Parallax
Dysphasia
Gaze
up at a starlit night sky and you'll see thousands...dare I say, millions...of
shiny orbs punctuating the darkness.
Each light appears “next to” another and there are wide arrays of
shapes, brightness, and patterns. From
our perch on earth the tapestry is two-dimensional, a canvass of shiny
objects. Yet, in reality, the sky is a three-dimensional
time and space continuum.
Without
mixing improper metaphors, let us say that the landscape of financial
securities is equally as three dimensional even though on paper all securities
appear to be residing side by side, just the same. As with the stars, financial instruments
originate from different timelines, geographies, and sectors; traverse not just
a two dimensional framework on a graph, but occupy a network of varied planes,
vectors and velocities. The point is
that while some objects appear to exist in close proximity to others, they may,
in fact, be unrelated, non-correlated, or simply in a different space,
altogether.
Why
is this metaphor noteworthy? Because
investors have been eagerly drawing parallels between events, statistics, and
valuations that simply do not correlate to the same timeline even though those
data appear to be congruent and confluent.
This parallel disconnect is something about which I have written
previously and forms the basis of what I title Parallax Dysphasia.
Thus,
as the world emerges from a financial, medical, and moral pandemic it might appear as if all data converge equally to result in common
outcomes and common opportunity, but nothing is further from the truth. While the confluence of current events might
converge neatly on a graph, the fundamentals necessary and sufficient to estimate
our three dimensional macrocosm are hidden in plain view.
Foremost
of these errors in reckoning is unwittingly convincing ourselves that the rise in stock prices is alright as long
as we keep those record valuations separate from the disaster wrought upon
others by the pandemic. Leaving
the “other guy” to fend for himself irrespective of our moral obligation
to each other incurs a staggering cost upon the rest of the global
economy. Nowhere is the comparison more
stark than the gap between the wealthy and the poor engaged in a life and death
daily struggle for food, security, housing, education, and peace of mind.
Those
of us in the financial world callously are taught to believe (only) that
everything in economics boils down to profit and loss. Conscience is an immeasurable quantity and obviously
not the first statistic found on a balance sheet. Strange, too, because business knows how to
feed the hungry, splice genes, cure disease, produce water and electricity, and
educate our children. The infrastructure for doing all these things exists, or
can be created. But, as our educators
taught us, business reverts to profits first.
Eliminating human malady is not a line item in the budget.
The
second error investors make is defining all regions of the globe uniformly. Not everywhere are resources in equal
supply. In fact, the industrial nations
are richer because of access to infrastructure and natural
resources; the poorer countries lag behind in both. Scarcity of capital and
natural resources perpetuates the cycle of lifetime heartache that afflicts
millions of people. These things are
taken for granted by those who have them, coveted by those without. Thus, that look at the heavens, the stars
above, might seem tranquil from millions of miles away, but we know that the
sciences tell us much more about the intricacies of life that are not always
visible to the naked eye. Here on planet
Earth, one's zip code, skin color, or nationality is unfortunately a stronger
precondition for acquiring wealth and status than any other variable.
Markets
These
are but two small examples of how defining, describing, measuring, and
investing in a vast backdrop of potential opportunity is both subjective and
objective in nature. We are all faced
with decisions whose subtleties determine the outcome of making money in the
financial markets. Whether one has the
patience to sort through that process is a factor that also most often affects
the outcome. But consider: just having
the luxury of being able to invest already puts you in a strata above the vast
number of "others" who have no such opportunity.
The
pandemic may have held data in abeyance, but did relatively little to quell the
years of progress and momentum built during the past decade. Yes, there are supply chain issues currently,
and much talk about price inflation and earnings reductions for the immediate
quarter, as well as local and international geopolitical wrangling. These are man-made changes in the culture and
climate, but there are organic shifts taking place as well. Some of these patterns are of short duration
while others are generational. But above
all, each of these paradigm shifts can be quantified from inception, their
timelines graphed, and the probability of duration measured. In almost every case, from ecology, climate,
and infrastructure to healthcare, biotech, and technology there are strong
positives and enduring stochastic integers.
The
world is being transformed in ways that were unfathomable decades ago. How we shop/consume, receive medical care,
produce our foods, harvest water, communicate, travel the globe and outer space
have gone through remarkable change....and the pandemic, in our opinion,
accelerated some of these generational shifts for the good. What once might have been unimagined is now a
part of everyday life.
Market
returns are exceeding historical pace.
Even the most optimistic forecasts failed to foretell today's
levels. We believe that secular themes
are poised to do even more. Those things
that contribute to a cleaner, more sustainable future (medicine, energy,
agriculture, technology, e.g.) are the investment opportunities for the next
generation. Emerging markets will gain
access to internet capabilities that will be more affordable, and start to
reshape their former financial limitations and psychological boundaries.
As a result, an expanding “middle class” widens the window of
prosperity, and puts the previously impoverished on an equal footing for
sharing wealth.
Strategy
As
more of us look at capital as an influence agent, as well as its traditional
role in building net-worth, there becomes a keener appreciation for structuring
social stability and political consensus to maintain equilibrium. Rather than depleting the globe of its
natural resources it will become possible to nurture and replenish them. Randomness and unpredictability affects
everything from tangible assets to alternatives. The appetite for participating in socially
responsible investing (SRI) is growing, not because of the "vogue"
factor but because it is the right thing to do and the most secure way to build
profits into one's portfolio in a highly capricious world.
The
last 18 months have certainly heightened anxieties about the future. Hypotheses that were always assumed to be
true have, by necessity, changed and evolved quickly during the pandemic. Life's minutiae and daily survival have
supplanted long term goal-setting. Many
of us are asking “What are the costs of
guessing wrong?”, or “How much longer
must we endure this disease?”
Informed
asset allocation helps us to diversify risk while still seeking to maximize
profits. We advise caution going
forward, in particular lowering our equity exposure for the near-term....there
simply is too much uncertainty surrounding the financial markets and the
economy to know when this cycle of contraction will end.....but it will end. The essence of our quantitative methodology
is to generate return (alpha) while limiting volatility or causing harm to
profits already won.
Conclusion
Understanding
not only the potential but the consequences
of investing creates a responsible mindset
about how money influences our world.
The pillars of our proprietary method involve balancing anecdotal experiences
and extraordinary supposition against economic data...earnings, price trends,
relative strength quotients, and sector relevance.....to outperform traditional
benchmarks, a task we have done successfully for over 4 decades. Today's landscape has never been more
consequential, nor more controversial, replete with a unique opportunity to
conquer anxieties and build optimism for the long-term.
Suggested
balanced account asset allocation, Q4, 2021
Equity: 38%
Fixed
Income: 32%
Cash: 30%
