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  • November Round Table with John DeTore – Part 1

    Peak Capital is running an online roundtable in November with our CIO John DeTore, John Mauldin, Sam Stovall.  You can check with them to get the full answers from the various panelists, but I wanted to share some of John's answers ahead of time. 

    It's a lot of information, so I'm going to split it between two weeks. 

    November 2019 PCM Roundtable 

    Peak: Let's kick things off in a very different way. It is April 2021 and we just completed the first 100 days of the Warren Administration. What are you most concerned or excited about?

    John:

    • Finding the bottom of the US stock market.
    • Concerned because there is further to go.
    • Excited because of my short positions.

     

    (Listen, I can see that she is trying to do good things for humanity:  Free healthcare, tuition, and so forth will help people.  But, ahem, it isn’t free, is it.  Taxpayers pay for it.  So, the stock market "don’t likey".)

    Despite one’s political leanings, and there are a lot of interesting ideas being kicked about, the market will hate a flirtation with socialism.  The market is probably off 20% from November 2020 (or its previous high if it became obvious she was winning earlier than November). Many analysts in April 2021 are looking for a bottom.  They are early.

    Remember the Obama recovery? (in RED below, it's the only one where the recovery is obviously not symmetrical.) While he shouldn’t be blamed for the financial crisis he inherited, he immediately moved to work on healthcare while we were in the depths of the crisis.  Taxes increased, and regulations expanded.  We can see how that recovery was different than any other in recent history, drawn around 2011:

    Picture1

    via calculatedriskblog

    I doubt that Warren will do any better with the economy and I fear she will do worse.

    Thinking about how inaccurate political polling has become, I believe economic forecasting errors have also risen dramatically. Formerly reliable indicators and data points seem less reliable in today's market. How are you addressing this reality?

    Statistical analysis is relatively easy and can be learned in a few college classes.  Forecasting is maddeningly hard and often largely based on the forecaster’s training, assumptions, biases, and experience.

    What happened to the notoriously inaccurate polls of 2016? 

    Party affiliation, likelihood of voting, age, sex, state of residence all affect candidate choice — even the most careful survey will find that the sample pool is different than the total voting population.  All pollsters adjust their sample demographics to what they assume the voting population is.  But how many of each will show up on the big day?

    Many pollsters in 2016 assumed they could use the turnout in 2012.  The election had a large black, young, liberal turnout … are we surprised given the first black U.S. president was elected?  Did we think Hillary would get the same response?  Most pollsters did, but does that make sense?  Several pollsters who saw Trump as having a decent chance were publicly describing this specific statistical error.

    Regarding economic forecasting:  It suffers from the same phenomenon.

    Example: we can dutifully correlate “yield curve inversion” to subsequent recessions.  And I read about this about 50 times a day when the curve inverts.  But let’s look a little deeper:

    • A simplified theory: 10-year Treasuries represent a market view of forward inflation. As such, we might suggest it’s a nice neutral point for Fed policy to set the Fed Funds rate.  (Maybe a little lower because we believe in term premium but let us not split hairs.)  If the Fed pushes up short rates higher than this, it’s hitting the breaks.  They tend to overdo things, causing recessions (occasionally on purpose?).
    • Do we believe that 10-year Treasuries still represent a market view of inflation? There are reasons to be suspicious, with QE now affecting long rates and a strange influence on foreign buying from markets with negative real rates.
    • If long-rates are depressed below that of long-term inflation expectations, then I for one lose faith in the usefulness of the indicator.
    • (For what it's worth, I think rates are set by the supply and demand for bonds. The supply is going through the roof given deficit spending.  I can reach no other conclusion that demand is growing faster. I suspect Dodd-Frank, Basel III and the like for creating new sovereign debt demand.  If someone has data on this, write to me!)

    Economic forecasting is an art best practiced by people who understand the economy.  Which means most of us should stop doing it.

    Peak: How will the trade war with China get resolved?

    John: It won’t.  Trump famously started his trade war tour with claims that it's easy to win a trade war with China because they have so much more to lose.  He thought they would be the first to resolve USMCA, the UK post-Brexit, Europe, and various Asian markets would follow … even India.

    He is correct they have more to lose … much more, since they hardly buy anything from us.  But to me, this was an obvious tactical mistake by the master negotiator.  President Xi feels no pressure.  His limo still has fuel, his meals are still exquisite, and there is no political pressure on him.  It would benefit their economy to cave to Trump, but they have no incentive.  They play the long game.

    Trump is right to pressure them and even to play hardball.  We might get real intellectual property relief.  It will be quite a slog … my prediction is there will be a string of broken promises, and once we have concessions they won’t live up to their end of the bargain.

    If Trump is really hard on them, they will just drag their feet for 5 years and try again.  It will shave a couple of percent off their GDP.  No one in China will complain.

    Peak: What is the long-term impact of Brexit?

    John: I fear the real result is to box Brussels into a difficult position.  The UK is leaving because politically the EU is too left-leaning and quick to impose their views on member countries.  The UK will survive this better than the EU will.  The only saving grace is that the UK was a reluctant participant in the first place … retaining the Pound as their currency.

    This does open the possibility, though, that the relations with one of our strongest partners improves.  US-UK relations are due to be renegotiated and this could be material.  In fact, to me this looks like the UK is trading in Europe for the US as their best buddy.   I think they will do fine. 

    Worry it hurts Europe.

    Peak: Is impeachment a threat to the stock market?

    John: Continue to believe this is political theater and not a serious impeachment case.  It's unclear what the charge is or whether the house will even take a vote.

    As an influence on the market, its probably already there.  For instance, if the impeachment effort dissolved, it would be enough for the stock market to eek up to new highs, maybe breakthrough.

    But if the market begins to believe that the Senate could actually convict … the market would react badly.

    Peak: Could the Turkey-Syria conflict spiral out of control?

    John: It could.  It’s not clear how badly this could hurt the US economy though.

    I doubt any of us really know what is going on behind closed doors.  The U.S. has no primary fight in that battle.  Turkey, Russia, and Iran all have strategic interests.  We have issues with all three, but if “the enemy of my enemy is my friend” what we are really all about is diminishing Iran’s influence.

    We will not be obvious about what we want.  It will not be public what is being said to Putin and Erdogan.  It will be a quagmire of deception and influence.

    But it won’t shave multiple percents off our GDP or cause our stock market to drop 10%. (If it does, BUY)

    Peak: Recessions are typically not formerly declared until months after they actually began. What is the probability the U.S. economy is in a recession by next June that would impact the 2020 election?

    John: The economy is strong, unemployment low, confidence high.  There are small snippets of bad news that come out all the time and are ignored by the stock market.

    The question implies, I think, that GDP would decline both in the 1st and 2nd quarters of 2020. 

    The combination of full employment, strong profitability, and very low rates rarely ever happens.  When you are at the summit of a mountain, every path leads downhill.  It's not that things aren’t good, they are.  It’s just that it’s hard to see them improving much from here … every macroeconomic variable is maxing out.

    Certainly, it could happen.  After many months of >200K new payroll, we are reaching what could be called full employment.  We have worked our way through a shadow economy of functionally unemployed, returning people to the workforce that was shed in the 2008  financial crisis (they weren’t retired after all). Interest rates are of course very low.

    It would take more than this to really hurt the stock market though.  Over the long-term, it’s surprising how S&P forecast eps yield are tracked by 10-year Treasuries.  

    • That forward eps yield is now 177/3022=5.9%! Even the dividend yield is 1.9%, ahead of the 10-Year’s 1.8%.  
    • While I don’t expect the eps yield to fall to 2% (which means the P/E ratio would head to 50x!), it is reasonable to think in this environment (strong economy, strong earnings and growth, and paradoxically very low rates) the multiple should be above average, and it’s not.

  • 90th Anniversary of Black Thursday

    This past Thursday was the 90th anniversary of Black Thursday, a day when sellers on Wall Street panicked and closed approximately 13 million shares on the NYSE … causing 5 billion in immediate losses and spurring the Great Depression, easily the worst stock market crash in US history. 

    GettyImages-51311238-585d7e163df78ce2c31d3706

     

    With 90 years of education, technology and progress under our belts, we can look back at their mistakes assuming that it could never happen again – but could it? 

    The years prior to 1929 were filled with post-WW1 optimism and massive speculation. The combined net profits of 536 manufacturing and trading companies in the first six months of 1929 showed an increase of 36.6% over 1928, itself a record half-year. Rural Americans flocked to cities to take part in the excess of the Roaring Twenties. Stock prices were rising and there was massive economic growth. Like many 20 years olds, the '20s was a period where Americans felt invincible, right up until October 24th of 1929. We almost made it out of the decade.  

    On the day the 1929 Crash started, 11% of the Dow's value was lost by the opening bell. There was so much trading that the ticker tape reports were backed up. Traders had no idea of the true value of the stocks. Panic.  Suddenly, 5 billion dollars was gone, along with optimism and trust in the system. By Black Tuesday, several stocks sat without buyers and the Dow drops another 12%.  Collective confidence shattered.  Psychological traumas compounded until there was widespread economic PTSD.  Uncertainty spread like wildfire. Owners of businesses were unsure if they could get credit, workers were uncertain of job prospects or whether they'd get paid. As a result, consumption dropped, businesses failed, banks followed, and shortly thereafter, so did the Great Depression. 

    From the peak of the Dow (September 3, 1929) to the bottom of the Great Depression (July 8, 1932) the Dow lost 90% of its value. 

     

    Human Nature is Human Nature

     

    We've since instituted many measures to protect businesses, banks, and consumers, including measures to suspend trading in periods of rapid decline (like the Securities Act of 1933 and the Securities Exchange Act of 1934). As well, we have a better understanding and tracking of economic barometers like car sales, real estate, etc. 

    The reality is that in various scales and timeframes human traders undergo the same issues time and time again. It only becomes a talking point when it becomes painful enough. 

    It shouldn't take mass unemployment and economic contraction for us to understand the dangers of speculation, the dangers of human fear, greed, and discretion, and the dangers of poor economic theory. 

    Human fear and greed will likely play less of a role in markets going forward.  Increasingly more of trading volume is algorithmic.  And increasingly more of the decisions are made with AI using more data and shorter time frames.  As a result, while I expect increased volatility, I also expect increased opportunity.

    Keep in mind that there is a difference between guessing and knowing … and knowing is more profitable.  The corollary is: if you don't know what your edge is … you don't have one. 

     

    If You Don't Know What Your Edge Is You Don't Have One _GapingVoid

     

    Here's to a great last few weeks of 2019!

  • Here Are Some Links For Your Weekly Reading – October 27th, 2019

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    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

     

    Trading Links:

  • Happy Halloween: The Trick To Treats

    Good data visualizations are few and far between. Bad data visualizations spread lies, misrepresent content, or are sometimes just plain unreadable. 

    In honor of Halloween, here's an example of a fun data visualization put together by Mariona Banyeres based on FiveThirtyEight's "The Ultimate Halloween candy power ranking." Compared to simpler charts it may be harder to read, but it's interactive, it's themed, and if you hover over points, it will add extra context. Click to go to Mariona's interactive Tableau DataViz. 

    Halloween

    Mariona Banyeres via FiveThirtyEight

     

    To skip the data visualization, here are the results of FiveThirtyEight's competition. 

    Screen Shot 2019-10-25 at 4.43.38 PMvia FiveThirtyEight

    Hope you have a Happy Halloween.

  • Gartner’s 2019 Hype Cycle For Emerging Technologies

    Technology is a massive differentiator in today's competitive landscape. 

    Sorting through predictions of which new technologies are going to impact the world and which are going to fizzle out can be an overwhelming task. I look forward to Gartner's report each year as a benchmark to compare reality against. 

    Last year, Gartner reported Deep Learning and Biochips were at the top of the hype cycle – in the "peak of inflated expectations." While I'm excited about both industries, there was certainly more buzz than actual improvement in those spaces last year. Excitement almost always exceeds realistic expectations when technologies gain mainstream appeal. 

    What's a "Hype Cycle"?

    As technology advances, it is human nature to get excited about the possibilities and to get disappointed when those expectations aren't met. 

    At its core, the Hype Cycle tells us where in the product's timeline we are, and how long it will take the technology to hit maturity. It attempts to tell us which technologies will survive the hype and have the potential to become a part of our daily life. 

    Gartner's Hype Cycle Report is a considered analysis of market excitement, maturity, and the benefit of various technologies.  It aggregates data and distills more than 2,000 technologies into a succinct and contextually understandable snapshot of where various emerging technologies sit in their hype cycle.

    Here are the five regions of Gartner's Hype Cycle framework:

    1. Innovation Trigger (potential technology breakthrough kicks off),
    2. Peak of Inflated Expectations (Success stories through early publicity),
    3. Trough of Disillusionment (waning interest),
    4. Slope of Enlightenment (2nd & 3rd generation products appear), and
    5. Plateau of Productivity (Mainstream adoption starts). 

    Understanding this hype cycle framework enables you to ask important questions like "How will these technologies impact my business?" and  "Which technologies can I trust to stay relevant in 5 years?"

    That being said – it's worth acknowledging that the hype cycle can't predict which technologies will survive the trough of disillusionment and which ones will fade into obscurity. 

    What's exciting this year?

    It's worth noting that in this edition of the hype cycle, Gartner shifted towards introducing new technologies at the expense of technologies that would normally persist through multiple iterations of the cycle; 21 new technologies were added to the list. For comparison, here's my article from last year, and here's my article from 2015. Click on the chart below to see a larger version of this year's Hype Cycle.

    CTMKT_741609_CTMKT_for_Emerging_Tech_Hype_Cycle_LargerText-1via Gartner

    This year's ~30 key technologies were selected from over 2000 technologies and bucketed into 5 major trends:

    • Sensing and Mobility represents technologies that are gaining more detailed awareness of the world around them like 3D sensing cameras, the next iteration of autonomous driving, and drones. Improvements in sensor technology and their communication through the IoT is leading to more data and more insight. 
    • Augmented Human builds on the "Do It Yourself Biohacking" trend from last year. It represents technologies that improve both the cognitive and physical abilities of humanity – technologies like biochips, augmented intelligence and robotic skin. The future is bringing implants to extend humans past their perceived limits and increase our understanding of our bodies; biochips with the potential to detect diseases, synthetic muscles, and neural implants. Many of my friends believe this realm will elongate human lifespans. 
    • Postclassical Compute and Comms represents new architectures of classical computing technologies like 5G or nanotech – it results in faster CPUs, denser memory and increased throughput. Innovation is commonly thought of as new technologies, but better versions of existing technologies can provide just as much value – and disrupt industries in a very similar way. 
    • Digital Ecosystems are platforms that connect various types of "actors." They create seamless communication between companies, people and APIs. This enables more efficient decentralized organizations (and decentralized autonomous organizations) and allows constant adoption of new evolutions in technology. Examples of this technology are the decentralized web, synthetic data, and decentralized autonomous organizations. 
    • My wheelhouse, Advanced AI and Analytics is an acknowledgment of new classes of algorithms and data science that are leading to new capabilities, deeper insights, and adaptive AI. The future of this space involves more accurate predictions and recommendations on smaller data sets. More signal. Less noise.  

     

    Looking past the overarching trends of this year, it's also fun to look at what technologies are just starting their hype cycle. 

    • Artificial Tissue (Biotech) could be used to repair or replace portions of, or whole, tissues(cartilage, skin, muscle, etc.)
    • Flying Autonomous Vehicles can be used as taxis, but also as transports for other things such as medical supplies, food delivery, etc. Amazon and Uber are likely excited about this development – and expect it in the next couple of years. 
    • Decentralized Web builds on the same arguments blockchain creates against normal currencies. Because the mainstream centralized web is dominated by massive and corporate-controlled platforms like Facebook and Google, the decentralized web movement strives to enable free speech and increased access to those users whose access to the internet is strictly regulated. 
    • Transfer Learning refers to the ability of an AI to solve one problem and apply that "lesson" to a different but tangential problem. When AI becomes able to generalize knowledge more abstractly, you will see a massive spike in utilization. 
    • Augmented Intelligence complements humanity instead of replacing them with robots. To be clear – Augmented intelligence is a subset of AI, but a different perspective/approach to its adoption. 

    AI has been around since the '60s, but technological advancement and increased data mean we are now in an AI spring after decades of stagnation. 

    Many of these technologies have been hyped for years – but the hype cycle is different than the adoption cycle. We often overestimate a year and underestimate 10. 

    Which technologies do you think will survive the hype?

  • Here Are Some Links For Your Weekly Reading – October 20th, 2019

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    Here are some of the posts that caught my eye recently. Hope you find something interesting.

     

    Lighter Links:

    Trading Links:

  • Prophetic Predictions

    New technologies fascinate me … As we approach the Singularity, I guess that is becoming human nature. 

    Second Thought has put together a video that looks at various predictions from the early 1900s. It is a fun watch – Check it out. 

     

    via Second Thought

    It's interesting to look at what they strategically got right compared to what was tactically different. 

    While not all predictions are made equal, it seems that we have a better idea of what we want compared to how to accomplish it. 

    The farther the horizon, the more guesswork is involved. Compared to the prior video on predictions from the mid-1900s, this video on the internet from 1995 seems downright prophetic. 

     

    via YouTube

  • Sickcare vs. Healthcare

    WARNING … the next picture is potentially NSFW. You've been warned!

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    Are you mentally ready?

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    Sorry for the shock! It's a picture of me getting tested at APEX, Dr. Jeffrey Gladden's concierge medical wellness practice. 

    Apex treatment plands are individually tailored to optimize your health, human performance, and longevity. They begin with a deep dive into your underlying genetic, physiologic & biochemical makeup, and then benchmark neurocognitive function, body composition, cardiovascular performance, hormonal status and much more. Ultimately, they help you rethink your concepts of aging and decline. Think about it, how many more decades of being healthy, fit, and vital do you want?

    Over the past couple of weeks I have shared multiple articles on fitness: 

    It got me thinking about the difference between the way we view healthcare and what healthcare really should be. Healthcare takes care of you once you're sick, but it should really help you stay healthier for longer. 

    Many of my friends now believe that with technology and a sustained focus on health & longevity, they can live past 100. They're paying attention to genetic, physiologic & biochemical makeup, cognitive function, body composition, cardiovascular performance, hormonal status and much more. 

    And whether they're going to live past 100 or not, I can see the daily results in the quality of their life, and the way they look. 

    I fully intend on being here for a long time … So, I'm building the habits to keep me healthy. I'm investing in wellness care so I don't have to invest in healthcare. 

    I encourage you to ask yourself how you can do the same. Ask yourself  "how good can I be?" and "how long can I sustain that?"

    What a great investment.

  • Here Are Some Links For Your Weekly Reading – October 13th, 2019

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    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

    Trading Links:

  • A Day of Atonement

    We're sprinting towards the end of the year. With that, stress and high expectations can lead to anxiety and hurt feelings.

    Meanwhile, we just finished the Jewish High Holidays.  A few weeks ago was Rosh Hashanah – The Jewish New Year, and this past Wednesday was Yom Kippur – the Day of Atonement.  The practice around these holidays is a good reminder to take account of where you are and appreciate the blessings around you. It was a reminder to me to sprint towards the end of 2019 with the energy of a new year. 

    Yom Kippur is a lot like a Catholic confession, but it happens once a year. The service is a mix of contemplation, mindfulness, and contrition.  Ultimately, we apologize for the sins we've committed against ourselves, our communities, our friends, and our faith.  Also important is the promise to do better next year.  On top of repenting, we fast (no food or water) for a full day to make sure we're mindful.  In my case, it also made me sleepy (yes, my son caught me sleeping in synagogue … I'm sorry for that too). 

     

    IMG_0030

    Looks like I still have some work to do.

    It's interesting how little human nature has changed in the past several thousand years. The list of sins is just as relevant today as I imagine it was back then. Even if you have managed to stay on the right side of the Ten Commandments, and haven’t killed or stolen … you have most likely been frivolous, stubborn, hurtful, dismissive, or judgmental (I know I have …).  

    To help drive the importance of the day, we ceremoniously read a poem called the Unetaneh Tokef. Below is a brief excerpt because it's a powerful read, regardless of faith. 

    On Rosh Hashanah will be inscribed and on Yom Kippur will be sealed how many will pass from the earth and how many will be created; who will live and who will die; who will die at his predestined time and who before his time; who by water and who by fire, who by sword, who by beast, who by famine, who by thirst, who by storm, who by plague, who by strangulation, and who by stoning. Who will rest and who will wander, who will live in harmony and who will be harried, who will enjoy tranquillity and who will suffer, who will be impoverished and who will be enriched, who will be degraded and who will be exalted.

    Equally important to recognizing and repenting for your sins, is recognizing and appreciating what you did good as well … for yourself, your friends and family, or your community. 

    All-in-all, it's a nice framework that highlights how you have grown; and, it also shows where you have room to grow. 

    You have one quarter left in 2019 to make it your best year yet.  What can you do?  What can you do better?

    I hope you all experience growth in your mental state, your relationships, and your businesses.