Good Morning,

U.S. stocks bounced back from the most significant selloff since May, while Treasuries fell after unexpectedly strong hiring data improving confidence in the American economy, bolstering the Federal Reserve’s case for raising interest rates.

Broad-based payroll gains that topped estimates boosted sentiment among equity investors a day after stocks suffered the biggest drop in six weeks. The Bloomberg Dollar Spot Index was flat as tepid wage growth stoked concern that inflationary pressure remains weak. The hiring report supported the Federal Reserve’s stance that recent signs of labor market sluggishness are transitory, though the tepid wage gains gave fuel to arguments that weakness remains.

On the Canadian side, Canada’s job market delivered another stellar performance in June by adding 45,300 positions, Statistics Canada said Friday.

The number, which vastly surpassed economists’ consensus expectation of 10,000 new jobs, increases the probability that the Bank of Canada (BoC) will raise interest rates at its next rate announcement on July 12.

Our Take

There are plenty of reasons to be bullish as global earnings per share are expected to grow around 11 percent this year, compared to just 2 percent growth last year. In fact, all the major economies around the globe and the companies which compose them are gaining momentum at the same time, the first such simultaneous recovery in years.

What we are looking at is a “global synchronous recovery”. This is a big change compared to recent years, when we had various regions and countries moving in and out of EPS recessions.

Furthermore, Janet Yellen's bet on pulling workers back to the labor force appears to be paying off. The flow of people moving from outside of the labor force straight into jobs jumped in June to 4.7 million, its highest level in records that go back to 1990. Labor force participation has stabilized after a long-run decline, and the share of the population that works continues to rise moderately. And as long-hidden labor market slack gets absorbed, it could be helping to keep wage gains modest and inflation in check.

Nevertheless, there are reasons to remain cautious as central bank chiefs in the US and UK seem very sure of themselves. Mark Carney, the governor of the Bank of England and chair of the international Financial Stability Board, said this week that issues of the last financial crisis had been “fixed“.

Last week, his American counterpart, Janet Yellen said at a Q&A in London:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”

Last week, Mario Draghi, governor of the European Central Bank, sent the euro to its highest level in more than a year by proclaiming that the euro-zone economy was improving and that he was “confident” the bank’s policies working. Both the Bank of Canada and Sweden’s Riksbank have also recently suggested that their economies probably don’t need any more monetary stimulus.

The problem is that the wage increases which should go along with increasingly low unemployment are nowhere to be found. Inflation remains below central bank targets.

In response, central banks are largely sticking to the script: The retreat in inflation is transitory, idiosyncratic even, and the slow-but-steady slog back toward the central bank's 2 percent target will probably resume.

The prevailing wisdom based on the Phillips curve is that the jobless rate is so low that wages and inflation just have to -- at some point -- really start to pick up.

So far this isn’t happening and thus as we have stated before, it may be wise to allow inflation to run above the 2% target rather than raise rates prematurely and risk undermining a still fragile global recovery.

Musings

A shorter note this week. For insights into how we are navigating this market I urge you to read our Q2 letter to our investors included below.

Nevertheless, to pick up on the themes of patience and discipline included in our letter, I wanted to briefly consider an article I read this week from Nir Kasissar in Bloomberg.

Nir reminds us that despite the reams of financial data and vast computing power to process it, investing remains a stubbornly superstitious and emotional pursuit.

As such, it should come as no surprise that the investment world has always prized “discipline” as the holy grail of personal attributes.

As an investor, you should find a strategy and have the discipline to stick to it over the long-term. Just ask Warren Buffett or Charlie Munger.

The problem is that every style of investing -- no matter how thoughtfully constructed and ably executed -- goes through a long, agonizing period when it doesn’t work. Again just ask Warren Buffett or Charlie Munger.

Only a few years ago pundits dared to suggest that Buffett’s underperformance was evidence that perhaps he had “lost his touch”.

The longer an investing style falters, the harder it is to know whether that style is temporarily out of favor or destined for retirement. The line between discipline and foolishness becomes increasingly blurry, even to elite investors.

Further compounding this dilemma are two issues:

1) Current markets are abnormal : Value stocks, for example, are supposed to shine during recoveries. They haven’t. Low interest rates are supposed to translate into meager returns from bonds. Sub 5% unemployment is supposed to translate into greater than 2% inflation. Again nope.

2) “Long-term” doesn’t mean the same thing anymore : In the 1960’s the average hold time for stocks was roughly six years. Today that average hold time is from six weeks to six months.

In this environment, patiently finding the line between discipline and foolishness is itself a fantastic test of discipline...

Logos LP Updates

June 2017 Return: -3.69%

2017 YTD (June) Return: 19.66%

Annualized Returns Since Inception March 26, 2014: 24.89%

Cumulative Return Since Inception March 26, 2014: 82.99%

Logos LP in the Media

Our Q1 2017 letter to our investors picked up by ValueWalk

Our Q2 2017 letter to our investors picked up by ValueWalk

Thought of the Week

"Patience is bitter, but its fruit is sweet" -Jean-Jacques Rousseau

Articles and Ideas of Interest

What history says about low volatility. For all that's being said and written about the lack of volatility in financial markets these days, you might think something unusual is going on. In fact, history suggests it's the opposite. Nice piece in Bloomberg suggesting that volatility is lower than average historical levels, but it’s at levels typical of the bottom of a quiet period between two crises. Instead of fretting about complacency, it appears that history shows us that crises occur when the VIX and realized volatility are above 20 percent, and investors typically get warned months in advance of what the headlines refer to as “shocks”...the market anticipates news events about 18 months in the future. It’s not perfect, of course, but it may be a lot better than experts and commentators. Evidence of smooth sailing over the next while?

Rising inequality may be the real risk of automation. Technological change has had more impact on earnings distribution than on demand for workers. If your main worry over automation is losing your job, history suggests you’ll probably be just fine. The bigger concern, economists David Autor and Anna Salomons reckon is how technological advances will affect earnings distribution. Interestingly, in the AI age, “being smart” will mean something completely different. HBR suggests that we will need to take our cognitive and emotional skills to a much higher level.

How to deal with North Korea? The Atlantic proposes that there are no good options. But some are better than others. For his part, Trump has tweeted that North Korea is “looking for trouble” and that he intends to “solve the problem.” For his part, Trump has also tweeted that North Korea is “looking for trouble” and that he intends to “solve the problem.” Nevertheless, the U.S. has 4 broad strategic options: 1) Prevention : crush them using a military strike 2) Turn the screws : limited targeted precision strikes and small scale attacks to debilitate 3) Decapitation : remove Kim and his inner circle and replace the leadership with a moderate regime 4) acceptance : allow nuclear ambitions and train and contain. Acceptance is how the most current crisis should and most likely will play out…

Baby boomers will live long but might not prosper. The biggest threat to the majority will be outliving their nest egg. As life expectancies continue to climb, managing longevity risk will be a key input in the portfolio management and planning for the 10,000 or so baby boomers retiring every day for the next 19 years or so. Ben Carlson suggests a few tips to stay above water. One I particularly like is try generational financial planning. Bring other trusted family members into the retirement planning process. Just don’t count on millennials buying your home. Student loans are a problem for all of us not just the young. Great piece in Businessweek suggesting that mounting student debt in the U.K., U.S. and elsewhere, might hold young people back from buying houses and saving for retirement. That would endanger economic growth and asset prices, with the effects made worse by shifting demographics. This should worry everybody.

There is a “wellness” epidemic going on. Why are so many privileged people feeling so sick? Luckily (or unluckily) there’s no shortage of cures. Wellness is a very broad idea, which is no small part of its marketing appeal. On the most basic level, it’s about making a conscious effort to attain health in both body and mind, to strive for unity and balance. This is not a new idea. But perhaps what is new is that there is something grotesque about this multi billion dollar industry’s emerging at the moment when the most basic health care is still being denied to so many in America and is at risk of being pulled away from millions more. In addition, what is perhaps most concerning about wellness’s ascendancy is that it’s happening because, in our increasingly bifurcated world, even those who do have access to pretty good (and sometimes quite excellent, if quite expensive) traditional health care are left feeling, nonetheless, incredibly unwell. Will all the high priced meditation retreats, aromatherapy, yoga, pressed juice, spiralizers and supplements really change anything? Or is history repeating itself with the resurrection of the 18th century peddler with dubious credentials, selling “snake-oil” with boisterous marketing hype often supported by pseudo-scientific evidence? Get your ashwagandha, bacopa, chaga mushrooms, colloidal silver, cordyceps mushrooms, eleuthero root, maca, selenium and zizyphus while supplies last…

Last Domino’ just fell for Canada rate hike. Canada added more than four times the number of jobs economists had expected in June, capping the best quarter since 2010 and solidifying the view the Bank of Canada will raise interest rates at its meeting next week. A series of government measures and the prospect of higher interest rates boosted listings and sparked the biggest sales decline in more than eight years last month, the Toronto Real Estate Board reported Thursday. The Toronto Real Estate Board also lowered its forecast for sales and prices. Expect prices to decline further as central banks begin to reign in easy money policies.

Our best wishes for a fulfilling week,

Logos LP