Fred Hickey on the everything bubble

The notion that we could be in a new bull market without correcting the unprecedented valuations, the enormous debt levels, all the malinvestments throughout the economy created from years of "free money" and the egregiously excessive investor enthusiasm is ridiculous, but that's how misguided the dancers can become when FOMO takes over.  Investor desire to believe that the good times will continue is nothing new.  There were ten double-digit rallies during the 1929 to 1932 bear market and 16 double-digit rallies during the 2000-2002 bear.  In both periods the stock market rallies averaged 23%.

~ Fred Hickey, The High-Tech Strategist, "Up It Goes, Before It Blows III," June 28, 2023

Alex Pollock on the Fed's holdings of mortgage securities

As of April 2023, the Fed owns $2.6 trillion of mortgage securities.  That is larger than what the total assets of the Fed were at the end of 2008.  That number and the interest rate risk it represents would have astonished previous generations of Federal Reserve governors.  The Fed also experienced a massive mark to market loss on these mortgage securities: a loss of $408 billion as of the end of 2022, or almost ten times the Fed' total capital of $42 billion.

~ Alex J. Pollock, "How do you gt interventions withdrawn when the crisis is over?," The Austrian, May-June 2023

Joe Queenan on why he won't take a cruise with millennials

An interesting thought occurred to me.  Millennials and Gen Xers quite accurately view baby boomers as their economic adversaries.  Retirees like me are stifling the futures of younger generations with our extravagant Social Security benefits.  Yet for some reason young people are enthusiastically signing up for cruises where they will be surrounded by the very cohort they have reason to despise.  Why? 

Let’s just say ocean cruises offer a wonderful opportunity for millennials and Gen Xers to even up the generational score.  There you are, out on the Lido Deck, all set to enjoy the Aurora Borealis, when without warning some vindictive millennial gives you a little nudge in the back.  Splish!  Splash!  Man overboard!

Do I honestly think millennials would do such a cruel and devious thing?  Well, I could hardly blame them.  That’s why I’m keeping my eyes peeled for an all-expenses-paid family cruise invitation from my kids.  I love you guys, but I don’t trust you.

~ Joe Queenan, "I Won't Be Going on Any Cruise Ship With Millennials," The Wall Street Journal, June 28, 2023

Joel Tillinghast on investing in Japan

In the United States, every executive has been instructed that his or her top goal is increasing shareholder value.  When I bring up this idea in Japan, most businessmen (and in Japan, they are men) have no clue what I'm talking about.  Perhaps it's because employing armies of people and having a dominant market share bring more prestige in Japan than high profits.  Some argue that the Japanese are taking the longer view than American corporations.  Eventually, having a strong market share should lead to profits.  On average, though, Japanese companies earn lower returns on equity than other businesses around the globe.  Social ties and responsibilities are conceived differently in Japan.

"The nail that sticks out gets hammered down"; so goes the Japanese proverb.  If making too much money would make them stick out, they won't do it.  CEOs in Japan are paid much smaller multiples of the average employee's pay than CEOs in America.  Employees probably do feel greater loyalty to their company when everyone is more nearly in the same boat.  This might explain why politics is less polarized in Japan.  But today the "salaryman" system of lifetime employment really exists only at larger companies.  Many companies try to prevent being hammered down by holding large cash balances and avoiding debt.

[...]

As an investor, I want profits that will keep sticking out and not be pounded down quickly.  The retail industry is where I've often found the un-Japanese desire to stand out, and these have indeed been stand-out investments for me.  Cosmos Pharmaceutical is a discount drugstore chain on Kyushu, a smaller island on the southwest corner of Japan, far away from Tokyo.  Cosmos offered very sharp prices to consumers by keeping a tight rein on operating costs.  It's selling, general, and administrative (SG&A) expense was just 14 percent of sales, an outstanding number.  Walmart, which also pinches pennies, spends 19 percent of sales on SG&A.

Cosmos was founded in 1983 by its CEO, Masateru Uno, and has grown rapidly.  Perhaps because Cosmos is in a less populated region of Japan, good store locations can be secured more quickly and at a lower cost.  Drugstores earn better profit margins on private label products than on branded products; Cosmos sells a lot of private label.  Cosmos turns its inventory over faster than the leading American drugstores, CVS and Walgreens.  The average life expectancy is four years longer in Japan than in the United States, so the population is aging.  This would seem to set up drugstores for strong growth, but the stock was trading at only ten times earnings in 2011.  Over the next five years, the stock soared sixfold, as growth continued and the P/E expanded.

~ Joel Tillinghast, Big Money Thinks Small (2017), pp. 91-93

David Laband on "unfair competition"

Every effort by small businessmen to forestall the building of a Wal-Mart is an attempt to shoot the messenger rather than pay heed to the message.  Local economies do not go to pot when Wal-Marts are built.  Quite the opposite: Sam Walton once said, "There was a lot more business in those towns than people ever thought."

Without question, each Wal-Mart and Sam's store alters the structure of local unemployment.  The sons and daughters of local businessmen and women no longer follow in their parents' proprietary footsteps.  Now they, as well as many other local workers, go to work for Uncle Sam (Walton).  Thus, the overall rate of local employment is generally not adversely affected.  While we may feel sorry for the personal losses suffered by the owners of these no-longer competitive small firms, the aggregate benefits reaped by (all-too-often- forgotten) consumers, including those same small businessmen, outweigh their losses...

The pleas to local zoning boards and planning commissions for protection from "unfair competition" by small businesses faced with the prospect of having to compete with a new Wal-Mart store sound identical to the rhetoric employed by mouthpieces for the Big Three automobile companies, the textile and steel industries, sugar producers, and every other domestric industry seeking to restrict foreign sales of these products in America.  To kick Japanese and other foreign producers out of American markets is to deny the benefits of Sam Walton-esque competition.

[...]

By invoking the rhetoric of "unfair competition," domestic firms seek deliberately to mislead consumers into thinking that protection of competitors is the same thing as protection of competition.  Nothing could be further from the truth.  Protection of the existing firms in an industry against more efficient competitors, be they American or foreign, insulates those firms from the forces of competition.  American consumers are the worse for it: they pay higher prices for shoddier products than would be available in a more competitive environment.

Japan-bashing is equivalent to Sam Walton-bashing.  The principles of competition are universal, whether the competitors are domestic or foreign.  The fact that sellers are foreign does not diminish the potential gains to American consumers from competition between sellers.  If we're going to lionize Sam Walton, consistency demands that we lionize every successful producer in the global economy.

~ David N. Laband, "Lessons from an Entrepreneur," The Freeman, September 1992

(Article was reprinted in The Spirit of Freedom: Essays in American History, edited by Burton W. Folsom, Jr. This quote appears on pp. 197-198.

Brock Lovett on experience working against Titanic's captain

26 years of experience working against him [captain John Edward Smith].  He figures anything big enough to sink the ship they're gonna see in time to turn.  The ship's too big with too small a rudder.  It doesn't corner worth a damn.  Everything he knows is wrong.

~ Brock Lovett (as played by Bill Paxton), treasure hunter in the 1997 movie Titanic

Marcus Aurelius on time management

Understand that your time has a limit set to it.  Use it, then to advance your enlightenment; or it will be gone, and never in your power again.

~ Marcus Aurelius

Hans Sennholz on the National Labor Relations Act of 1935

The Wagner Act, or National Labor Relations Act, was passed in reaction to the Supreme Court's voiding of NRA and its labor codes.  It aimed at crushing all employer resistance to labor unions.  Anything an employer might do in self-defense became an "unfair labor practice" punishable by the Board.  The law not only obliged employers to deal and bargain with the unions designated as the employees' representatives, later Board decisions also made it unlawful to resist the demands of labor union leaders.

Following the election of 1936, the labor unions began to make ample use of their new powers.  Through threats, boycotts, strikes, seizures of plants, and outright violence committed in legal sanctity, they forced millions of workers into membership.  Consequently, labor productivity declined and wages were forced upward.  Labor strife and disturbance ran wild.  Ugly sitdown strikes idled hundreds of plants.  In the ensuing months economic activity began to decline and unemployment again rose above the ten million mark.

~ Hans F. Sennholz, "The Great Depression: Will We Repeat It?," The Freeman, April 1975

(Article was reprinted in The Spirit of Freedom: Essays in American History, edited by Burton W. Folsom, Jr.  This quote appears on p. 168.)

Mark Twain on education

Education consists mainly of what we have unlearned.

I have never let my schooling interfere with my education.

Education is the path from cocky ignorance to miserable uncertainty.

~ Mark Twain

(Quoted by Steve Berger, presentation to Mises University, 7:55 mark, August 6, 2008.)

Conor Dougherty on transferring low-rate mortgages to new home buyers

Because so little is for sale, home prices have remained stable, and even resumed their ascent, despite a huge increase in borrowing costs.  The refrain among real estate agents and economists is that anyone who secured a mortgage rate of 3 percent or lower owns a valuable asset that they are loath to give up. 

But every asset has a price.  And now an emerging cadre of investors and real estate agents are trying to, in effect, sell mortgage rates from several years ago by transferring them to new buyers. 

Redfin, the real estate brokerage, has seen a steep rise in listings like Mr. Kilboy’s that have comments like “beautiful home with assumable loan at 3.25 percent.”  Facebook groups have popped up to find buyers for them, while new companies are pitching services to speed up the transfer. 

“Homeowners with mortgages that are capable of being assumed have something valuable that many home buyers want and would be willing to pay for,” said Daryl Fairweather, chief economist at Redfin.  “For people who bought when home prices were near the peak but mortgage rates were still low, it may be an attractive way to get out of a remorseful purchase.”

~ Conor Dougherty, "The Hot New Thing Is a Loan From 2021," The New York Times, June 11, 2023

Joel Tillinghast shares lessons for investors

Q: When you think about your own influence on the firm [Fidelity Investments] and the people who will be there after you've retired, what do you hope your main lessons will be for them?

A: Stick to the long view.  Compare price with value.  Think about risks that are not immediately in view.  Favor founder-led companies that offer something the customers think is very valuable.  Dare to explore companies where management doesn't give much guidance and where there aren't many analysts.  I think a lot of analysts are afraid to go where management doesn't spoon feed them and the Street isn't there to say, "$3.45 is the consensus number."  Don't hold too many path-dependent companies, especially if they don't have moats.  I hope that they'll take some of that, especially the "take the longer view."

~ Joel Tillinghast, "The Art of Investing" interview, Morningstar's The Long View, 25:35 mark, May 31, 2023

Enrique Abeyta on investing and skepticism

I spend a lot of time on human psychology.  Negative feedback has eight times the impact on us psychologically and chemically.  And so you always sound a lot smarter if you come out and pull ideas apart...  So me sitting here and telling you why something will work never is going to sound as smart as me pulling an idea apart and telling you why it won't work.  But the fact is, when we're investing, to make money we need to buy things that work.  It is important to avoid the things that don't work, but if you just avoid things that don't work, but don't find the ones that do work, what was the point?

~ Enrique Abeyta, interview with Dan Ferris, Stansberry Investor Hour, 41:45 mark, June 12, 2023

Mark Zandi: "odds that a downturn is dead ahead are receding"

What recession?  The consensus view that recession was virtually a slam dunk looks increasingly off base.  Yes, there will eventually be one, but odds that a downturn is dead ahead are receding.

~ Mark Zandi, tweet, June 11, 2023

Kevin Duffy on via negativa and why most banks are uninvestable

“Via negativa” is the study of what not to do.  In life, it means avoiding addictions, distractions, bad habits, toxic relationships, jealousy, boredom, sugar, processed foods and lawyers.  In investing, it usually comes down to steering clear of crowds, leverage and businesses that are hard-to-grasp or overly dependent on government.

Coffee Can rule #18: Due to high leverage, fickle capital and exposure to bubbles, most banks are uninvestable.

~ Kevin Duffy, "Regional Bank Failures: Containable or combustible?," The Coffee Can Portfolio, June 9, 2023

Michael Milken on the expanding role of private credit

This country has been primarily financed since the 1970s by public and private markets.  Banks in America only hold 20% of the loans.  80% are owned by others.  So I think we're just going to see a decrease in the percentage of loans that are owned by the banking system and we will be stronger as they move into the hands of people like pension funds that have long-term liabilities.

~ Michael Milken, CNBC interview, 7:05 mark, May 2, 2023

Torsten Sløk on the unfolding banking crisis

I started my career at the IMF.  The first thing you learn is that banking crises normally happen in a bad economy because the banks start losing money on loans to consumers, corporates, and commercial real estate.  What is unusual today is that with the collapse of the 14th-largest and 16th-largest banks [First Republic Bank and Silicon Valley Bank], we have what I describe as a banking crisis in a good economy - and we are about to enter a bad economy.

~ Torsten Sløk, "A Recession Is Brewing. It Will Be Lengthy.," Barron's, May 29, 2023

(Actual interview took place on May 10.)

Thomas Hoenig on bank asset growth as a red flag

When I was in supervision, we looked at accelerated growth.  That was a red flag.

~ Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City

Tim Price on bond investors trying to front-run central bank purchases

As a direct consequence of the central bank manipulation of asset prices, today’s markets give the impression of risklessness, irrespective of price.  Why not buy conspicuously overpriced bonds if you know there is a greater fool out there, in the form of a central banker willing to pay even more for those bonds than you did?  After all, the central bank can print money out of thin air to make those purchases.  This must end badly: major financial accidents are typically born out of a misconception of risks, rather than returns.

~ Tim Price, "Regime Change is Coming," Price Value Partners, April 1, 2023

Kevin Duffy on the banking crisis

In the annals of government boondoggles, the global policy of interest rate obliteration from 2008 to 2022 stands in a class by itself.  A distant second is the Covid-panicked stimulus orgy of 2020-21.  Together they created a tinderbox for fractional reserve banks, which are nothing more than poorly-run hedge funds levered to government policy.  Regulators not only failed to put out any brush fires, they provided a false sense of security while the self-proclaimed firemen (central banks) doused the economic forest with gasoline.

~ Kevin Duffy, "Regional Bank Failures: Containable or combustible?," The Coffee Can Portfolio, June 9, 2023

Fred Hickey on why Apple's stock is vulnerable

Apple's stock has rallied all year long (almost back to a record high) and certainly does not reflect the deterioration in the economy, the squeeze on consumers from tightened lending, declining consumer sentiment (remember - Apple sells to consumers - not corporations), the slide in the smartphone market - leading to an inventory overbuild and digestion period, falling revenues and earnings and a rising P/E ratio (twice as high as it normally runs at).  It also doesn't account for its heavy exposure to China (relations between the U.S. and that country continue to worsen), a difficult (and likely costly) transition from producing nearly all its products in China to places such as India, the likelihood that the Chinese government will kick Apple in the pants on the way out (I don't think China will forget how the U.S. government destroyed Huawei's smartphone business), the poor position of its product cycle and lack of innovation.

Of all today's Big Seven, Apple (and likely Tesla) appear to me to be in the most trouble (short-term and long-term) and once Apple's stock momentum inevitably turns downward again, investors may experience a Wile E. Coyote moment - over the cliff and with a long way to fall in the bear market.

~ Fred Hickey, "2000 Déjà vu," The High-Tech Strategist, June 1, 2023

David Giroux on autonomous driving

Over the next 10 years, as more consumers buy cars that incorporate these [self-driving] technologies that reduce accidents, that's bad for auto insurers.  Maybe lawers, too - anyone who benefits from auto accidents.  But from a societal perspective, it's a great thing.  And the technology exists today.

~ David Giroux, chief investment officer, T. Rowe Price Investment Management, "A Portfolio Manager Peers Into The Future," Barron's, June 3, 2023

Leo Tolstoy on armies

Governments need armies to protect them from their enslaved and oppressed subjects. 

~ Leo Tolstoy