Business

  • Here Are Some Links For Your Weekly Reading – November 17th, 2019

    The holiday season is coming fast.

     

    191117 Holding Off the Holidays

     

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

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  • November Round Table With John DeTore – Part 2

    Peak Capital is running an online roundtable in November with our CIO John DeTore, John Mauldin, and 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. I previously shared Part 1. This is Part 2 and will finish this piece. 

    November 2019 PCM Roundtable 

    Peak: Consensus suggests the U.S. economy is slowing and that trend will continue. What might cause an unexpected rise in GDP going into 2020?

    John: Well, a cascading set of trade deals would now set us up for that.  It would be politically beneficial for Trump to wrap them up soon.  So that means 1) he will try really hard, and 2) other countries (and his political adversaries) will use that to their advantage. I have no idea who will win that one.  For instance, look for the house to ignore USMCA until the election.

    Peak: The Fed takes its cue from the economy, so it is unusual with virtually full employment and strong wage growth they are cutting rates, and everyone expects QE4. Any non-consensus views about the Fed's policy going forward?

    John: Well, they are cutting rates not because the economy is weak, but because they figured out that they overdid it in 2018 by raising the rate.  They started out too low, they raised it too much, and are now in the process of fixing it.

    Peak: Earnings season started strong with better than expected earnings from banks. Are initial results going to be reflective of the broad market's earnings for the remainder of 2019?

    John: Earnings are not going to be a problem for us. 

    Last year, earnings benefitted from very substantial corporate tax relief and deregulation.  This will continue for several years, but the benefit is front-loaded, and the tailwind will ease off.

    We fall into the trap of looking at year-over-year EPS growth to judge the strength of our public companies.  They are earning good money!  Profits are not being driven down by any undue systematic force.  Even if they don’t grow fast, they are still quite profitable.

    Peak: Looking out 12 months, 1 month prior to the 2020 election, do you believe the stock market will be higher, lower, or generally flat from today's level?

    John: The market assumes Trump will win and very much will want Trump to win, if only to avoid the painful experiment with the far-left policies of the current Democratic candidates. 

    You would think Trump would be unbeatable given the success of the economy and a democratic candidate pool that is oddly positioned to the left of the Democratic party in general. 

    But there really is Trump Derangement Syndrome (TDS) in the country today …don’t remember there ever being a President with such venomous detractors since Nixon … right before his resignation.  So, we can’t assume.  And Hillary might get into the race which will cause the market to take off if only for the entertainment value.

    The answer to the question is that I am biased to the market being higher.  If it looks like Trump will probably lose the market will have a hard time with this and could be off quite a bit.

    Peak: The search for yield has not gotten any easier in 2019. What concerns do you have for pension plans and retirees who require steady income?

    John: A lot of concern.  Long-term rates, in fact, act as a negotiation between generations.  Retirees, who need income, lend their life assets to young families, who borrow for home formation.  As discussed earlier, long-term rates are too low.

    While “too-low” rates do in general stimulate the economy, lots of awkward or even negative side effects occur:

    • Pensions go deeper into unfunded territory because of the assumed discounts on future obligations.
    • Low rates mean low mortgage rates. While this is initially good for borrowers, there is an equilibrium that drives up housing prices.  Most of America buys their home with a mortgage and set what they can afford based on what they can borrow.  Low rates push housing prices up.
    • While retirees get hurt by low rates, it's unclear if young families will get helped in the long run. They end up with more debt for the payment they can afford.  It can lead to a housing price bubble.
    • There are other disruptions of too-low rates like “zombie companies” supported by too-easy credit.

    Not to sound all 50’s about it, the solution for income for retirees (that don’t pursue active management) might be to seek out strong US public companies that have significant dividend yields.  The S&P yield is now competitive with bonds.  Remember also that we have gone through a multi-decade process of accepting that stock-buybacks are often preferred by investors to dividend yields.  You don’t just get the dividend payment, you get the buybacks in the form of capital appreciation.

    Those who are interested in alpha should find approaches that will work in the new environment.  The three major sources of return available to typical U.S. investors are bond yields, the stock market, and a return from active management.

    As yields fall, active management must work less well to keep up.  The bar has been lowered. 

    There has been a mass exodus from active management into index funds and ETFs.  So many people I talk to say they don’t want to take the risk of active management.  But a S&P index fund has more risk than most retirees should take with the core of their assets.  Active management in general needs a careful new look by investors.

    Peak: Switzerland, Germany and Japan have negative yields going well out on the yield curve. Do you expect negative yields at any point in the U.S.?

    John: No … but I didn’t think they would go as low as they have so far either.  

    I’ve heard educated arguments that falling yields are a counter-intuitive result of too much government debt.  But this just seems wrong-headed to me.  I brought it up earlier:  the yield of bonds is set by supply and demand.  Supply is certainly up given our deficit spending, but, counter-intuitively, rates are down.   I am left with only one good answer: demand is up more than supply.

    My suspicion is that the culprit is the post-2008 waves of regulation with its haircuts to allowed leverage, and complex capital ratios that favor first-world sovereign bonds.  I see no reason why so many would be willing to hold a bond at negative rates unless they really had no legal choice.  The sky is not falling, there are many great places to invest capital for positive rates.

    To answer the question, sooner or later we will better understand why negative rates happen.  We should try and fix it. If we don’t, it's probably a matter of time 'til it happens here.

    Peak: Correlations between stocks and bonds this year have made maintaining a diversified portfolio relatively easy. Anything on your radar that may make this more difficult in the future?

    John: Bonds obviously respond to changes in interest rates.  Stocks, through the P/E ratio, also respond to interest rates in the same way.  Lower rates mean a higher P/E, all things being equal. 

    In periods of rapid rate changes or big changes in inflation expectations, the two asset classes will be correlated because they are both responding primarily to rate changes.  Both will have positive returns when rates drop.

    Hmm … but right now the market has refused to play this game.  While the yields on bonds are in many cases at ALL TIME LOWS,  the corresponding yields on stocks are near average.  It is as if the stock market is saying: “these really low bond rates are crazy … this can't last for the next 5-10 years … I’m waiting this out.”  If the market ends its obstinance and plays along, IT WOULD NEED A 50x P/E multiple.  It might even be saying “The stock market is rational, but the bond market is a bubble.”

    The stock market is responding to the EPS side of the equation, though.  When EPS come though unexpectedly, the market rises.  When perceived growth increases the market rises (and the bond market falls).

    In addition, the market has been really (too) preoccupied with politics and the political divide in the country right now.

    This adds up to a low correlation between the stock and bond markets.  It is lower than usual and will eventually go back to normal. 

    Catalysts that would cause low correlation to rise: 

    1. it will happen naturally if bond yields and P/E ratios normalize,
    2. it will also happen if we go into a recession and the stock market re-adopts it “bad news is good news” posture and rises with every rate lowering move by the Fed.

     

    Peak: If I gave you a magic wand that allowed you to change just one thing about the financial markets or investing, what would it be?

    John: (I genuinely, seriously wish I had invented high-frequency trading back when it was fun and innovative.  I promise I would put my $B’s to good use.)

    But seriously, I wish we would pass legislation (tax or regulation) that made it attractive to spinoff companies rather than merge them.  Many evils in our economy stem from too few firms that are too large and influential (drugs, tech, banking).  This is doable and would affect income disparity more than any of the proposals I hear from politicians.  It would add many more senior and middle managers who are talented and can drive innovation better with some independence.

    JDT1

    via USFunds

  • Investing In Your Future

    I think about investments a lot … which makes sense given my profession. 

    Yet, there are three key investments I think are more important than any monetary investment you can make. 

    The first is in yourself – in your physical and mental health. I recently spent a whole month introducing my approach. 

    Physical and mental health was a major topic at last weekend's Genius Network Annual Event in Arizona.  I enjoyed listening to speakers like Peter Diamandis, Andrew Weil, Christopher Voss, and Dave Asprey – which brings me to key investment #2.

    Find Your Genius Network

    "You are the averrage of the five people you spend the most time with." – Jim Rohn

    I have always believed that you can predict a lot about your future, based on the quality of the people you spend the present with. That is why I think participation in quality peer groups is critical. Peer groups help us set higher standards for our behavior, help us aim higher in our aspirations, and they help us stay better focused and committed to big-picture goals.

    I belong to several executive and business leader peer groups like Genius Network,  EO or Strategic Coach—groups that double as advisory boards, counselor’s offices, and idea factories. They allow me to see, hear, and discuss things I don't normally think about, talk about, or even notice.  Peer groups bring blind spots to my attention and keep me fully connected to trends that are transforming industry on a global scale.

    I've gained partners, life-long friends, and ideas that will last a lifetime. I've also started taking my son, Zach, to these events so he can get a headstart. 

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    Dan Sullivan, founder of Strategic Coach, met my son and proclaimed "The book reader!" 

    Good memory. 

    Which brings me to my third key investment – and the one I'm most proud of. 

    Spread The Wealth

    It is not enough to have a good mind; the main thing is to use it well. -Rene Descartes

    Like many parents, I wanted to teach my children that, to a large extent, they control what happens to them. One of the first ways I did that was to set up a "game" for them to earn video games. Some parents try to limit the amount of time their kids spend watching TV or playing video games.  Instead, my kids earned their games by reading books. Here is a photo from way back then.

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    Paid With Play.

    Here's how it worked. Every 10 books earned them a video game, and every 100 books earned them a video game console. When they finished a book, it was their right, and my obligation, to take them to the bookstore for us to pick up the next book together. Likewise, when they finished the requisite number of books, it was their right, and my obligation, to take them to the computer store (does anyone remember CompUSA?) for them to choose whatever game (or console) their heart desired.

    How Can You Encourage a Jump to the Next Level?

    “Don’t just read the easy stuff. You may be entertained by it, but you will never grow from it.” – Jim Rohn

    There came a point when I wanted one of my sons to start reading grown-up books. He was comfortable reading a certain type of book, and didn't want to read the kind of books that I read. So, I created a bonus system that counted a particular book as three books. I didn't force him; I just let the easier path to a reward "whisper" in his ear what to read. Once he finished that, he never went back to teen fiction.

    It's a great way to learn about your kids.

    I used the bookstore to get a sense of how the boys were doing. For example, I might say "I notice that you read five books in that series, maybe you'd like this book". Or, "That sure is a lot of science fiction; what was the last biography you read?" For the most part, though, I didn't care what they read. The key was to get them to want to choose certain books for their own reasons. Ultimately, their preference meant they were learning to love reading – and once you love reading, you'll eventually branch out on your own.

    It Puts Them In Control of Their Destiny and Rewards.

    My younger son likes competition. He also broke or misplaced many things. So, in order to earn back the Game Boy unit that he lost, I challenged him to read five books in five days. These weren't easy books either. It was designed to stretch him, and also to teach him that he could read a book a night. The bet was that he either finished all the books in the allocated time, or none of them counted towards games or Game Boys. On the other hand, if he read a book a night for two weeks, not only would he get to have his Game Boy back, the books would count towards a game too. It worked like a charm, and we were both happy.

    So, Who Got the Better Bargain?

    To end the game, as they entered their teenage years, I upped the ante a little. 500 books meant they got a laptop of their choice and had beaten the system. Both boys cashed in … and probably felt like they were taking advantage of their dad. I got what I wanted, though; my boys love reading, and I was able to teach them two key ideals.

    1. The secret to growth is to constantly challenge yourself
    2. You can accomplish anything you put your mind to … one step at a time.

    That is an investment that pays dividends for a long time.

  • Here Are Some Links For Your Weekly Reading – November 10th, 2019

    Here's a quick reminder about Veterans Day.
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    Here are some of the posts that caught my eye recently. Hope you find something interesting.

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    Trading Links:

     

     

  • A Roller Coaster of Emotions

    I recently saw this video during a presentation.

    It's hilarious – and a great reminder that it doesn't matter how simple something is (if the stakes are high enough) and the environment is distracting enough. 

    That's where automation comes in. Enjoy. 

     

    Eliminating fear and greed are great steps to take in the pursuit of eliminating discretionary mistakes.

    Think about how many other places this video explains the "why" behind disappointing results.

  • 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.

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  • 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

    Free speech

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

     

    Lighter Links:

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