If you have followed our weekly articles digest, you are no doubt aware of the large amount of material that we review each week.
Sometimes it is easy to miss the forest for the trees, so we thought it prescient to take a step back and outline what we feel like we see going on in the world more broadly. We have tried to organize our thoughts based on major categories.
Global Macro Environment
- Coming out of the financial crises, the public sector stepped in to offset a rapidly deleveraging private sector.
- This is now leading to growth headwinds as there simply is not a lot of re-levering occurring in private sector to drive a more robust GDP recovery
- As well, much needed structural reforms in many economies have not been realized
- Europe – Germany and the UK may be the only two economies that may be structurally ok, even that, with some caveats. Southern Europe is a slow moving train wreck
- China – The incentives are so skewed here across all levels, we are skeptical about the reported growth figures and concerned by the massive amounts of leverage hiding across the system
- Central banks are using QE to drive asset prices higher in hopes of driving economic growth – but they have forgotten that it is not just seeing ‘paper riches’ that puts people in a risk taking mood
- We can’t tell you how many high-net worth individuals and family offices we have interacted with that have massive amounts of cash sitting on the sidelines
- As such, the markets are starved for growth – and growth companies are rewarded with high multiples
- Fewer growth companies are going public early – which is shifting a significant amount of demand into funds that can do ‘late-stage VC / growth equity’
- Equity investors are putting more capital into ETFs
- Millennial investors are hesitant to own equities in aggregate
- Increased regulations have decimated inventories of bonds at the dealer level
- Pensions and endowments have under-performed for so long that they need better performance to catch up – so they are putting a ton of capital into alternatives – which in aggregate may in fact hurt their ability to realize higher returns
- Thanks to the silliness of risk-parity investing – some of these institutional investors are substantially long fixed income coming into the end of a super-cycle in interest rates
Meanwhile in consumer land…
- Where has the consumer gone? No one can seem to find them – except in autos, iphones, and electronic dance music festivals
- What happens to auto sales when rates rise? Can’t be good
- Millennials – too much student debt, too few jobs and living at home with parents
- Even for the millennials in the workplace – people are forgetting that they started their careers in the most uncertain economy since the great depression – so why are we surprised that they are more cautious about signing up for big ticket consumer obligations?
- Especially when Uber, Airbnb, Tinder, etc – allow you to procure most of life’s necessities on a rental basis
- The consumer is busy – malls are a pain. Why go when I can order online for free shipping?
- Lack of store traffic is hurting retailers ability to move clearance merchandise when they have a fashion mis-step
- Stratification of spending – the consumer continues to high/low their purchases. They buy basics, staples, and trendy stuff at the fast fashion chains and splurge in some categories
- Where do they splurge? Only in categories where they are aficionados…
- Brands that appeal to the aficionado are typically small shops which offer ‘heritage’ i.e. crazy quality and a relationship / community set that the aficionado wants to affiliate with
- If the consumer isn’t buying that, they are buying services because doesn’t everyone know that services and experiences bring greater happiness?
- Aside – all this creates huge headwinds for growth in my view for the large consumer products companies. For example, craft beer is hurting Bud’s ability to grow volume by slowly nipping at its heels
- As a public investor- huge portions of this growth are not even going to be available for investment
- The consumer also wants bandwidth and lots of it – streaming video is exploding – and the next wave is the live-broadcasting of services like Periscope
- I was at a concert last week with loads of 20-somehtings who were almost all posting pics to Instagram and live-streaming the show
- The global environment is hurting demand for industrial goods. Even if you were protected, the pullback in oil-related capex is pretty much washed everyone out
- The only large scale sector that seems to be intact right now is Aerospace and demand for planes.
- While oil prices have been crushed, there is a massive amount of petro-chemical facilities and capacity being built in TX and Louisiana that we have not really even seen the benefits of
- Even if you feel better about industrial production, we are 6 years into a recovery – why buy now? Doesn’t there have to be a recession at some point?
- Agriculture demand has been hit hard too –
- US Infrastructure is literally crumbling – but Washington is fiddling while Rome burns.
Financials – Waiting for rates to rise
- Financials are largely the cheapest sector in the market and have not recovered from the crises
- That said, they are suffering net interest margin repression through an accommodative Fed
- If that doesn’t get you, Dodd-Frank and Basel III should finish obliterating your margins
- Seeing financials systematically re-evaluate every business they are in
- Community banks – at least in Nashville they are growing rapidly, but why are they building so many branches?
- Health insurance companies – consolidating quickly
- Reinsurance – pricing has gotten sloppy, the next hurricane should show some of the bad behavior here
- P&C – with all the talk of autonomous cars, when do you short anything with consumer auto exposure?
- Fundamental reset in who the marginal price setter in the industry – Saudi’s are out, the Texas wildcatter is in ….. this can only lead to more volatility in prices
- Inventories remain high, so growth is going to have to pick up to burn off the excess
- While production hasn’t come down as quickly as some have thought it should, people seem to be missing how fast frack wells run dry.
- Could lead to some upside surprises around inventory builds – maybe what we are seeing this week?
- Doesn’t this have to hurt demand for electric cars – looking at you Tesla!
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