Divergence
“Two roads diverged in a snowy
woods……”
As the economy ponders in which
direction the vectors will move next it is incumbent upon us to remember that
any period of uncertainty is always a volatile time in the markets. Of course, the specifics of the variables are
much less important than the overall trend itself, which means that one’s macro
view of events is more highly significant than trying to micromanage individual
inflection points. “Two roads
diverged”… is more than just a
poetic metaphor….it is a warning that needs to be heeded.
Many parts of the global financial
landscape are dealing with instability and social crises. Corporations are caught in the foment, both
internal and external, wreaking damaging effect upon their labor force and
hiring practices, costs, inventory development, and delivery systems. Those that can absorb these variables will
emerge robust and competitive. Unfortunately, we are also seeing the demise of
businesses that are outdated or incompetent and which have difficulty adapting
to the commercial disruptions caused by war, Covid, inflation, and supply chain
issues. The nature of competition is
that you cannot “protect” the vulnerable and still maintain integrity in the
system.
Not in dispute, however, is that the financial
system is having difficulty adapting to many factors not of its own
making. Central banks’ efforts to reign
in inflation and reduce the money supply is an artificial impingement upon the
natural order of things. Any effort to
combat runaway pricing pressures by raising interest rates only prolongs the
cycle of discontent. Rising prices,
although onerous, cause the consumer to reduce his purchasing, leaving rising
inventories, and resulting sometime later in a reduction of prices. Such cycles, if interfered with by central
authorities, cause greater dislocation than if left to be resolved by the free
market.
No matter the industry, there are
disruptions occurring to the bottom line in a post-Covid world. Job number one is always to stay in business.
So no matter the cause we are seeing more companies trying to be nimble
and unfortunately focusing upon the here and now in lieu of strategic planning
for the future.
However, we would suggest that there
is too much aggression and emphasis
upon managing the short term. How much
fat can be trimmed before irreparable harm is caused to one’s brand, one’s
internal organizational structure, or one’s community? Globally integrated entrepreneurship has
gotten so “micro” that the most important thing considered in most boardrooms today
is quarter-to-quarter viability and how to appease Wall Street analysts. True capitalism is being impeded by that kind
of thinking. The withdrawal of the
consumer has put business on the defensive.
The reduction in discretionary spending and the lack of confidence in
the future has shifted the business culture from expansion and reform to perish or becoming extinct……and, of
course, no one in the boardroom is seeking the latter option. The loss of a true predatory climate has
softened and diluted today’s capitalism to a “bail out” quotient that makes
irrelevant a company’s product or mission statement. Indeed, it is social consciousness, not
social justice, that produces a fair market.
Individual users and producers have a much better understanding of the
demand/need curve than do central bank engineers who take all the spontaneity
out of the economic cycle. As the
upcoming “earnings season” unfolds we expect to see more carnage and more
accounting calisthenics to weather the storm.
This is so prevalent as a
socioeconomic phenomenon that even with fiscal and monetary support behind them
businesses and households would rather withdraw from the contest than try to
get in and possibly fail. Untold
billions are not being spent
(where once they were) because of fear about politics, war, migration, ecology,
inflation, and such. City boulevards
might be teeming now with people in the wake of the Covid pandemic but there is
still an underlying concern about endemic issues such as hunger, poverty, crime,
homelessness, and lack of empathy.
We have recently been using the
fortuitous rate increases to dabble in short term time deposits, thereby
establishing “baseline” floors to our portfolio returns while reducing volatility
associated with concentrated equity positions.
There are no indications that the market has established equilibrium at
its bottom quite yet, so we welcome the chance to deploy cash reserves into
yield enhancing opportunities for the time being.
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