Guess what stock this is?
Our belief resides in the fact that economies grow through productive means – not monetary stimulus.
Imagine if you had this in your portfolio one year ago – you would be up 100%!
Wish you had bought it back in 2018, right? Well, it isn’t a stock – it is a bond. And it illustrates what is wrong with our global financial system. I would have used ‘capital markets’ but didn’t want to affiliate the word ‘capital’ aka true capitalism with today’s market place that determines the price of money since the system of setting the price for money today is the furthest thing from a free market. Today’s marketplace unfortunately is controlled and manipulated by a handful of central banks around the world. Within the walls of these institutions likely are bright people but it might be that when separated from a text book or classroom, they struggle with common sense.
Maybe we are missing something – but to us the reality today is that our monetary system is out of control. If monetary policy of forcing rates to 1 or 2% didn’t create the growth they were looking for, what makes them think that zero (or negative) will. Our belief resides in the fact that economies grow through productive means – not monetary stimulus. Maybe stimulus encourages investment in productive assets – supporting future economic growth – but it seems that today’s central planners believe monetary stimulus equals growth – which isn’t true. In fact – unintended consequence are bubbles and the misallocation of capital.
What has the past 10 years of extreme monetary policy (cheap money) generated?
First and foremost – it generated $16 TRILLION of ‘assets’ (we would call liabilities) that no one who values their capital should touch in a million years…
Here is a chart showing the market value of negative yielding debt around the world. Five years ago – it was about zero. Today – $16 TRILLION. And global GDP has grown by $10 trillion over that time frame. Not a good return in our opinion and creates a larger problem of how to get out of this addiction. Our thoughts were summed up well in this Forbes article.
Second – Unicorns (private companies valued over $1 billion).
When money in your pocket costs you to hold it – then you are incented to put it ‘to work’. Unfortunately, cheap money has no value and results in malinvestment. Similar to the late 90s – when companies focused on ‘clicks’ – it seems today it is more important to focus on revenue growth than profit growth – which to us is illogical. However, GS (Bloomberg article) tells its clients as much – focus on revenue growth and not profits – now – their incentive is about 4.4% in fees per IPO – with having done close to $6B in IPOs – they have earned close to $262 million selling new IPOs just this year alone. So – they made $262mm selling companies they are telling their clients to buy – maybe they should roll that $262mm of fees into all those money losing companies for 10 years – since it is such a good deal. (Bloomberg League Table – 9/4/2019)
WeWork – IPO announced. The last valuation of WeWork was done at a $50 billion valuation by SoftBank. Today IPO price talk of WeWork is $10-15 billion. How does the value of an asset decline by $35 or $40 billion in such a short time frame? Well some examples that come to mind are Enron and WorldCom in early 2000s – but these were both frauds. Others would be CSCO, MSFT and many other Tech companies in FY00 – but these are all in a bubble. Well – today you can include WeWork, UBER, WORK, LYFT and many other multi-billion companies that don’t make money, may never make money, but the reason to buy it was growth at any cost. Well, once the market wants a return on its capital, the downside is treacherous (remember when people paid for ‘eyeballs’ and ‘clicks’ in late 90s). But how should one determine a return on capital or how to assess what their returns should be? It comes back to our philosophy of knowing what you own. This philosophy leads us to our final symptom of crazy monetary policy – the rapid growth of passive investing.
Third – Passive Investing – Talk about being as far away from knowing what you own.
If you want a market return – that is fine but just don’t pay anyone for it. Go do it yourself and pay about 5 bps in low cost ETFs. However, if you actually want to know what you own – like where you put your money, how much is it earning and what is the thesis around why the value of the asset you own is supposed to grow over time – then passive investing is one of the worst ideas ever. It reminds us of all the water cooler conversations in the late 90s where the topic was someone’s great stocking picking abilities – don’t confuse a bull market with investment skills – the results can be devastating to your capital.
Go capture Beta (passive investing) just don’t pay for it. If you want a portfolio constructed from the bottom up – then pay for it. But in doing so – know what you are paying for and if you look at your statement and it consists of 8-12 funds or a hodgepodge of stocks, then you might want to think long and hard about what you are paying for – you may have just paid for something that could have been free.