Hope Over Experience

Hope Over Experience

Article, Investment Strategy, Public Policy, The Market, , , , , ,

The Fed’s latest projection was for annual inflation to fall from over 5% at the end of 2022 to about 2.5% by the end of 2023. At this point, we’re not taking the Fed’s projections seriously, and for good reason. They were spectacularly wrong when a depth of understanding and insight into critical future events was essential. In other words, the understanding of how the economy works, the Fed’s ability to predict the effects of economic shocks, and its policy actions have gotten no better over the last 50 years. More specifically, price stability doesn’t seem to be coming anytime soon because people simply don’t think it will. If we look at the combination of rising wages and inflation expectations for both consumers and businesses, it is these expectations that drive inflationary pressures more than central bank policy. Inflation levels will be stickier than first theorized by the Fed, and the time to resolution is likely longer. Expect more “surprises” that will be no surprise.

Volatility and Uncertainty

Where Does the Market Go from Here?

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The illusion that one can either predict or get ahead of cycles, or predict when they will end is why most investors underperform the market. Markets are driven by human emotion, and it is human emotion combined with the supply and demand dynamic that determines price. Therefore, pricing is independent of anyone’s perspective about “intrinsic value.” Markets are based on price, price is based on supply and demand, and that dynamic is subject to abrupt changes based on the whims of small numbers, and sometimes exceptionally large numbers, of investors. Human behavior controls the markets. Optimism, pessimism, psychology, fear, conviction, and resignation all play a role in adding to volatility and uncertainty. Frequent and intense volatility is here to stay. Market movements really can’t be predicted unless they are at extremes when prices are at absurd highs or lows. But, picking the high or the low is a fool’s errand. Understanding and profiting from volatility, managing risk, and believing in a sustainable investment model is still the best strategy.

The Point of the Point - Nicholas Mitsakos

The Point of The Point

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In Native Hawaiian, Kaiko’o means “swirling waters” which is a fair description of life itself, and mine. The double meaning is intended. A beautiful Point that inspires harmony and solitude, but also synchronicity of calmness and beauty. It is also a place to contemplate “the point.” The swirling waters of life are there somewhere, but, looking at the present, if I seize it accurately as V.S. Naipaul admonishes, it is unclear what it can foretell, if anything. But life’s dramatic and unexpected change keeps us vital and longing to see what will happen next. To experience, to travel, to be a loose-fitting component to a tightly fitted place. China, Britain, or anywhere where one can be a loose component and absorb the unique experiences of societies and cultures where we will never fit. A magnificent blur in the distance, the sun is setting at Kaiko’o. While the sunset beckons, I am not finished. It is easy to give up sometimes, especially when one feels tired, abandoned, and, like many, the best is behind me. What is the point of continuing? Like The Point, the point is to go on. One is never finished. The realm of the Gods will come fast enough.

Reality and the Crypto Crash

Reality and the Crypto Crash

Advanced Technology, Article, Investment Strategy, Transformative Businesses, , , ,

Cryptocurrency staying power has certainly been challenged these last few weeks. There is been a general market drop (even correction), but crypto has been collapsing in value and, to many, is in a death spiral. Of course, reality is more nuanced, and with more detailed analysis, a broad brush hardly seems appropriate. Certainly, the weakest and, honestly, craziest portions of the crypto world have been exposed to be nothing more than silliness. But some components remain resilient. The market is quite effective at sorting the specifics of an otherwise overgeneralized sector. There is no such thing as “crypto.” There are stable and valuable digital assets, globally exchangeable and disruptive. Others have nothing but fluff. Of course, government should insist on more reliable information, and institutions should guard more effectively against fraud. But, there is wheat among the chaff, and it continues to have the potential to be disruptive, create substantial value, and enhance global prosperity.

Digital Assets

Recent Lecture – Digital Assets: Innovation, Opportunity, and Nonsense

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Recently, I gave a lecture at a graduate program focused on innovation, technological disruption, and the impact on global industries and investment opportunities. My lecture focused on digital assets and attempted to draw distinctions between disruptive and substantial opportunities and hype, nonsense, and unsustainable business models. This is a quiz given to the students that reflects the main points raised in this lecture. For fun, I am including it here because it makes a series of fundamental points that I think are especially important, and the true-false construct conveys those points with clarity.

Disruption and Nonsense

Disruption and Nonsense

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Transformation, or euphemistically, “disruption,” creates great opportunities to capture newly created wealth. But, as industries are transforming and strategic disruption is occurring, quite a lot of absurdity and certainly enough terror are associated with some of these extraordinary opportunities to require much greater analysis and understanding. There are extraordinary risks associated with anything disruptive and transformational. The first disruptor isn’t always the one who creates the most value or is even a sustainable competitive entity. Innovation does not mean competitive sustainability. Digital platforms, ranging from the internet to digital assets and cryptocurrency are transforming industries globally. But, along with that comes a lot of hyperbole and typically that is followed by very little substance. Great companies use technological disruption, innovation, and transformation to establish themselves and thrive. But they rarely last. Every company, even the most valuable companies such as Apple, Apple, Amazon, Facebook, Netflix, etc. must dynamically transform to stay competitive and valuable. Transformations are certain. New entities will become very valuable, legacy companies will diminish, and a handful will transform and thrive. Transformation and sustainability create and capture great wealth, but are far more challenging to identify, and even more challenging to sustain.

The Crypto Revolution

The Crypto Revolution

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Super lofty ideas get attention and publicity, but they are not real. Narrow, specific applications are where true foundational value is created. The financial revolution will certainly not be based on a process where someone buys coins or tokens and simply waits for them to increase in value. On top of that, despite the belief that there will be frictionless peer-to-peer transactions, purchasing any cryptocurrency requires a crypto exchange like Coinbase or FTX that charge high trading fees and have questionable security. Blockchain is an evolution for businesses, it is not a disruption or a new infrastructure. It will improve user experiences, regulatory clarity, and interoperability. Crypto proved that digital transfers and settlements were possible, it is the blockchain platform that enables this efficiently and securely. It may be boring and we’re not going to have any stadiums or arenas named after a technology platform, but real change will be driven by a blockchain. The rest is a noisy sideshow.

Inflation

Folly and the Fed

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The average prices of food and fuel rose more than 16% in February from a year earlier and are expected to rise further by the war in Ukraine. Consumers are paying much more for meat, bread, milk, shelter, gas, and utilities. Only a small amount of food consumed in the U.S. is imported, and most of that is from Mexico and Canada. But Russia provides 15% of the world’s fertilizer and other agricultural chemicals that are now in short supply as planting season approaches. Wheat futures are up 29% since Feb. 25 and corn is up 15%. There is no shortage of wheat in the U.S., but global supply was the tightest in 14 years before the conflict, and dramatic shortages and price spikes are expected. What data is the Fed looking at, and how is it assessing inflationary risks? It’s hard to feel confident that the right hands are on the wheel because the combination of extraordinary factors, such as extremely tight labor markets and wage inflation (at over 6% annually and accelerating) showed inflation was already a significant risk. Yet interest rates were left unaltered. This is even before the crisis in Ukraine. The Fed should do whatever is necessary with interest rates to bring down inflation, including movements of more than a quarter-point, and a rapid reduction of its balance sheet. It also means recognizing that unemployment is likely to rise over the next couple of years. Paul Volcker would not have had to take extraordinary steps, driving the economy into a recession to crush runaway inflation, if his predecessors had not lost their focus on inflation. To avoid stagflation and the associated loss of public confidence in our economy today, the Fed has to do more than merely adjust its policy dials — it will have to head in a dramatically different direction.

Commodities

Commodities and Crisis

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Beyond 2022, higher interest rates and slower global growth most likely trigger a market correction, perhaps at an exorbitant cost. As discounts rates rise and growth assumptions lower, many stocks based assumptions that low interest rates and high growth would sustain for many years will see dramatic repricing and much lower valuations.
Energy and commodities, and the businesses associated with them, are in for a very bumpy ride, but there is a fundamental sustainability to their cash flow and long-term attractiveness as world supply reorders. That which is essential prevails.
The luxury of thinking we have halcyon days of global growth and geopolitical stability may not be with us for some time to come. It is perhaps time to plan for that now.

A New Perspective

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Sometimes, things can change simply because we want things to change. People can feel differently and that can spark a cascade of cause and effect. For instance, sometimes a recession can start simply because people feel as if there is a recession. So, it becomes a downward spiral, and our actions start matching our thoughts and words, and suddenly we have caused recessionary activity. Then we enter a downward spiral that makes reality from our thoughts.

Some of the things that Pres. Biden has done right away were maneuvers to undo what seemed like harmful policies and actions. But also, it was intended to have us think differently. Right away, he did things to try to reconnect us with the rest of the world. For example, the United States is back in the Paris Accord, he is not going to build the wall, he is going to reconnect us with the WHO, and many other things. But right away, he is sending a message that the United States will become part of the world and that is likely to undo the fragmented and rudderless direction and create a cascade of positive actions that lead in the same direction – one toward openness and connectivity. I sense we are going to reconnect a little bit more with China, reconnect more generally with the world through global trade and cooperation on climate change, and many other important topics. It’s suddenly uplifting for people to focus their energy, and thoughts lead to words lead to actions.