I think about investing a lot. I’m thrifty. I’m a value investor. I’ve read “The. Intelligent Investor” and “Security Analysis.” I’ve done all the practice problems in Newnan’s “Engineering Economic Analysis.” I’ve read Geraldine Weiss. I’ve done OK. Better than OK. But for the last two years none of the traditional value approaches to investing work.
I know that two year stretches do not a market make. I know that we are used to a reversion to the mean. I know there are short term trends. I think this is different. Here’s why it might be different.
Investing and business activity (investing is a business activity!) require rule of law. Business activity requires thousands of shared assumptions about how contracts work, what money is, who the parties involved are, and much much more. A lot of this stuff is defined in the Uniform Commercial Code. A lot of it is spelled out in case law. Most of it is tacit. If you buy lemonade at the lemonade stand you can see each other, neither of you has to explain what money is, how the money is exchanged for lemonade, why the lemonade is for sale, or thousands of other ideas that underpin the whole enterprise.
What if some of the tacitly understood underpinnings of the transaction changed unbeknownst to one or even both parties? What if money changed? What if unbeknownst to both parties the government loaned money to a competitor without the competition even filling out an application? This and more is happening.
This shifting business environment makes it impossible to be successful in business because of a rational set of decisions. (You can be successful with luck or being offered the ticket.) We’ve never had all the information when we made business decisions, but we’ve never had so little accurate information before. Don’t tell me about data mining or your CRM. It’s mining sewage.
Traditional money no longer exists. Federal reserve notes are an entirely new type of instrument. Because of this returns are no longer composed of a risk premium, cost of capital, and an inflation hedge. This breaks value investing. Old models don’t hold.
Because the Fed is actively buying S&P 500 bond funds, being the last AND first resort buyer of corporate debt, there is little or no reward for running a company debt free. Additionally, the consequences for taking on debt are minimized or maybe even completely absorbed by the Fed. We don’t know what corporate debt costs because the fed has it’s thumb on the scale. It’s been like this since Jekyll island and is getting worse. As a result pricing for debt and even retail goods is Fuxxored. This is leading to fuxxored supply chains. Lumber shortages and corn oversupply. It’ll lead to more.
Many investments (derivatives, CDO’s, others) are meta-assets. They are models that exhibit behavior based on what other assets do. What, precisely, are you buying when you buy a derivative? I’ll wait for your answer. Most answers I hear boil down to buying a magic incantation designed to throw off a certain yield. They damned sure aren’t concrete like 1/2 interest in a new Bridgeport mill.
Crypto is even whackier than that. As my readers know I’m pro-crypto currency. That doesn’t mean there aren’t serious questions about the thinginess of it. Metaphysically, what is bitcoin? What does it mean to own a hash of numbers? Where does it live? Don’t say blockchain. The blockchain has a number of physical locations. WHere are these locations? Whose property is it on? What consequences are there for parking your money on someone else’s hard drive? No one knows. I’ve read the papers. I’ve heard the nerds speak. The truth is no one knows and we won’t know until we’ve used it for at least 100 years.
AND ALL OF IT REQUIRES PETROLEUM.
Most investment instruments are now entirely social in nature. You aren’t going to be rewarded for investing prudently in companies who make a lot of money using very little. They are bets on the perceived efficacy of policy. Is the government going to back Tesla to the hilt? How much more money is going to be printed? When is mortgage forbearance over? These policies are certain to work until they don’t. So financial decisions are now reduced to:
- Betting with the fed
- Betting against the fed
The first two come down to market timing. The last is means ostracism. Wat do?