What Is The Purpose Of Tax Reform?

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Good Morning,
 

U.S. stocks climbed to records as the latest jobs report boosted optimism in the world’s largest economy, continuing equity rallies that took hold in Asia and Europe. The dollar posted its best week this year.

 

The S&P 500 Index and Dow Jones Industrial Average closed at all-time highs in light volume after data showed hiring increased by more than forecast in November and the unemployment rate held at a 17-year low of 4.1%. The dollar briefly edged lower as investors assessed tepid wage growth that missed estimates, then resumed its fifth consecutive gain. Average hourly earnings — a closely watched component of the report — rose 0.2 percent for November and 2.5 percent for the year. Economists expected a monthly increase of 0.3 percent or 2.7 percent for the year. Ten-year Treasury yields inched higher.

 

The jobs data added to a run of recent news that has been contributing to investor confidence after the U.S. government averted a shutdown and tax reform negotiations made progress.



Our Take
 

This melt-up may have legs as forecasts for U.S. growth have been too pessimistic. Nevertheless, despite a mostly solid run of job growth, 2017 ends pretty much where it began — with wage growth stuck and inflation subdued.

                                               

This nonfarm payrolls report brought with it news all too familiar to the post-crisis economy. The 228,000 jobs created formed a solid foundation, but the pedestrian 2.5 percent average hourly earnings growth left many scratching their heads wondering how a 4.1 percent unemployment rate, the lowest in 17 years, still wasn't producing fatter paychecks.

 

The lack of wage growth at the aggregate level despite the declines in the unemployment rate and strong job gains remain a mystery.

 

Central bankers can control short-term interest rates but as has become glaringly obvious in the post recessionary world, long-term ones are out of their purview.  

 

Ms. Yellen’s Fed has raised rates twice this year and will likely raise a third time this month. In October the Fed began reversing quantitative easing (QE), purchases of financial assets with newly created money. Despite all this monetary tightening, yields on ten year Treasury bonds have fallen from around 2.5% at the start of 2017 to about 2.3% today. As a result the “yield curve” is flattening. The difference between ten year and two year interest rates is at its lowest since November 2007.

 

The yield curve matters as it has inverted- ie. long-term rates have dipped below short term ones-just before each of the past seven American recessions.

 

The yield curve reflects where markets expect Fed Policy to go and what we are seeing is an expectation that rates are not likely to increase.

 

Why? Falling inflation risk may explain the falling yield curve but as the Economist suggests, what is most likely is that markets are losing confidence in the Fed’s ability to raise rates without inflation sagging. This nonfarm payrolls report will only accelerate this loss of confidence.  

 


Musings
 

So what of Trump’s new tax reform package? Despite Trump’s approval ratings hitting a new low, the market appears to be applauding it. From our perspective, although this tax package will likely stimulative in the short term, in the long term a fiscal stimulus through generalized tax cuts is unnecessary, and destabilizing, in an economy running substantially above its 1.5 percent potential (and non-inflationary) growth on the steam of exceptionally loose monetary policy.

 

Furthermore, deep corporate tax-cuts (which have been tried before by Ronald Reagan) don’t seem to work.

 

The Trump team’s argument goes something like this: Cutting taxes on businesses will free up profits they will invest in new factories, research and development, and new equipment. The resulting investment boom will spur growth, as firms hire and as workers harness new ideas and equipment to produce more than they used to.

 

If we look at the Reagan years, investment fell—that was the weakest period of investment in the postwar period.

 

The same is likely to occur today. Firms aren’t cashed constrained. They aren’t asking for more money then and they certainly aren’t asking for more now. In fact, companies don’t even know what to do with their money. Companies today are sitting on record cash piles (roughly $1.84 trillion).

 

When asking the question of what companies will do with a windfall of after tax-profits,  Quartz points out that the odds that it will flow back into the real economy (investment) aren’t looking good. Many major companies are planning to hand that money to their investors through dividends and share buybacks. In fact, when Gary Cohn, Trump’s economic guru, asked a gathering of corporate leaders who was planning to reinvest their tax cuts, few raised their hands, Bloomberg recently reported. What these cuts will likely do is inflate asset prices even further as the bill directs the largest tax cuts as a share of income to the top 5 percent of taxpayers and by 2027, taxes on the lowest earners would go up.

 

This at a time when we find ourselves in what could be argued is an “everything bubble”. At a time when a cool $1 million which has long been considered the gold standard of retirement savings, has become only a fraction of what you will really need.A time when 44 percent of millennials would prefer to live in a socialist country, compared with 42 percent who want to live under capitalism. A time when 41 million Americans officially live in poverty. A time when  bitcoin is the most popular search on Google as well as the most popular news story on virtually every news outlet….

 

What goes up must come down….In this environment, where the balance of risk is likely to the downside, buying EXTRA thoughtfully is warranted.



Logos LP November Performance


 

November 2017 Return: +7.33%

 

2017 YTD (November) Return: +28.83%

 

Trailing Twelve Month Return: +35.67%


CAGR since inception March 26, 2014: +20.65%


 

Thought of the Week 

 

"Do you wish to rise? Begin by descending. You plan a tower that will pierce the clouds? Lay first the foundation of humility.” -Saint Augustine



Articles and Ideas of Interest
 

  • Collective intelligence can change the world. Combining the minds of humans and machines to avoid confirmation bias. A group with a more autonomous intelligence will fare better than one with less autonomy. It will fall victim less often to the vices of confirmation bias or functional fixedness. It is more likely to see facts for what they are, interpret accurately, create usefully or remember sharply. Knowledge will always be skewed by power and status as well as our pre-existing beliefs. We seek confirmation. But these are matters of degree. We can all try to struggle with our own nature and cultivate this autonomy along with the humility to respond to intelligence. Or we can spend our lives seeking confirmation. Over the Holidays -- give yourself the freedom to explore, think and imagine without constraint.

          

  • There’s an implosion of early-stage VC funding, and no one’s talking about it. Amid record amounts of capital raised by VCs worldwide, and a sharp rise in the number of private “unicorns” valued at $1 billion-plus, therehas been a quiet, barely noticed implosion in early-stage VC activity worldwide. This is now a three-year trend, so cannot be “blamed” on macro or short-term factors. More worryingly, it comes at a time of unprecedented stock market valuations worldwide. Whether the early-stage VC implosion is healthy or disastrous for the tech ecosystem remains to be seen. This is likely healthy over the long run in order to break Silicon Valley’s never-ending startup cycle: Startup employees get rich quick and quit to become venture capitalists.

 

  • Mysterious object confirmed to be from another solar system.Astronomers have named interstellar object ’Oumuamua and its red colour suggests it carries organic molecules that are building blocks of life. Interestingly, NASA has also found another 20 promising planets for humans to colonize.

 

  • Net neutrality: catastrophe or a non-event?  Some suggest that the internet is dying and that repealing net neutrality hastens that deathOthers suggestthat concerns over net neutrality are overblown as public blowback in past cases of service providers blocking sites that are competitive has been fierce, scaring other providers from following suit. Second, blocking competitors to protect your own services is anticompetitive conduct that might well be stopped by antitrust laws without any need for network neutrality regulations.

     

  • Will BlackRock and Vanguard own everything by 2028? Imagine a world in which two asset managers call the shots, in which their wealth exceedscurrent U.S. GDP and where almost every hedge fund, government and retiree is a customer. It’s closer than you think. BlackRock Inc. and Vanguard Group  — already the world’s largest money managers — are less than a decade from managing a total of $20 trillion, according to Bloomberg News calculations. Amassing that sum will likely upend the asset management industry, intensify their ownership of the largest U.S. companies and test the twin pillars of market efficiency and corporate governance.

 

  • Robots aren’t killing jobs fast enough-and we should be worried.Interesting perspective on this. In fact, data show that the US labor market is the calmest it has been in more than 160 years. The problem is there is not enough disruption. If anything, we need more jobs destroyed. That argument, made by Robert Atkinson and John Wu of the Information Technology and Innovation Foundation, a think tank promoting policies that spur innovation, is a novel one. Their belief that we are in an age of stagnation, not disruption, is based on a decade-by-decade analysis of how quickly occupations have been appearing and disappearing since 1850. No wonder Google, Amazon have found that not everyone is ready for AI.

 

  • How high will bitcoin go? Should you buy in? What is next for cryptocurrencies? Well ladies and gents even the most staunch haters arethrowing in the towel with Jamie Dimon recently suggesting a reversal of his position stating that “I'm open-minded to uses of cryptocurrencies if properly controlled and regulated." Make no mistake this is a frenzy much like the dot-com bubble in 1995. Perhaps even larger as bitcoins appear to be at least 4 times as expensive as dot-com stocks were at their height. Interestingly, few are talking about its energy use implications: By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today. Is this sustainable? The cryptocurrency’s price is completely unreal. Then again so is money...The problem is that it is clear that this is not a currency. Most are buying and holding in hopes of future gains. This is an asset class and as seen many times before, when lots of investors buy an illiquid asset, the price can rise exponentially yet at some point the urge to turn all those digital zeros into cars and iPhones will prove too great. Getting out of an illiquid asset can be much harder than getting in. When that rush inevitably happens, people are going to get hurt. Rule number 1: don’t lose money. Rule number 2: don’t forget rule number 1.

 

  • Me, myself and iPhoneFascinating research presented in the Economistsuggesting what we already know (subconsciously): the many hours young people spend staring at their phones is having serious effects. Adolescents who spent more time on new media-using Snapchat, Facebook or Instagram on a smartphone were more likely to agree with remarks such as: “The future often seems hopeless” or “I feel like I can’t do anything right.” Those who used screens less, spending time playing sport, doing homework, or socialising with friends in person, were less likely to report mental troubles.

 

Our best wishes for a fulfilling week,  
 

Logos LP

When To Sell?

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Good Morning,
 

Last week U.S. stocks  posted their first 2-week losing streak as the Treasury yield curve flattened further, raising concerns about economic growth while worries about tax reform percolated. The dollar dropped as the yen and gold gained.

 

The spread between two- and 10-year Treasury yields hit the tightest level in a decade. The greenback remained linked to political developments in Washington, where the Senate girded for negotiations on its version of tax reform.

 

Elsewhere, bitcoin hovered under $8000, emerging market shares headed for the highest close in six years and Tesla’s shares jumped after the company unveiled two new vehicles, including Semi truck. Trucking company J.B. Hunt said it has reserved "multiple" Semis.

 

The odds American firms will get a tax break improved Thursday after the House approved its version of the legislation. The Senate is still debating its own plan, trying to reduce the 10-year debt impact below $1.5 trillion. Adding to the discussion, Federal Reserve Bank of Dallas President Robert Kaplan said Friday the government’s debt-to-GDP is possibly at unsustainable levels.


Our Take
 

From most vantage points over the last year you've had an almost perfect backdrop for equities with an acceleration in nominal growth, earnings between 10%-15% globally and whatever you look at is pretty much in double digits. Nevertheless, last week investors in a choppy trade appeared to be trying to figure out whether benchmarks will continue to march to all-time highs on strong earnings and faster growth spurred by corporate tax cuts or if they will be pulled down amid lofty valuations, the flattest yield curve in a decade (which often signals an impending recession) and a selloff in junk bonds.

 

In our view the curve is likely reflecting the fact that the Fed will be raising interest rates at the same time that there is virtually no inflation. The short end has risen on Fed rate hike prospects, the long end is not reflecting the potential for growth. Key word “potential”.

 

On the other hand, in addition to a flattening of the yield curve and a selloff in junk bonds we’ve noticed a few other interesting data points:

 

-Restaurant sales growth has been slowing at a pace usually seen in a much weaker or even recessionary economy.

-Amid marijuana boom, costs leave analysts dazed and confused. Producer margins could start to shrink as provinces start to purchase pot wholesale. What the price drop will do to margins is nebulous because there isn’t an industry standard for reporting production costs.

-Appetite for risk has increased among money managers to a new high, according to the latest fund manager survey by Bank of America Merrill Lynch (BoAML)

-America’s ‘retail apocalypse” is really just beginning. And this comes when there’s sky-high consumer confidence, unemployment is historically low and the U.S. economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis. That’s caused an increase in the number of delinquent loan payments by malls and shopping centers.The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. The ripple effect could also be a direct hit to the industry that is the largest employer of Americans at the low end of the income scale. The most recent government statistics show that salespeople and cashiers in the industry total 8 million.

-Millionaire bankers feel sorry for struggling millennials. Credit Suisse’s Global Wealth Report says those who came of age after the turn of the century have had a “run of bad luck,” and that low wealth tend to be disproportionately found among the younger age groups.

-Firms that burn $1B a year are sexy but statistically doomed. Five outliers — Chesapeake Energy, Netflix, Nextera Energy, Tesla and Uber — have collectively lost $100B in the past decade. Firms that burn piles of cash are often lionised in an era when growth is sluggish and few companies reinvest all their profits. But losing a billion dollars or more a year is a wildly risky affair and the odds are that such businesses will fall flat.

-Artemis Capital Management is comparing the current market state to the Ouroboros – the ancient symbol of a snake consuming its own body.


Musings
 

Last week, given the significant move higher in one of our holdings (Luxoft Holding Inc: LXFT) which many had left for dead after its last earnings report, I reflected on the ever so difficult question of when to sell. This year at Logos LP we’ve faced this question on both the upside and the downside as certain holdings have skyrocketed while others have slipped.

 

Overall, the question of when to sell is typically conceptualized as a complicated one. Do you use a simple trigger? Or like Warren Buffett do you only buy certain high quality businesses at such attractive prices that you never have to sell?

 

As markets continue to edge higher this question becomes all the more relevant as high valuations reduce our margin for error.

 

For us, the best approach to selling is buying well enough that you don’t really have to follow the stock.

 

After all, following the stock market too closely is bad for your returns. Most underestimate just how bad it is. Equity investing is mostly characterized by a great irony: if you knew nothing about the stock market and followed little to no financial news, you would probably make a very handsome return on your investment, but if you tried to be a little bit smarter and overloaded on commentary from experienced managers and analysts you probably would perform poorly.

 

That fact is apparent in the stats, where the average investor earns a return that is less than 1/3 of what they would have earned if they knew nothing and blindly invested in the stock market.

 

I’ve quoted these stats in other letters but I will do it again: The fact that the stock market rises in 76% of all years, that it gains an average of 7.5% per year and that annual falls greater than 20% occur less than 5% of the time, are ignored in decision making. Since 1980 the S&P has suffered an annual loss of less than 3% an overwhelming 84% of the time. The mind interprets every 10% correction as the beginning of something much worse, even though a 10% fall is a typical, annual occurrence during bull markets.

 

In a recent blog post on The Fat Pitch, we are reminded that the human mind has a tendency to assess risk based on prominent events that are easily remembered. The 1987 crash, the tech bubble, the financial crisis and the flash crash in 2010 are all events that are easily recalled. The mind automatically assigns a high probability to prominent (but rare) events. It ignores the more important "base rate" probability that better informs decisions.

 

Thus, when deciding when to sell, keep in mind the “base rate”: although 10% market falls are a typical annual event, the stock market finishes better than that an overwhelming 87% of the time.

 

Thus, assuming you have bought well or even “relatively well” absent material and significant changes to your evaluation of the business, the decision to sell should typically be obvious. The long-term holder of an asset reaps the advantages lower tax costs, transaction costs, and the significant long-term compounding benefits offered to those who understand the principle of “base rate” probabilities.



Logos LP October Performance



October 2017 Return: +3.86%

 

2017 YTD (October) Return: +20.03%

 

Trailing Twelve Month Return: +24.77%


CAGR since inception March 26, 2014: +18.83%

 


Thought of the Week

 
 

"The place in which I'll fit will not exist until I make it." -James Baldwin



Articles and Ideas of Interest

 

  • The Future of Online Dating Is Unsexy and Brutally Effective. Dating apps promise to connect us with people we’re supposed to be with—momentarily, or more—allegedly better than we know ourselves. Sometimes it works out, sometimes it doesn’t. But as machine learning algorithms become more accurate and accessible than ever, dating companies will be able to learn more precisely who we are and who we “should” go on dates with. How we date online is about to change. The future is brutal and we’re halfway there.

          

  • Big data meets Big Brother as China moves to rate its citizens. The Chinese government plans to launch its Social Credit System in 2020. The aim? To judge the trustworthiness – or otherwise – of its 1.3 billion residents. I wonder if North Americans would be into this?

 

  • Are we on the verge of a new Golden Age? History doesn’t exactly repeat itself, but it does run in cycles. One of the most robust theories of such cycles was articulated by economic historian Carlota Perez, in her influential book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (Edward Elgar, 2002). It suggests that humanity can get through the current period of upheaval and economic malaise and enter a new “golden age” of broad economic growth, if the world’s key decision makers act in concert to help foster one. This may seem far-fetched, but it’s happened four times before. We are in the midst of the fifth great surge (as Perez calls them) of technological and economic change since the Industrial Revolution.

 

  • The upside of being ruled by the five tech giants. The tech giants are too big. But what if that’s not so bad? For a year and a half — and more urgently for much of the last month — there have been warnings about the growing economic, social and political power held by the five largest American tech companies: Apple, Amazon, Google, Facebook and Microsoft. But another argument suggests the opposite — that it’s better to be ruled by a handful of responsive companies capable of bowing to political and legal pressure. The NYT suggests the 3 best arguments on the bright side: 1) They can be governed 2) They hate each other’s guts 3) They are American grown.

     

  • Wall Street’s invasion of the legal weed market. Fascinating account of the race to become the Goldman Sachs of ganja and the Blackstone of bongs.

 

  • FAANG SCHMAANG: Don’t Blame the Over-valuation of the S&P Solely on Information Technology. A small group of technology stocks have recently delivered stellar returns. Facebook, Apple, Amazon, Netflix, and Alphabet (Google), the so-called “FAANG” stocks, are up 36% on average year to date through September. This superlative performance, in such a narrow group of large cap names, has led many to raise questions about the current valuation of the S&P 500, its sector composition, and comparisons to other markets. Interesting report from GMO suggesting that the higher weight in the relatively expensive IT sector is driving some of the expensiveness of the S&P 500, but this does not fully explain the bulk of its high absolute and relative valuation level.

 

Our best wishes for a fulfilling week, 
 

Logos LP

Solitude Is A Competitive Advantage

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Good Morning,
 

The tech-heavy Nasdaq composite rose to a record high last Friday as Wall Street cheered the blowout quarterly reports from three of the world's biggest tech companies.            

 

The index rose 2.2 percent to 6,701.26 and notched its biggest one-day gain since November 2016.                        

                                                                

The PowerShares QQQ Trust exchange-traded fund, which tracks the Nasdaq 100, rose 2.9 percent.         

                                                                          

Leading the ETF higher were shares of Amazon, Microsoft and Google-parentAlphabet; their stocks rose 13.2 percent, 6.4 percent and 4.3 percent, respectively.

 

The S&P 500 Index also hit a new high, after the U.S. saw its strongest consecutive quarters of growth in gross domestic product in three years.

 

The first reading on third-quarter GDP showed the U.S. economy grew by 3 percent, above an estimate of 2.5 percent indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday. In addition, U.S. consumer sentiment rose to its highest level since 2004.



Our Take
 

These tech giants reported excellent numbers.  Amazon's third-quarter earnings stole the show with accelerating revenues, a growing customer base, 42 percent sales growth in Amazon Web Services and a busy Prime Day.

 

Alphabet's earnings report impressed thanks to its 70 percent growth in YouTube, which now delivers 100 million hours of content per day to its users.

 

Microsoft blew away Wall Street's earnings estimates by delivering 42 percent growth in subscription revenue from its Office 365 offering and 90 percent revenue growth from Azure, its cloud platform.

 

This tech strength is closely tied to the growing importance of data. More specifically, the explosion of data via the cloud. Amazon, Alphabet and Microsoft are the big three of web services, the backbone of the cloud. Expect the strength to continue as these giants continue to shore up their dominant positions in the space.

 

For Q3 2017, with 55% of the companies in the S&P 500 reporting actual results for the quarter, 76% of S&P 500 companies have reported positive EPS surprises and 67% have reported positive sales surprises.

 

For Q3 2017, the blended earnings growth rate for the S&P 500 is 4.7%. Six sectors are reporting earnings growth for the quarter, led by the Energy sector. On Sept. 30, the estimated earnings growth rate for Q3 2017 was 3%. 

 

These are excellent numbers supporting the suggestion that this is a rally based on earnings growth.

 

A very strong bull market indeed, also supported by a global economy that continues to surprise to the upside. 

 

Even Caterpillar earnings which showed increased profits and and improved outlook which tends to evidence that global growth is picking up in a synchronized fashion.

 

Valuations continue to look frothy but fundamentals are keeping pace.

 

As we have previously stated, caution is warranted in this environment yet caution should also be exercised when faced with arguments that both the economic cycle and the stock market has run its course and it is time to lighten up, raise cash and wait for an imminent crash.

 

The veracity of these types of arguments now seems obvious. The danger is believing that what seems obvious, must take place. This is simply untrue. Instead, such beliefs evidence the primacy of emotion over reason. A lazy reliance on heuristic shortcuts rather than thoughtful analysis.

 

The skeptics have and continue to beat their drums yet the place to be remains equities. The brightest opportunity for returns over the long-term remains the ownership of high quality businesses.

 


Musings
 

Thought-provoking piece in HBR I came across this week which suggests that in a distracted world, solitude is now a competitive advantage. “Always remember: Your focus determines your reality.” Jedi Master Qui-Gon Jinn shares this advice with Anakin Skywalker in Star Wars, but in our hyper-distracted work world, it’s advice that we all need to hear. 

 

Research by the University of London reveals that our IQ drops by five to 15 points when we are multitasking. In his book, Your Brain at Work, David Rock explains that performance can decrease by up to 50% when a person focuses on two mental tasks at once.

 

Our world is becoming increasingly complex which is having a major impact on our lives especially when it comes to problem solving. Pushed and pulled by X,Y and Z stimulus at any given time it is unclear how we can solve the challenges of our age. The answer may lie in cultivating solitude.

 

Having the discipline to step back from the noise of the world is essential to staying focused and thus to staying effective.

 

How can we cultivate solitude? How can we build this skill?

 

Build periods of solitude into your schedule

Analyze where your time is best spent

Starve your distractions

Don’t be too busy to learn how to be less busy

Create a “stop doing” list

 

Logos LP September Performance

 

September 2017 Return: 2.03%

 

2017 YTD (September) Return: +15.57%

 

Trailing Twelve Month Return: +18.71%


CAGR since inception March 26, 2014: +18.06%
 


Thought of the Week

 

"I’m a “dumb shit” who doesn’t know much relative to what I need to know. Whatever success I’ve had in life has had more to do with my knowing how to deal with my not knowing than anything I know.” - Ray Dalio



Articles and Ideas of Interest
 

  • These are the businesses still immune to Amazon. In order of least likely:1) Dollar Stores 2) Auto parts 3) Home improvement 4) Home Furnishing

          

  • Our biggest economic, social and political issue The Two Economies: The Top 40% and the Bottom 60%. Very interesting piece from Ray Dalio suggesting that Average statistics camouflage what is happening in the US economy, which could lead to dangerous miscalculations, most importantly by policy makers. For example, looking at average statistics could lead the Federal Reserve to judge the economy for the average man to be healthier than it really is and to misgauge the most important things that are going on with the economy, labor markets, inflation, capital formation, and productivity, rather than if the Fed were to use more granular statistics.

 

  • Tim O’Reilly: ‘Generosity is the thing that is at the beginning of prosperity’. Tech pioneer and CEO Tim O’Reilly suggests that his industry will fail unless the web giants start putting consumers ahead of shareholders. When questioned about the notion that technology is going to eliminate jobs, Tim counters by suggesting that this will happen only if that’s what we tell it to do. And it is what we’re telling it to do. But on the other hand Marc Bain suggests that now corporations kneel down to us. We’re in the midst of a profound shift in consumer culture, he writes. Corporations were once king, but “influencers” and viral videos—like the one of the United Airlines passenger-dragging incident that shaved $1 billion off the company’s valuation—have shifted the balance of power. A new report examines how US buying behavior will change as a result. Nobel Prize winner Joseph E. Stiglitz writes that America has a huge monopoly problem.

 

  • Robots are eating money managers’ lunch. Rishi Ganti on why obscure assets may be the human investor’s last refuge. Like what? Like scooping up receivables and other claims owed to those in need of immediate cash—a refugee facility waiting for payment on a contract from a charity, for example. Luckily robots still have a lot to learn about being a human trader. 

     

  • How social media endangers knowledge. The very idea of knowledge itself is in danger. The idea behind Wikipedia—like all encyclopedias before it—has been to collect the entirety of human knowledge. It’s a goal that extends back to the Islamic Golden Age, when numerous scholars—inspired by Muhammad's famous verdict of ‘Seek knowledge, even from China’—set themselves to collecting and documenting all existing information on a wide variety of topics, including translations from Greek, Persian, Syrian, and Indian into Arabic. Social networks, though, have since colonized the web for television’s values. From Facebook to Instagram, the medium refocuses our attention on videos and images, rewarding emotional appeals—‘like’ buttons—over rational ones. Instead of a quest for knowledge, it engages us in an endless zest for instant approval from an audience, for which we are constantly but unconsciously performing.

 

  • Why is everyone so busy? Time poverty is a problem of perception and partly of distribution. The Economist looks into the fact that everybody, everywhere seems to be busy. In the corporate world, a “perennial time-scarcity problem” afflicts executives all over the globe, and the matter has only grown more acute in recent years, say analysts at McKinsey, a consultancy firm. These feelings are especially profound among working parents. As for all those time-saving gizmos, many people grumble that these bits of wizardry chew up far too much of their days, whether they are mouldering in traffic, navigating robotic voice-messaging systems or scything away at e-mail—sometimes all at once.

 

  • Will Canadians survive higher rates? A new poll from Canada’s largest insolvency firm, MNP LTD, shows that 1 in 3 Canadians say that they already feeling the effects of increasing interest rates. Don’t think this is surprising considering well known debt issues. But that 63% of Canadians are either worried about bankruptcy or already feeling the effects of 50bps (to 1%)…feels like something that should be concerning.

 

Our best wishes for a fulfilling week,  

Logos LP

Temperament Determines Outcomes

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Good Morning,
 

This week U.S. stocks climbed to record highs and Treasuries rallied after a core inflation reading slowed, adding to evidence that economic growth continues apace without stoking price increases. The dollar pared losses.

 

The three major indexes posted slight weekly gains. The S&P 500 and the Dow recorded their fifth consecutive weekly gains, while the Nasdaq has completed three.

 

Bonds in Europe gained after a report that the European Central Bank may continue asset purchases for at least nine months after it starts tapering in January. The Stoxx Europe 600 Index climbed, led by steelmakers and miners as most industrial metals gained and crude oil rose back above $51 a barrel.

 

Excluding food and energy, so-called core prices rose 0.5 percent in September, below an estimate of 0.6 percent. At the same time, a Commerce Department report also released Friday showed U.S. retail sales rose in September by the most in more than two years, as Americans replaced storm-damaged cars and paid higher prices at the gasoline pump. Excluding autos and gas, sales still increased at the second-fastest pace since January.


The inflation data bolstered the view that U.S. inflation below the Federal Reserve’s target may be structural rather than transitory, prompting traders to slightly reduce the odds of another rate increase in December. Could the Fed be ignoring actual inflation data?



Our Take
 

As we’ve suggested in the past, inflation is simply not cooperating but the fundamentals continue to look good. The never-ending crazy going on in Washington simply hasn’t stopped the economic expansion.

 

The International Monetary Fund, echoing increasingly gloomy sentiment in Washington, has concluded that the Donald Trump administration and Congress probably won't succeed in enacting tax reform or even significant tax cuts. The Republican chairman of the Senate Foreign Relations Committee calls the White House "an adult day care center" and says he fears that the president's reckless bluster may lead us into World War III. The president, meanwhile, says he wants to compare IQ test scores with his secretary of state.

 

No worries. Investors do not appear to be concerned about any of these things. Earnings season has also gotten off to a good start, with 87 percent of the companies that have reported topping bottom-line expectations. The number of companies currently beating estimates, and the margin by which they are doing so, is running at a clip well above what these same 31 companies have recorded, on average, over the past three years.

 

Even Buffett thinks that stock valuations make sense with interest rates where they are. You measure laying out money for an asset in relation for what you are going to get back. You get 2.30% on the ten year. Seems fair to say that stocks will do better over the long term. In case you missed it Warren Buffett’s full interview on CNBC.

 

But what of the concept of Ben Graham's “margin of safety” in this "bull market in everything" environment? The idea that the price paid for an asset (stock, bond, real estate etc.) should allow for human error, bad luck or, indeed, many things going wrong at once.

 

In a problematic world of trade tariffs, nuclear braggadocio, nationalism and inequality such a concept is more prescient than ever. Rarely have so many asset classes -from stocks, to bonds, to gold, to real estate to bitcoins, to wine, to classic cars- exhibited such a sense of invulnerability. And all at the same time to boot! Listen to the temperature of this market. Listen for the all too familiar refrains of “this time it’s different” as they roll in. Timing markets is a fool’s game, but remaining alert to the concept of “margin of safety” is not. It may ensure survival.  

 


Musings
 

Many great investors suggest that generating above average investment results necessitates above average temperament.

 

As warren Buffett has stated: “Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

 

Over the last few weeks in particular I’ve observed this on numerous occasions. Individuals with seemingly above average intelligence making poor decision after poor decision, blinded by ego and jealousy. Weakened by insecurity and contempt. Burdened by an inability to move forward after failure. Influenced by “opinions” when they reach “decisions”. Led astray by their own faulty temperaments.

 

This week I came across an interesting piece in the Economist that made me think deeply about temperament. Management gurus have poured over a related topic endlessly: is a knack for entrepreneurship something that you are born with, or something that can be taught? In a break with those gurus’ traditions, a group of economists and researchers from the World Bank, the National University of Singapore and Leuphana University in Germany decided that rather than simply concoct a theory, they would conduct a controlled experiment.

 

Moreover, instead of choosing subjects from the boardrooms of powerful corporations or among the latest crop of young entrepreneurs in Silicon Valley, Francisco Campos and his fellow researchers chose to monitor 1,500 people running small businesses in Togo in West Africa.

 

As they reported in Science, the researchers split the businesses into three groups of 500. One group served as the control. Another received a conventional business training in subjects such as accounting and financial management, marketing and human resources. They were also given tips on how to formalise a business. The syllabus came from a course called Business Edge, developed by the International Finance Corporation.

 

The final group was given a course inspired by psychological research, designed to teach personal initiative—things like setting goals, dealing with feedback and persistence in the face of setbacks, all of which are thought to be useful traits in a business owner. The researchers then followed their subjects’ fortunes for the next two-and-a-half years (the experiment began in 2014).

 

An earlier, smaller trial in Uganda had suggested that the psychological training was likely to work well. It did: monthly sales rose by 17% compared with the control group, while profits were up by 30%. It also boosted innovation: recipients came up with more new products than the control group. That suggests that entrepreneurship, or at least some mental habits useful for it, can indeed be taught. More surprising was how poorly the conventional training performed: as far as the researchers could tell, it had no effect at all. Temperament was the determinate factor. Superior mental habits lead to outperformance.

 

Focusing on the theme of temperament for our own decision making at Logos LP we’ve made a conscious effort to record instances in which poor temperament has lead to poor outcomes. A record of instances when either we or those around us have let poor temperament wreak havoc upon output. The journal gets re-visited on a monthly basis in order to develop an awareness of trends or patterns. Action items are them developed to alter behaviour.

 

For the next six months try and keep track of all of your major decisions and thoughts in a journal. This will help to build an awareness of the way your decisions are made and their associated outcomes. What you may find is that you develop more control over yourself and your decision making. Education comes from within; you get it by personal struggle, effort and thought. Live in the process…

 


Thought of the Week

 
 

"If you do not conquer self, you will be conquered by self.” - Napoleon Hill



Articles and Ideas of Interest

  • There’s nothing old about this bull market. Claims that it’s the second-longest ever don’t hold up. Barry Ritholtz makes a convincing case that the current bull market is only four and a half years years old. The best starting date of a new bull market is when the prior bull-market highs are eclipsed. That is how we get a date like 1982 as the start of the last secular long-term bull market. And it is also how we get to March 2013 as the start date of this bull market, when the S&P 500 topped the earlier high of 1,565 set in October 2007. Could we just be approaching the middle of the run?

          

  • Debt keeps rising and nothing bad happens. Economists are stumped. As the Republicans prepare for their big tax reform push, the issue of deficits and debt is once more coming to the fore. Many economists realize that tax cuts, especially income tax cuts, tend to increase deficits, which over time lead to increases in the national debt. The GOP plan, if adopted, probably would pump up both deficits and debt. So the question is: Is more debt good, bad or does it even matter? But if it’s bad, how serious a problem is it?

 

  • Ideas aren’t running out, but they are getting more expensive to find. The rate of productivity growth in advanced economies has been falling. Optimists hope for a fourth industrial revolution, while pessimists lament that most potential productivity growth has already occurred. This must read piece argues that data on the research effort across all industries shows the costs of extracting ideas have increased sharply over time. This suggests that unless research inputs are continuously raised, economic growth will continue to slow in advanced nations.

 

  • Bitcoin resumed its climb. After tearing past $5,000 on Thursday, the cryptocurrency soared above $5,800 on Friday. JPMorgan CEO Jamie Dimon, who told investors last month that bitcoin was a bubble “worse than tulip bulbs,” said Thursday he doesn’t want to talk about it anymore.  But on Friday, Dimon responded to a question about bitcoin by saying if people are "stupid enough to buy it," they will pay the price for it in the future. The craze rolls on with hedge funds flipping ICOs and receiving preferential discounts and terms. Here’s the deal with an ICO: You can buy entry in a computer ledger issued by a start-up company on the basis on an unregulated prospectus. It is called an ICO (“Initial Coin Offering”) but though the ledger entry is called a coin, you cannot spend it at any shop. And whereas the use of the term ICO makes it sound like an IPO (initial public offering), the process whereby a firm lists on the stockmarket, coin ownership does not necessarily get you equity in the company concerned. The Economist points out that this is the kind of bargain that would only appeal to people who reply to emails from Nigerian princes offering to transfer millions to their accounts. There is a serious side to the craze as there was with the dotcom boom. The technology that underpins digital currencies- the blockchain- is an important development. The problem is that it is not easy to draw a line between financial innovation and reckless speculation.


     
  • Dating apps are reshaping society. There’s been a big uptick in interracial and same-sex partners who find each other online. Interesting research presented in the MIT Tech Review which tends to support that there is some evidence that married couples who meet online have lower rates of marital breakup than those who meet traditionally. That has the potential to significantly benefit society. And it’s exactly what new data models predicts. Perhaps online dating isn’t all bad. Important to think about as Berkshire Hathaway CEO Warren Buffett recently stated that making money means nothing without having another person, such as a spouse, to share the wealth with. Who you marry, which is the ultimate partnership, is enormously important in determining the happiness in your life and your success. A study published by Carnegie Mellon University found that people with supportive spouses are "more likely to give themselves the chance to succeed."

 

  • The loneliness epidemic. This may not surprise you. Chances are, you or someone you know has been struggling with loneliness. And that can be a serious problem. Loneliness and weak social connections are associated with a reduction in lifespan similar to that caused by smoking 15 cigarettes a day and even greater than that associated with obesity. But we haven’t focused nearly as much effort on strengthening connections between people as we have on curbing tobacco use or obesity. Loneliness is also associated with a greater risk of cardiovascular disease, dementia, depression, and anxiety. At work, loneliness reduces task performance, limits creativity, and impairs other aspects of executive function such as reasoning and decision making. For our health and our work, it is imperative that we address the loneliness epidemic quickly.

Our best wishes for a fulfilling week, 
 

Logos LP

Our Inner Scorecard

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Good Morning,
 

The S&P 500 closed at a record Friday, helped by gains in technology stocks on the last trading day of the quarter. The tech-heavy Nasdaq composite rose more than half a percent to post its 50th record close for this year. The Dow transports and small-cap Russell 2000 also hit record highs.

 

The Dow posted quarterly gains of 4.9 percent its eighth straight quarter of gains for the first time since 1997. The S&P 500 rose nearly 4 percent in the quarter, also its eighth straight quarter of gains. The Nasdaq composite gained almost 5.8 percent for the quarter, its fifth straight positive quarter since 2015.

Our Take
 

Strength begets strength. Virtually every asset class is moving up. New record highs are being made in virtually every corner of the market. We suggest remaining cautious as positive sentiment is building.

Of note this week this week was the announcement surrounding Trump’s tax reform. As expected it was thin on details and appeared to favor the rich. On a first read it is likely to
increase the U.S. budget deficit but beyond that, its impact is still unclear. Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut) questioning whether tax cuts stimulate growth. Tax cuts are still the GOP’s go-to solution for nearly every economic problem and extravagant claims are made for any proposed tax cut. Bruce looks into whether they hold water.


Musings
 

Over the last few weeks I’ve been busy setting up a new venture yet I finally found some time to get to a staple in the value investor’s library: The Education of A Value Investor by Guy Spier. What a breath of fresh air in my increasingly busy world.

 

What was so refreshing about the book was that it wasn’t what I’d been expecting. As the esteemed manager of Aquamarine Fund I figured Guy would spend a considerable amount of time on his stock selection approach yet the book offers something much more valuable.

 

This is a book about life. About Guy’s life. Guy’s education. Guy’s path and Guy’s alone. This point teases out its key piece of wisdom. We spend so much time trying to compete with others. Looking for their acceptance and adoration failing to realize that true success in life, true fulfillment can only occur through the acceptance of self.

 

Once we shift from orienting ourselves towards an outer scorecard towards an inner scorecard we can become aligned with ourselves. Authenticity is a powerful force. Guy’s story is the story of this shift. It is the story of the magical success one can have when one becomes aware of one’s own values and perspectives.

 

This message really spoke to me at this particular point in time as I’m starting to realize that the outer journey we start at birth; going to school, learning how to build friendships, learning how to navigate relationships, deciding what to take in school, getting our first jobs, navigating heart aches and let downs is only the starting point. The real growth occurs when we are able to drive ourselves toward the inner journey of spiritual development and self-awareness.

 

In our early years we are often driven by the outer scorecard - that need for public approval and recognition, which can easily lead us in the wrong direction. Come to think of it, many of the mistakes (perhaps all of them) I’ve made in my life have occurred because of my pursuit of this outer scorecard.

 

What I’ve realized and what Guy so eloquently posits is that the inner journey is not only more fulfilling but is also a key to becoming a better investor. If we don’t understand our inner landscapes - including our fears, insecurities, desires, biases, and attitude to money- we’re likely to get run over by reality. As such it is important to look within:

 

Are we the same people on the outside as we are on the inside? Are we pretending to be something we aren’t? Are we building a rock-solid understanding of who we are and how we want to live? Are we building environments in which we can operate rationally and calmly? Do our friends support and stimulate the authentic version of ourselves? Why are we building wealth?

 

The outer journey may bring us to money, professional advancement or social cachet yet the inner journey, the one we also start at birth is the one that puts us on a path toward something less tangible yet more valuable. The inner journey is the path to becoming the best version of ourselves that we can be, and this appears to me to be the only true path in life. It leads us closer to finding the answers to the real questions that matter: What is my wealth for? What gives my life meaning? And how can I use my gifts to help others?

 

Logos LP in the Media

 

Forbes has done a special feature on Canadian Investment Opportunities and we offer one of our ideas.


Thought of the Week

 

"This became my own goal: not to be Warren Buffett, but to become a more authentic version of myself. As he had taught me, the path to true success is through authenticity.”-Guy Spier



Articles and Ideas of Interest

 

  • Successful investing isn’t easy. They say a picture is worth a thousand words, but in investing it is worth so much more. Check out this great collection of extreme charts as a helpful reminder that there is no such thing as "can't", "won't," or "has to" in markets. The market doesn't have to do anything, and certainly not what you think it "should" do. The market doesn't abide by any hard and fast rules; it does what it wants to do and when it wants to do it. That's what makes it so hard and at the same time so interesting.

          

  • The plastic fantasy that’s propping up the oil markets. Kenya's mountains of plastic bags might not seem central to oil's grand narrative, but they are. Last week, the East African country banned almost everything about them: making them, importing them, selling them, using them, with penalties of up to four years in jail or fines up to $38,000. This type of prohibition carries a warning for an oil business that's depending on petrochemicals -- and the plastics made from them -- to pick up the slack when we all switch from gas guzzlers to electric cars. Petrochemicals are seen as the strongest source of global oil demand growth in 2015-2040. On the current track, by 2050 our oceans could contain more plastics than fish (by weight), according to a 2016 report by the World Economic Forum and the Ellen MacArthur Foundation. But, as Kenya shows, the days of single-use plastic packaging may already be numbered. And with this stuff making up about a quarter of all the plastic used, that will have a profound impact on the petrochemicals industry. Let’s not forget that there is now a Great Pacific Garbage Patch that is estimated to be about the size of Texas while a new report (dug into by National Geographic) has shown that extreme weather, made worse by climate change, along with the health impacts of burning fossil fuels, has cost the U.S. economy at least $240 billion a year over the past ten years...Can the oil industry really avoid disruption?

 

  • Brace yourself: the most disruptive phase of globalization is just beginning. Great piece in Quartz covering Richard Baldwin’s new book The Great Convergence: Information Technology and the New Globalization. Baldwin argues that globalization takes shape in three distinct stages: the ability to move goods, then ideas, and finally people. Since the early 19th century, the cost of the first two has fallen dramatically, spurring the surge in international trade that is now a feature of the modern global economy. A better understanding of globalization is more urgent than ever, Baldwin says, because the third and most disruptive phrase is still to come. Technology will bring globalization to the people-centric service sector, upending far more jobs in rich countries than the decline in manufacturing has in recent decades. Baldwin argues that we shouldn’t try and protect jobs; we should protect workers. It’s really a fool’s errand to struggle with “protecting jobs” because after a year or two those jobs will still go. Governments should instead focus on comprehensive retraining, help with housing, help with relocation.

 

  • Some market myths hurt investors. Nice piece by Ben Carlson looking over some of the rules of thumb and aphorisms that investors accept without investigating their merits based on the historical evidence: Low volume rallies spell trouble for stocks, There is tons of cash on the sidelines, Margin debt at all-time highs mean euphoria in the markets, Something’s gotta give between stocks and bonds, Bonds always lose money when interest rates rise.

 

  • Do tax cuts really equal growth? Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut). Tax are still the GOP’s go-to solution for nearly every economic problem. Extravagant claims are made for any proposed tax cut. Do they hold water?

 

  • The shorter your sleep, the shorter your life: the new sleep science. Leading neuroscientist Matthew Walker on why sleep deprivation is increasing our risk of cancer, heart attack and Alzheimer’s and what you can do about it. We are in the midst of a “catastrophic sleep-loss epidemic”, the consequences of which are far graver than any of us could imagine. More than 20 large scale epidemiological studies all report the same clear relationship: the shorter your sleep, the shorter your life. To take just one example, adults aged 45 years or older who sleep less than six hours a night are 200% more likely to have a heart attack or stroke in their lifetime, as compared with those sleeping seven or eight hours a night (part of the reason for this has to do with blood pressure: even just one night of modest sleep reduction will speed the rate of a person’s heart, hour upon hour, and significantly increase their blood pressure).

 

  • Education isn’t the key to a good income. The Atlantic presents a growing body of research which debunks the idea that school quality is the main determinant of economic mobility.

 

  • The secret to Germany’s happiness and success: Its values are the opposite of Silicon Valley’s. To Germans, caution and frugality are signifiers of great moral character. Moreover, for Germans, a good work-life balance does not involve unlimited massages and free meals on the corporate campus to encourage 90-hour weeks. Germans not only work 35 hours a week on average—they’re the kind of people who might decide to commute by swimming, simply because it brings them joy.

 

  • Take some time to enjoy the scenery. Check out The Atlantic’s coverage of the 2017 National Geographic Nature Photographer of the Year Contest.

 

Our best wishes for a fulfilling week, 

Logos LP