergate, the rise of OPEC, deep worldwide recession and the collapse of the Nifty Fifty stock market, the IMF being called in for a financial rescue of the UK, runaway inflation, Carter appointing Paul Volcker and the consequent sharp rise in interest rates…

What a mess. But that was also the decade of the migration to the suburbs, the rise of specialty retail and the demise of the department store, an oil and gas drilling boom and the sharp shift in investor interest from large to medium- and small-cap stocks.

The key to investment success in the Seventies, to my mind, was not to get caught up in the general craziness but instead to find at least a few things to have a high degree of confidence in.

I think it will be the same kind of thing today. In fact, my sense is that the next few years will turn out to have a close affinity with the Seventies, with a major difference being that the people in charge now appear to be much less technically and economically competent than those back then. Not something I’m going to bet on, though.

–tariffs. Tariffs are taxes on imports. It’s possible, in the sense that I can type out a sentence and understand its meaning, that the entire tax will be absorbed by the seller who is exporting. So the price to the buyer will remain unchanged. But that’s highly unlikely. A more reasonable guess would be that the tariff will be split 50/50. If so, that would mean Canadian and Mexican good imported to the US will cost 10%-15% more. Put a different way, tariffs would reduce US consumers’ spending power. They’ll also cause inflation.

–deportations. In simple terms, GDP grows either by having adding more people to the workforce or having existing workers become more productive. The US workforce is growing by about 0.5% yearly from residents. Roughly 20% of the total workforce is immigrants. If the country began to deport, say, 5% of the immigrant workforce yearly, that would be enough to cause the overall workforce to begin to shrink, making it very difficult to have any real GDP growth

So it seems to me that Trump’s MAGA program is a recipe for slowing growth (nominal as well as real) and rising inflation. The latter implies that interest rates will remain higher for longer; the former suggests the consumer isn’t going to be a powerful growth driver.

My guess is that this means high-end retail won’t be a driving force this year, and that durable goods–like cars and appliances–won’t be, either. Probably good for Walmart (I own shares) and maybe for the dollar stores (I haven’t tried to sort these out yet).

more tomorrow

Looking around the developed world: the UK is a train wreck, China continues to dismantle the economic juggernaut a prior generation built, the EU is old–and showing its age (although southern Europe, of all places, seems to be prospering). The US has reelected as president the reality show host who didn’t exactly cover himself in glory in dealing with the covid crisis during his first term and for whom the country’s GDP growth doesn’t seem to be a very high priority. Put a different way, despite the key role of tariffs played in creating the Great Depression of the 1930s, he believes they’re the path to prosperity today.

All in all, not a lot of reason to think we’re entering a period of rapid economic expansion.

In addition, we’ve had a very strong post-Covid two years+ of stock market performance, with the S&P up by 68% from its late 2022 lows and NASDAQ coming close to doubling over the same span. So one might argue from this alone that we’re due for a pause. The counterargument, and there is almost always a counterargument, is that the Trump administration will organize another cut in the corporate tax rate. A similar corporate tax cut during his first term gave stocks a significant boost–even though it also weakened the government’s long-term financial position.

What to do …or rather, what I’m doing. To be clear, this is not general financial planning. This is about how I’m managing the active part of my equity portfolio, which makes up about a third of the money my wife and I have in the stock market.

Generally speaking, I think the key to success with stocks is knowing a lot about a small number of positions that you hold rather than to have the portfolio express half-baked opinions about a whole bunch of stuff. To my mind, “knowing a lot” means knowing more than the average market participant knows–hopefully much more, even though the reality is that this is a high bar. The market is sneaky smart and most often knows more than we give it credit for.

As a professional growth stock investor, I typically had a portfolio of about fifty names. Invariably, though, my outperformance would come from two or three stocks. Nowadays, as a private investor, I have about a dozen. All the performance still seems to come from one or two positions, though. So I have two main tasks–watching the outperformers super-carefully and making sure the also-rans don’t punch a hole in the bottom of the boat.

Seasons count, too. Growth investors tend to do best in up markets. Value investors tend to shine in flattish or declining markets. My impression is that the current administration in Washington has a social agenda that’s significantly anti-growth. So thinking defense is becoming the order of the day.

More tomorrow

During almost three decades as an equity portfolio manager, I used to tell myself as I entered my office to take off my hat as a human being and put on my hat as an investor. My main job there was to try to make my customers’ savings grow so they could send their children to college and retire comfortably (the two main investment goals for most Americans). That’s all that counted.

On the other hand, I also knew that companies that sold socially-destructive products like tobacco or firearms would always trade at low PE multiples–and that those PEs would be more likely to contract than expand and that earnings weren’t going to grow at a fast pace. Also, companies that treated employees badly, cheated suppliers or customers, falsified their financial statements or actively discriminated against women or minority groups were, almost by definition, run by incompetents and were doomed to eventual failure. Avoiding such serial clunkers would put me ahead of the game. This was just common sense.

The real point of my mantra was for me to tell myself to focus on the economics of the current situation and ignore everything else.

How do I see things today?

The US has really been the only game in town for years. When Xi, a Mao-style Communist Party functionary replaced Deng, an advocate of Western-style capitalism, as head of the Party in 2012, that produced two decades of strong economic growth there, the writing was on the wall for the Chinese economy. The suppression of Jack Ma and Alibaba more than half a decade ago made the return to something like Maoism clear. Around the same time halfway around the world, Brexit, the UK’s failed attempt to restore its 19th century glory, happened. Economically, the EU was kind of a weird duck anyway, but the self-destructive withdrawal of the UK highlighted the shakiness of the Copntinental economies.

Those two shoot-yourself-in-the-foot moments left North America as effectively the only place to look for growth stocks.

The same anti-growth political development appears to have popped up here in the US, as well, where the electorate decided the better candidate for president was a convicted felon espousing a white supremacist, anti-immigrant agenda, with an economic plan based on the policies of the 1890s that didn’t work back then but somehow are supposed to be better now.

Trump has acted aggressively to destroy all evidence in the criminal cases against him for trying to overthrow the government and for his misuse of top secret documents. He’s tried unsuccessful so far, to end food stamps and Medicaid. And, in his most important economic move, he’s imposing tariffs on imports from Canada, Mexico and China. In what I see as a maneuver to avoid the mediation provisions in the US Mexico Canada (USMCA) trade agreement he negotiated in 2020, Trump is maintaining that fentanyl imports from both countries constitute a national emergency. This last is only interesting in that it shows someone has put considerable thought into these maneuvers.

A real political mess, with a lot more to come, I presume.

The two big domestic headwinds I see:

—tariffs

–tariffs are taxes placed on goods imported into a country. In the very short run, the cost of the tariff is split between the maker/seller and the buyer–the latter paying somewhat more and the former making a somewhat smaller profit. The hit to each side depends on its relative market power.

Sooner or later, both will begin to look for cheaper substitutes, with the seller looking for new, tariff-less markets (like Canadian oil producers looking to the Pacific Basin instead of the US) and the buyer different products (like switching to gas heat instead of oil). The speed with which the sides move depends on the situation. A Canadian oil company will probably want to keep its output at a steady rate to avoid damaging its fields or having equipment remain idle, so it will likely move more quickly to find other markets. Same thing with the US refineries tuned to accept Canadian crude. In the short run, retail customers may just pay the extra and turn down the thermostat for the time being.

—government layoffs

Federal government spending represents just under a quarter of domestic GDP. That’s a huge chunk. Government employees, on the other hand, make up about 2% of the total workforce. As an overall economic issue (as opposed to an issue affecting the lives of thousands of Americans being laid off), cuts in government spending seem to me to present a much greater threat to domestic GDP growth than the layoffs in Washington. Of course, because the people now being so heartlessly laid off are the ones who have control of that spending, this may be a distinction without a difference.

To date, though, Trump seems to me to be at least as interested in seeing all evidence that would support future criminal prosecutions of him is destroyed as he is in closing down government socical programs..

more tomorrow