Scottish politician Andrew Fletcher, in the 1700s once said, “Let me make the songs of a nation, and I care not who makes its laws.”
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I began this column in the midst of a massive market pull-down and completed the proofreading process 24-hours later with a rally underway on Wall Street. The stock-selling barrage on election night, like yellow gun-flashes of lightning, have quickly given way to cobalt skies and joy in the morning as renewed prospects of decreased regulation, tax reform, and increased revenues will surely get us out of the soup. It will finally awaken that vast swath of underinvested Americans who envisioned months and years of market splintering.
Post-election and 700 Dow points later: As I survey across America – its economy, its workforce, and its citizen’s ability to defy consensus voting expectations – I perceive huge currents of thought and life, some of which are life giving – and some of which are quite devastating. I also perceive a fundamental shift – a flash of awareness of sorts - in what may very well drive our investment narrative over the next years to come.
First let us begin here. Acknowledging the election result was decidedly out of consensus and unexpected and despite the candidates shattering records for their promises, sophistry and vulgarity, history has clearly shown us that the business cycle tends to trump presidential outcomes in terms of their impact on the economy, the markets, and your investments. Other words, investors making hasty investment decisions – i.e. rotating in-or-out of pharmaceutical or infrastructure stocks, becoming a foreign currency speculator, or gold expert predicated on a presidential outcome is – according to history - fairly short-sighted and not worth the risk. That is to say, hold lightly what the market has done or will do over the very immediate term.
Second, it is true that most Americans feel mismanaged, sabotaged, and led into the muck and naturally voted for the candidate who best offered to carry those hopes and dreams; those visions on how life should be ordered. Yet this incessant yearning for a demigod ignores the considerable sameness that does unfortunately exist between the proposed leaders and the led along with the extreme left and far right as both camps are ironically looking for the similar deliverances – just packaged in different size parcels labeled either perfect society or perfect protection.
We have increasingly become a nation of activists bound together by an invisible chain of delusion – unwilling to confront the real enemies crouching at our nation’s door including increasing debt, low-productivity, the shrinking value of a human workforce, and the complications of a rapidly aging population. So how does one invest? How are we to maneuver, or capitalize, within a societal message that says, “I don’t want your socialized medicine and please keep your hands off my Medicare mentality?” A culture that welcomes governments services and scope as long as they don’t perceive a growth in government itself?
Third, I often find the most obscure and below-the-newspaper-crease things the most intriguing and on the whole, this exercise has taught me that few points in life can or should be compartmentalized for an awareness of one area – even one that seems wooly – may lead to discovery in another. Whether it is
Uber vs. the destruction of taxi cab medallions, the ever increasing cheapness of knowledge, health care as an inborn right or economic data being a sticky mess of chaotic contradictions – everything is somehow connected, and the trick is to find those points of interaction and invest accordingly.
Debt and deficits, an economy with too much cash, a quickly aging population, and a declining need for humans in the labor force. Whether we are brought to this point by foolishness which we are still committing, whether it’s simply a manner of course, or whether it’s not too late to mend our ways matters little. We are at an inflexion point; a time when layers of fundamental shifts will eventually produce a new pattern. Patterns that demand a new investing normal.
- Cash: As investment advice goes, cash doesn’t get the attention it deserves. True, it generally has a zero expected real return. But at least there is a near conviction around that expected return. Cash has one important attribute which is too commonly unrecognized: a concealed optionality resulting from its comparative stability. In other words, the holder of cash has an actual option to buy more unstable assets if and when they become ridiculously cheap.
- Stock valuations will have less relevance: Valuations are always relative, yet will be increasingly so in an economy lacking much needed productivity and one awash in cash. Over the past year there has been an increasing vocal majority who cannot fathom investing in an S&P 500 that is trading at a valuation 2.5x above its long-term-average. Typically a prudent measure of value investing but decreasingly less so as absolute value will continue to yield to relative value. Favor equities with a consistent return-on-equity track-record.
- Interest rates vs. growth rates will be a headwind. Stocks can and have rallied in periods of rising rates; the next few years won’t be one of those instances. Watch for central banks to slowly evolve from monetary-easing to fiscal-easing as a way to create meaningful employment, stimulate inflation, and all the while rebuild our nations crumbling infrastructure. This would cause a spike in borrowing costs – not for reasons that would necessarily benefit the equity market.
- Favor momentum – relying less on standard mean reversion. For decades trusted advisors have had the comfortable task of diversifying portfolios among sectors/industries and rebalancing such when one sector became too cheap and the other too expensive. This is based on a theory called mean reversion – one where an asset will eventually and continually follow a long-term trajectory, or mean and the trick is to balance the portfolio along that mean. A new normal will have an increasing amount of cross-currents where a mean could be rendered meaningless! Lessen exposure and in its place add momentum strategies including managed futures and global macro.
Remember market thematics are not easy to pin down and when pinned down they often turn out to be trivialities or have no real tie-in with one another.