Showing posts with label The Coffee Can Portfolio. Show all posts
Showing posts with label The Coffee Can Portfolio. Show all posts

Sep 5, 2025

Kevin Duffy on wars in the Middle East

Wars are the embodiment of collective delusions.  The same laws that govern bubbles apply: the madness of crowds, intolerance for dissent, promotion of false and simple narratives and a rush of euphoria that brings about an orgy of poor decisions.  The good news is that all bubbles eventually burst, reversing a long, ruinous trend and exposing the false belief that supports them.  

In the Middle East there are multiple delusions taking place.  The first is that Israel has a history of acting in self-defense.  The second is that the U.S. has long been a “global force for good.”  The third is that Donald Trump is opposed to “forever wars” and a threat to the military industrial complex.

~ Kevin Duffy, "The End of the Innocence: American Foreign Policy in the Middle East," The Coffee Can Portfolio, August 27, 2025

 

May 14, 2025

Derek Au on TSMC's Arizona semiconductor factories

Despite significant delays and cost overruns at TSMC’s Arizona plants, the company invested $65 billion during the Biden years and pledged another $100 billion after Trump took office. Derek Au, keen technology observer and investor, writes: 
Were it not for the punitive actions of the US [threat of tariffs], there is simply no advantage for the TSMC to build in the US.  The CHIPS Act subsidy is just a mild sweetener.  If you listen carefully to the announcement at the White House, Trump doesn’t even try to hide it.  He says he strong armed the Chairman [C.C. Wei].  If we believe in comparative advantage there are none for building advanced fabs in the US.  The operating costs are much higher, salaries are higher and there is no domestic talent.  There is also no local supplier chain. Everything has to be imported.  In Arizona they are saying the area around the fab is becoming Little Taipei.  Ethnic restaurants and grocery stores are springing up to cater to the new workers from abroad.  I’ve read that operating US chip plants would lower operating margins for the entire TSMC.  But they have no choice, because Trump is going after not only TSMC but its customers to force a realignment of the supply chain.
Derek recently visited a TSMC factory in northern Phoenix:
The place is pretty massive.  I drove around the front of the fab and all of the people in the employee lots walking towards the building were Asians.  The non-Asians that I saw had construction vests and looked like contractors, construction workers… 
~ Derek Au, as quoted in "Mercantilism in America," The Coffee Can Portfolio, May 6, 2025



Kevin Duffy on the benefit to American consumers from trade with China

American consumers were standout winners in the pre-Trump 2.0 U.S.-China trade relationship.  Last year, the U.S. got 78% of its imported smartphones from China, 65% of its TVs and 76% of its toys.  As the chart below shows, these categories experienced massive deflation since 2000 at the same time the Consumer Price Index rose 81%. (Unfortunately, we can’t yet import pre-fab homes from China!)  More money in consumers’ pockets translates to more consumption, more investment and more jobs.

~ Kevin Duffy, "Mercantilism in America," The Coffee Can Portfolio, May 6, 2025



May 7, 2025

Kevin Duffy on fixing America's economic problems and maintaining an empire

While America’s economic problems are fixable, American hegemony is ephemeral.  The U.S. can have guns or butter, but not both. 

President Trump is writing checks he cannot cash.  He can’t maintain an empire and reduce the size of government.  He can’t limit cheap imports and keep a lid on inflation.  He can’t manage trade from the top down and cultivate a free market from the bottom up.  He can’t bully the world and enjoy the privilege of printing the world’s reserve currency.

~ Kevin Duffy, "Mercantilism in America," The Coffee Can Portfolio, May 6, 2025



Dec 30, 2024

Kevin Duffy on left- and right-wing delusions

The latest bull run was kicked off by the release of ChatGPT just over two years ago.  From trough to all-time high, the S&P 500 vaulted from 3,840 to 6,090, good for a gain of 59%.  The previous high was set on January 3, 2021, with the S&P perched at 4,797.  I believe we are seeing all of the classic signs of another significant peak in U.S. stocks. 

The symmetry of this second major market top is hard to miss.  The broad market actually crested in early 2021, coinciding with the Biden victory and inauguration.  Speculative excesses were quite obvious in meme stocks and Cathie Wood’s “growth at any price” moonshots.  Left wing delusions included Covid vaccine rollouts, DEI, ESG and male athletes competing with women.  Today’s speculative excesses include bitcoin, generative AI and Big Tech.  Right wing delusions include trade wars, hot wars, deportations and American exceptionalism. 

The Trump victory was the cherry on the speculative sundae, the catalyst for a euphoric blowoff rally.

~ Kevin Duffy, "Portfolio Review," p. 17, The Coffee Can Portfolio, December 20, 2024



Kevin Duffy on Trump, trade and tariffs

Outside of Trump’s inner circle, nearly everyone seems to understand the destructive nature of tariffs, even Keynesian economists and Trump voters.  After the election, the stocks of dollar stores immediately sold off on concerns the industry would face higher costs in a trade war with China, no doubt passed on to their lower- and middle-income customers.  Investors, at least for now, are downplaying these risks.

The problem is that the very essence of Trump is that of a pragmatic, businesslike interventionist who thinks trade is “negotiable” and “reciprocal.”  In a sense, he is right: trade is mutually beneficial, but to the parties involved, its terms are negotiated by the parties involved and each gives up something to get something in return.  However, when a third party, in this case the government, interferes, it can only interject its own wants and needs.  It does so through violence, i.e. it gives up nothing and benefits at the expense of those who would otherwise trade with each other.  While the state gains power, both parties to the trade are made poorer. 

Protectionism prevents a nation’s consumers from securing the best products at the lowest prices around the world.  It also denies producers and distributors the cheapest inputs and best deals.  Trade and peace go hand in hand.  A healthy global economy and rising living standards require expanding trade, specialization and the division of labor.  Protectionism moves in the opposite direction, towards self-sufficiency, nationalism and ultimately impoverishment. 

When Trump threatens 100% tariffs on anyone who refuses to trade in U.S. dollars, he is playing with fire.  In response to the Smoot-Hawley tariff of 1930, global trade plummeted 65%, plunging the world into depression and laying the groundwork for nationalism, authoritarianism and world war.




Kevin Duffy compares the present U.S.-China cold war with U.S. vs. Japan in the late 1980s

The present U.S.-China cold war rhymes with the U.S.-Japan clash of the late 1980s, except that in many ways the roles are reversed.  Today it is the U.S. who smacks of hubris while China lacks confidence.  Ironically, the U.S. adopted many of the pillars of the flawed Japanese model, including protectionism, industrial policy (CHIPS Act), stimulus, bailouts, zero interest rates and trusting of authority.  In the battle of ideas, Japan won.

~ Kevin Duffy, "Bull in the China Shop," The Coffee Can Portfolio, December 20, 2024



Kevin Duffy makes the bull case for Chinese equities

The bull case for China is simple: it’s cheap, hated and on course to become the dominant economy on the planet.  Even the bears will concede the first two points.  But China’s economic future, contrary to a cacophony of negative narratives, makes the 2021-24 equity bear market the mother of all fat pitches, a generational buying opportunity.

~ Kevin Duffy, "Bull in the China Shop," The Coffee Can Portfolio, December 20, 2024



Oct 25, 2024

Kevin Duffy on investing in China

Long-term, China is hated for all the right reasons: economically successful, minds its own business, refuses to kowtow to the U.S. and is too big to attack.  In addition, China boasts a smart, hard-working, entrepreneurial culture that values education and has avoided some of the toxic ideologies of the West, like wokeness.  China represents a key control group and geopolitical diversifier.  And it’s on sale.

~ Kevin Duffy, "Portfolio Review," The Coffee Can Portfolio, p. 19, October 22, 2024







Kevin Duffy on being a long-term investor

As a long-term investor, I get far more excited about the quality and number of seeds being planted than the size of the annual harvest.

~ Kevin Duffy, "Portfolio Review," The Coffee Can Portfolio, pp. 15-16, October 22, 2024



Kevin Duffy on competitive edges in the investment business

The keys to the investment business are developing competitive edges and finding clients who will allow you to apply those edges over time.

~ Kevin Duffy, "Fade to Black," The Coffee Can Portfolio, p. 14, October 22, 2024





Kevin Duffy on the Dalbar effect

The dirty little secret of the asset management business is that the sophistication level of one’s clients is paramount.  If they constantly chase what’s hot and panic out of what’s not, all the hard work by the portfolio manager can be negated.  I refer to this pesky boat anchor as the “Dalbar effect,” after an annual study by Dalbar, Inc.  In it, they document how actual investor returns deviate significantly from published returns due to the poor timing of a firm’s clients.  

Aggressive marketing and client quality are inversely related, although Dalbar is unlikely to admit this to their institutional investor clientele.  BlackRock is no doubt an asset gathering machine, but where are the customers’ yachts?  According to my calculations, over the past ten years BLK’s all-important equity iShares franchise (32.5% of base fees in Q3) suffered a headwind (Dalbar effect) of 5.3% per year.  This effectively cut published returns in half.

~ Kevin Duffy, "Fade to Black," The Coffee Can Portfolio, p. 12, October 22, 2024



Kevin Duffy on the passive bubble

Over [the past 10 years], a staggering $6.0 trillion has poured into passively managed funds, with $2.3 trillion pulled from active funds.

~ Kevin Duffy, "Fade to Black," The Coffee Can Portfolio, p. 10, October 22, 2024





Kevin Duffy on technology waves

Technology waves are like hurricane warnings: those who go through them suffer from recency bias.  As the most recent experience is seared into their brains, they swing from underprepared to overprepared for the next one.  The internet altered the economic landscape, wreaking havoc on some and heaping fortunes on others.  (Many of the big winners, including Google, Facebook, Netflix and Salesforce, weren’t even public companies in 2000.)  No one can fault the current crop of high-tech CFOs for clamoring to ride the current AI wave.

~ Kevin Duffy, "Countervailing Forces," The Coffee Can Portfolio, p. 5, October 22, 2024



Kevin Duffy on investing: using the past to inform the future

But enough about the past.  Investing, to paraphrase Danish philosopher Søren Kierkegaard, must be understood backwards, but lived forward. 

Where some see randomness and others statistical certainty, the economic historian and forward-looking investor sees patterns and probabilities, motivations and biases, individual calculation and group error.  At times, and to no one’s surprise, guesses about the future can diverge wildly.

~ Kevin Duffy, "Countervailing Forces," The Coffee Can Portfolio, p. 3, October 22, 2024





Kevin Duffy on writing about politically sensitive topics

I realize taking on politically sensitive topics like Covid, wokeness, China and the Israel-Palestine conflict risks turning away subscribers, but it is a risk I’m willing to take. The last thing the world needs is another conventional, politically-neutered investment letter.

~ Kevin Duffy, "Mailbag," The Coffee Can Portfolio, p. 22, October 22, 2024

2024


Apr 20, 2024

Kevin Duffy on economics and investing

Our ideal economy would safeguard the property of its people, limit the meddling of its government, appreciate the efforts of its entrepreneurs and refrain from watering down its currency.  Sadly, no such state of nirvana exists.  We are all grading on a curve.

~ Kevin Duffy, "Western Media Hates China: For contrarians, what's not to love?," The Coffee Can Portfolio, April 15, 2024



Apr 19, 2024

Kevin Duffy on Nvidia's $2.2 trillion valuation

As we speak, Nvidia commands a market value of $2.20 trillion, roughly 3.5 times the annual sales of the entire semiconductor industry. 

[...]

As the table below shows, the 40 or so analysts who follow Nvidia expect the company to sustain 65% operating margins this year and next, more than twice the average of the past five years. The bear case rests on capitalism’s knack for hammering down excess profits. If 2025 revenue comes in 15% light with margins closer to 40%, analysts will be forced to cut their earnings estimates in half. Add some valuation compression and Nvidia could easily lose its trillion dollar market cap status. 

As Bob Farrell, a keen observer of investor sentiment, would say, “When all the experts and forecasts agree – something else is going to happen.”

~ Kevin Duffy, "Bubble? What Bubble?," The Coffee Can Portfolio, April 15, 2024



Kevin Duffy on bitcoin

I heard someone say bitcoin is 80% speculation and 20% hedge against the fiat money experiment blowing sky high. That sounds about right. While I’m largely agnostic on bitcoin, mainly because it is outside my circle of competence, the speculative forces are hard to miss. Exhibit A: MicroStrategy, a modest software business turned large-scale holding company for bitcoin, has been extremely aggressive with its buying lately. In the past at least, that’s been a sign of a top. 

On March 8, MicroStrategy (MSTR) issued $800 million worth of convertible notes paying just 0.625%, above the $650 million initially hoped for. The offering was so well received that, five days later, the company announced plans to raise another $500 million. The fact that investors are handing substantial sums of money over to MSTR on such favorable terms to go speculate in bitcoin is a clear red flag.

~ Kevin Duffy, "Mailbag," The Coffee Can Portfolio, April 15, 2024



Apr 15, 2024

Kevin Duffy on gold

“Gold,” says Jim Grant, “is not so much an inflation hedge as an investment in monetary disorder.”  Havoc is the unfortunate consequence of creating money out of thin air in a desperate attempt to let governments spend more than they take in.  Expenditures on war and luxury, and popular support for their continuance, are the genesis of all fiat money experiments, past and present. 

The tidal wave of extravagant spending in response to Covid got its start under the Trump administration and continued under Biden.  That both men, well over the retirement age, are vying this November to influence the federal purse strings is not lost on goldbugs.  Frugality is not on the ballot.

~ Kevin Duffy, "Gold's Epic Breakout," The Coffee Can Portfolio, April 15, 2024