Synopsis: Many accept as doctrine that the entire rebound in stock prices since 2009 has been driven solely by artificially low interest rates. The observations of a 15th Century sage should be enough to tame that dogma.
The two ecclesiastical scholars looked warily at each other across the table. Outside, street carts noisily rumbled past on their way to a sunny, bright market day. Inside the Cathedral in Frauenberg, it was silent, cool and dark. The men drank ale and ate hard cheese, enjoying a companionable silence punctuated by occasional drabs of conversation.
“You know Bishop, I’ve been making astronomical observations for quite a while. In fact, I remember the exact day I began, March 9th in the year 1497. And I’ve learned a few things, come to a few conclusions.” Announced the Canon of Frauenberg wistfully.
“Ah, such as?” Asked the Bishop.
“Well, I think we’ve been mistaken about the sun revolving around the earth. I believe it is the other way around,” announced the Canon.
A silence ensued. Old boards groaned and somewhere a shutter hinge squeaked. The men eyed each other across what seemed to be a widening distance. Then, the Bishop slapped the wooden table as if he intended to split it in half. He bellowed and snorted, then nearly giggled with joy. Tears streamed from his eyes. “Nic, that’s funny. Really funny.” His face sobered, the mirth draining like a tankard of good beer. “But don’t let anyone else hear you joke about that stuff. I don’t want to see you burned as a heretic.”
Now it was the Canon, Nicolaus Copernicus, whose face drained; of color. He quickly shifted topics as his boss sipped and nibbled. “Right then, how about we discuss that issue with the currency?” Lucky for him, Copernicus could converse about multiple topics. He was multi-talented, working simultaneously on determining the motions of heavenly bodies and managing the monetary matters of Prussian Poland. And you thought talking on the phone while perusing Facebook was serious multi-tasking?
Five hundred years later, we recently completed the eighth revolution around the sun since the bull market began back in March of 2009. Has it all been a Fed induced, easy money binge? Will future orbits be more sobering? Are there alternate theories that won’t get us burned at the stake? The two topics Copernicus knew best help us reach a revolutionary conclusion:
1. Monetary theory: Cracking the questions of the cosmos is nice and all, but Copernicus also dabbled in man’s greatest ambition: money management. (I may be biased.) As the Canon, one of his responsibilities was maintaining the local currency. An original monetarist, he opined that inflation was a matter of too much money chasing too few goods and that excess amounts of currency or loose monetary policies should be avoided. Prices rise when there is money to buy and excess liquidity leads to increased inflation. And talk of bubbles dawns when easy money chases things like stocks, artificially driving up values.
2. Heliocentricity: Copernicus’s idea that the sun was the center of the solar system broke with the classical theories of Greek philosophers like Aristotle and Ptolemy. Yet, for all that time since classical antiquity no one could accurately say why some bodies seemed to move across our sky and then move backwards, or retrograde, before continuing on the primary path. Through his calculations he sought “…a more reasonable arrangement of circles, from which every apparent regularity would be derived while everything in itself would move uniformly, as is required by the rule of perfect motion.” It would take decades before anyone would widely accept that they weren’t at the center of the universe.
In places like the Federal Reserve, they still find it hard to believe the cosmos doesn’t revolve around them. Yet their efforts to make money more available through low interest rates have been only partially successful. Such funds have been more stationary than inflationary, parked on corporate balance sheets and held as excess reserves at financial institutions. Creating it isn’t enough; the money must circulate to create price pressures in the form of inflation or bubbles.
Today, the most reasonable arrangement of data for stock investors should have less to do with the Fed and more to do with earnings. That is, valuations don’t seem to be artificial at all. Since markets stopped moving in retrograde back in 2009, solid earnings have made stocks more and more attractive. And the first quarter of 2017 is no exception with the S&P 500 projected to have the highest year-over-year earnings growth since 2011.
Revolution #9 should see us grabbing a beer and putting the fun back in fundamentals, paying less attention to Federal Reserve press conferences (yawn) and more to corporate earnings calls (okay, also yawn). For those who believe this period since the Great Recession is a Fed induced bubble, most of this will seem like heresy. But, much like that whole heliocentricity thing, being heretical doesn’t make it wrong.
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Links to Sources:
2. https://www.astronomyclub.xyz/uniform-circular/copernicus-and-planetary-motions.html 3.https://insight.factset.com/hubfs/Resources/Research%20Desk/Earnings%20Insight/EarningsInsight_032417.pdf
5. Federal Reserve Bank of St. Louis, Excess Reserves of Depository Institutions [EXCSRESNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EXCSRESNS, March 29, 2017.
Synopsis: The French and Indian War, as it became known in America, launched the career of a young soldier who learned many lessons during his time on the frontier. His story presents four key lessons for investors and their money. If they saddle up and don’t call in sick.
“Ahem. Ah, listen, I’m not sure I can make it today.” He’d awoken and felt okay, but his stomach was a bit sour and he was pretty sure it was going to get worse. No sense in pushing it, and if he had to exaggerate a bit to get his point across, so be it.
Silence. The boss wasn’t buying it.
“No, I’m telling you, I’m not fit.” He coughed once or twice, but since he was complaining of dysentery wasn’t sure why. This wasn’t going well at all.
“I’m sure someone else can handle it. I mean I’m not the only one, right?” He was one of three people doing the same job, and he had just joined, so was it really that important he get up and go with them?
“Besides, there is more. I have other medical issues as well.” He went on to detail them at some length.
“Alright Georgie. Do as you will. We can’t expect a lad from the backwoods to pull his weight in the real army, can we? We’ll move on without you.” General Braddock, stern as ever and a proper blue blooded Englishman, stood to leave.
His aide, a young Virginian planter of just twenty-three years, sighed heavily and rose, though a bit unsteadily. “I’ll mount up and ride with you, sir. It is my duty and my pleasure.” Like most twenty-somethings, he just needed a little motivation. He found it, and much more, throughout that July day in 1755, a battle with French forces near present day Pittsburgh. Complaining of dysentery, fever and riding on pillows to help the pain of hemorrhoids, he was singled out for bravery and valor in a running retreat across southern Pennsylvania and Maryland after General Braddock was mortally wounded. He would continue to gain renown in the war that engulfed the Colonies and much of Europe throughout the 1750s, though the British army would never fully accept him as anything other than a nice kid from the wrong side of the Atlantic. The conflict, known as the French and Indian War ended via the Treaty of Paris on February 10th, 1763.
As a result, the British gained most of North America east of the Mississippi River, crippled the French Navy and expelled them from India, Louisiana and Canada. Not a bad decade’s work in the grand scheme of the empire. However, it was a lot to consume and like a bad pudding, it would later give the British people a considerable bout of indigestion. Nearly broke, government ministers attempted to raise revenues from the Colonies leading to disenchantment and a desire to throw away perfectly good tea in protest of taxes and tariffs. Meanwhile, the French seethed and decided to retaliate by backing the nascent independence movement championed by a military veteran who was denied a commission in the British army. But by then no one was calling him Georgie. They called him General Washington.
This President’s Day week, here are a few points for those looking to invest their dollars wisely, from the life of the man whose picture now graces them:
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Synopsis: A team for the ages won more games than anyone else over a four-year period during which they lost four Super Bowls. Were they all-time greats or merely a band of lovable losers? In sports, as in investing, it is important to make sure you are asking the right question.
It was thirty-eight degrees on January 20, 1991 and winter winds were whipping up from Lake Erie, making suburban Buffalo feel more like it was closer to single digits on the Fahrenheit scale. From the shotgun formation, the quarterback of the Buffalo Bills surveyed the scene, adjusting his receiver’s routes with an audible.
He had a not-so-secret hatred toward cold weather; he hated it enough to flee his native Pittsburgh (craziness!) to attend college in sunny southern Florida at the University of Miami. But he didn’t feel the cold now, although his breath was visible in a steady and even plume as he sized up the defense in front of him. A thin sheen of sweat covered his face and adrenaline coursed through him every time the crowd exploded into cheers, which had been often over the last few minutes. He felt strong, warm and loose. In contrast, the beefy boys on the defensive line breathed in irregular gasps, their lungs tight and muscles burning. They were already hunched over, gasping. The pace was punishing. Unable to make substitutions, the defense had taken a timeout two plays previously to rest.
“Hey Kelly, can you slow it down? Seriously!” bellowed Howie Long, a future Hall of Famer, his hands on his knees gasping for breath.
Buffalo Bills quarterback Jim Kelly, a future Hall of Famer himself, had a brief reply: “Hut!” And the next assault was underway.
Long and his compatriots were still in the same defensive set that had been carved up for over eighty yards in under four minutes. So, Kelly knew exactly what he was facing and how to make them pay on 2nd down and goal to go. But he soon realized something was wrong. The snap, arcing to his left, glanced off his hand and flopped to the artificial turf, landing on the hash mark at the 18-yard line. The AFC Championship game, which had started so promisingly seemed about to turn. Perhaps the smart move was to fall on the ball and regroup?
But Jim Kelly was a gambler. Indeed, he was a former Houston Gambler of the now defunct United States Football League. As a young, brash rookie, he had spurned Buffalo’s offer during the NFL draft because it was on a short list of cold weather cities he told his agent not to consider. It turned out to be a blessing for the Bills. While in Houston, Kelly came under the tutelage of “Mouse” Davis (formerly of Portland State) who redefined what offensive football could look like with an up-tempo, “run and gun” offense that placed a premium on quick decision making and limiting defensive substitutions. An early adopter of the philosophy, Kelly was now a master of the craft and would eventually come around on the whole Buffalo thing.
Now, picking up the ball, he rolled right to buy time and spotted a receiver breaking toward the middle of the field at about the 5-yard line. On the run, he squared up and delivered a strike, hitting him in stride so he could cruise untouched into the end zone. The delirious crowd thundered its approval, the noise swelling as a wintry mix of rain and sleet began to fall. The kicker, Scott Norwood kicked the extra point with 11:30 still on the clock in the first quarter. It was 7-0, but there was a lot of time left. Unfortunately for Howie Long and the Raiders, more time merely meant more offensive series for Kelly and the Bills. The “K-Gun” offense rolled to the most lopsided victory in an AFC title game, 51-3 and the Bills were headed to their first Super Bowl. Installed as 7 point favorites over the cross-state New York Giants for Super Bowl XXV, Kelly and Bills fans had to feel like the best was yet to come.
It wasn’t. As is often the case, the highest of highs proceed the lowest of lows. The Bills luck turned cold against a defensive coordinator named Bill Belichick and a Giants offense that gobbled up clock on long, plodding drives. Norwood missed a forty-seven-yard field goal that went wide to the right that would have won the game. The Bills lost a heart breaker but promised they would return to the big game. To their credit, they did, three times. Each trip they found new and interesting ways to lose the Super Bowl. It had all started so promisingly on that cold January day in Buffalo. By the time they lost Super Bowl XXVIII, everyone was asking: Were these the biggest losers in all of football?
Yes, they underperformed at big moments, but losers? The saying goes that when everyone is asking the same question, it is often the wrong one. The Bills weren’t losers at all. Indeed, over that four-year period they had the best overall record in the sport, including a 14-2 record versus supposedly dominant NFC opponents in the regular season. Howie Long, a Super Bowl winner and their overwhelmed opponent from January 1991, said “some people label them losers. Not me, though.” Indeed, he thought them worthy of consideration for his list of The Ten Best Teams of All Time.
The questions I’m hearing early in the game in 2017 seem to be the wrong ones as well. Will a stray tweet wreck the stock market rally? Are interest rates going to continue to rise this year? Is China going to replace America as the preferred global trading partner? Even if you knew the answers, could you move fast enough on offense to take advantage of them? Not likely. My advice is to keep the big picture in mind and ignore the noise of the crowd. Don’t be too euphoric when ahead or too depressed when behind. When it comes to the short-term news cycle, perhaps the best question an investor can ask is the simplest: so what?
Synopsis: A bitter presidential election between an angry populist and his rival, representing the establishment, strained the fabric of American civility. But it probably isn’t the election your friends are talking about on Facebook.
The afternoon sun was setting and a short line of bundled forms shuffled and stamped in the cold as the November evening came on. Though the lines were not terribly long at the polling place, the process was slow and voters had to wait over an hour to cast their ballots. Inevitably, conversations began, couched as complaints about the wait or the weather. But the longer the delay, the better the chance that politics would begin to creep into the conversation. It was as if a match had been struck and lain in tinder, waiting for a mere breath of air to spark a flame.
“You aren’t voting for that man are you?” Sniffed a well-dressed man as he arched an eyebrow, abandoning any good-natured chit chat.
“He is a man of the people and he has my vote, yes Sir.” Said his recent acquaintance. His preferred candidate was a raucous populist who many saw as ill-tempered, maybe even dangerous. Such a candidate was completely novel to the American political process.
“He is an abomination! An assault on the Constitution. Completely unfit in temperament for a job as serious as President of the United States.” Countered the first man. His preferred candidate had a clear history of Federal service including a stint as Secretary of State and a familial connection to the White House.
“Oh, you establishment types are all the same!” Partisan divides ran deeply during this election, often drawn along regional and economic lines. Luckily for all concerned, the men came to the front of the line and finally cast their votes, symbolically ending their argument. At least for now.
When the votes were counted in the election of 1824, yes it was 1824 and not 2016 despite the often eerie parallels, there was no winner in the Electoral College. Andrew Jackson, the populist Tennessee firebrand whose stormy temper and lack of pedigree made him unpalatable to eastern politicians, got the most popular votes. But the electoral college was split four ways, throwing the contested election into the House of Representatives for resolution. There, Secretary of State John Quincy Adams prevailed when House Speaker Henry Clay swung his support in exchange for becoming the next Secretary of State. This however, took until February 9th of the following year. Jackson and his supporters decried the “corrupt bargain” and railed against the “corrupt aristocrats of the East.” In other words, the system was rigged.
For the record, I do not wish to add to the social media deluge of post election prattle. And I’m professionally agnostic when it comes to political parties and elections. Though it is important historically to know that four years later Jackson defeated Adams in a landslide, I merely wish to point out something I think the media and pundits missed in the run up to, and events of, this election eve and beyond. Markets did not move downward as the race tightened because they were afraid of either candidate. Yet you heard much of that opinion, especially when overnight futures fell off a cliff as states like Pennsylvania and Michigan remained too close to call. Instead, I believe, they began pricing in the potential of 1824 style electoral mayhem. Indeed, for a time one of the networks showed a graphic describing the math, completely within the realm of possibility, to arrive at a tie in the Electoral College. Recounts, lawsuits and eventually a showdown in the House might have followed. And markets hate that kind of uncertainty. Waiting until February for a resolution to a tight and bitter presidential contest would not have gone over well. But it didn’t happen. Instead, a winner was declared, concession speeches were made and life went on. One suspects that the losing party did just what Jackson did, began planning immediately to retake the White House four years hence. Or did you think the seemingly perpetual political campaign season was merely a modern phenomenon as well?
Synopsis: Lewis and Clark entered the last phase of their journey to the Pacific in October of 1805. Whether they had endured an ordeal or had a great adventure was open to interpretation. Investors too have a choice in how they interpret their own journey and the hardships along the way.
The giant Newfoundland dog’s bark thundered and echoed down the canyon of the Clearwater River. Slobber was whipped from his jowly face and flung backward in the stiffening breeze to land among his boat mates. No one noticed or seemed to care much. The sun was low in the October morning sky and the temperature high enough to create a sweat as the men paddled hard with only their breathing audible above the rush of water. The lead canoe smelled of unwashed bodies and wet dog.
“Easy boy,” said his owner patting his tangled mass of fur atop the Newf’s wide forehead. It had been another difficult morning of travel, much of it spent freeing their canoe from a tangle of rocks. They’d worked at it for over an hour and everyone was tired and irritable, even the normally upbeat canine. Now their canoe slid easily along with moderate exertions through the middle of a wide expanse of water.
The dog bellowed again, a reverberation like a cannon booming, it brought the weary travelers to their senses. The sounds and smells had changed. Fire was on the breeze and something was cooking. They heard low sounds of human voices and felt eyes on them. As they rounded a wide bend there were warriors pointing towards them. Suddenly from both sides of the river men, women and children were gathering to look, watch and evaluate. Were they friend or foe? The river grew tense as the canoe continued its path forward.
On shore, the site of a black bear in a canoe was enough to make the Native Americans gathered on either side of the river take notice and stare in awe. They watched as the men and a woman with a baby drifted by. And they shook their heads in amazement when the bear barked like a dog. Eyebrows were raised, low discussion were held. But everyone seemed to agree, no danger here. One of the children waived and smiled. Then everyone was doing the same, content to watch the unusual floating party make its way downriver.
The dog, satisfied, nuzzled down in the canoe at Meriwether Lewis’s feet and promptly began to snore. Lewis patted his massive head and murmured, “Good boy Seaman, good boy.”
For months Lewis, his associate William Clark, the men and one dog of the Corps of Discovery had endured the privations of living wild and crossing an occasionally unfriendly continent. They’d gone hungry, crested mountain passes in the snow and the Newfoundland named Seaman had almost been killed when a beaver bite severed an artery in his leg. But by October of 1805, they could sense their goal, the Pacific Ocean, nearby. Indeed, within a few days they would be on the Columbia River. By early November 1805, William Clark was able to pen his most famous journal entry: "Ocean in view! O! the joy."
The adventures of Lewis and Clark came to mind recently while attending a presentation by a noted economist. (Newfoundlands, by comparison, come to mind daily when ours competes with me for space on the couch). He told a harrowing story of fishing on a remote and frigid lake in South America then summed up his point with the sage words of his Kiwi guide: “Know what the only difference between and ordeal and a journey is? Your attitude, mate.” One can well image the two explorers agreeing once safely ensconced in Fort Clatsop on the Pacific during the winter of 1805.
And for clients and investors, the last few years have certainly been adventurous, though not life threatening. The usual ups and downs have been supplemented by flash crashes, Brexits and election shenanigans taxing even the most upbeat of us. Have we been on a journey or endured an ordeal? Well mate, that depends a lot on your attitude, doesn’t it?