What’s
Mine is Yours
We
saw extraordinary resilience in the financial averages during the last quarter,
particularly in the number of new highs and other advancing issues outpacing
analyst’s expectations. In doing so, any
uncertainty about trend sustainability and investor confidence was
upended. The market’s current plateau
has all the doubters in an uncomfortable place….somehow they just love a good
“negative” narrative. No question, however, battle lines are being drawn which
clearly delineate the bulls from the bears.
The
significance of this emotional dichotomy is that action plans, political
discourse, and financial reasoning….good or bad….can be now be qualitatively identified.
As
we write, earnings modifications are accelerating, acknowledging that January 1
iterations were too timid. While growth
might not be extraordinary for all, it clearly gives to those who thought the
market would decline in 2024 something else to think about. Our year-end GDP forecast is on the higher
end of the spectrum, and more aggressive than we wrote in December. Clearly, most current “revisions” of the
forecasts are about upwards surprises, not downwards.
The
trouble with the pessimist’s point of view is that they have difficulty
separating what’s happening in the economy from what they see around the
kitchen table; neither are directly correlated, though. In the past, we coined the term “parallel
disconnect” to refer to this
oxymoron. But with the enormous
amounts of cash held in abeyance by consumers and businesses we believe this
time that there is a sufficient safety net of capital that will keep upside
performance percolating. It matters not
the capitalization or geography of the investment, only that the goal is to
build a better planet for its inhabitants.
In other words, moderation in one sector will not necessarily disrupt
the success of any other. There are
simply too many things to get done that we should expect….or encourage….a
global recession. An old sports maxim
states that “you can’t win a game in the first quarter but you sure can lose
it.”
Strategy
In
many ways what we’re discussing in this missive is how straightforward it is to
win (or lose) the public’s trust when it comes to finance, politics, and
morality. It is fashionable to tear down
the institutions when it seems they don’t agree with our point of view. But it
is particularly vexing when those same megaliths demonstrate a lack of concern for
us, their consumers. Take,
for instance, an insurance company when a weather disaster strikes. We expect the “good hands” to be there when
we need them to lend financial, technical, and emotional assistance. When they fail to deliver relief, monetary or
otherwise, in a timely manner it’s upsetting, of course. Many businesses that have a utilitarian
function are sometimes exposed to be just like any other business….a vehicle
for creating profitability for their stakeholders. Look, we have no qualms with corporate
profitability, but the crux of this hypothesis is that the common good might
sometimes be impeded by a fabricated expectation of service from the companies
that ask us to call upon them when needed.
A case of profit making for the sake of profitability versus “righteous”
benefit and good profits.
Toymakers,
automobile manufacturers, public utilities, financial institutions, hospitals and
other enterprises that provide a “public service” need to keep their pledge and
realize that their inordinate profits are a by-product of creating superior provision
and not just their “right” to collect our premiums. Think about it in the abstract: any
company could become profitable if it succeeds at giving the public what it
wants and needs, what it pays for, and if done honestly and responsibly.
Without
question, the post-Covid economy has given businesses an opportunity to rearrange
their operating models to conform more closely to a changing public
square. Unfortunately, some of the
realignments have uncovered a bewildered board of directors, intent more
aggressively on protecting what shrinking margins they still profess to “own”,
all at the expense of their consumers and the public perception of their moribund
business model. In some cases it means
layoffs and share buybacks which leads to an even greater sense of mistrust in
the public domain. Trying to manufacture
profits through alchemy, misdirection, and machination is the fastest way to
oblivion. Dishonesty, deceit, and
unprofessionalism create the very narrow-mindedness these organizations are
trying to avoid in the first place. Here
again, building a better mousetrap has fallen victim to greed and
self-interest.
And,
no doubt, consumers have gotten wise to this kind of corporate chicanery and
have become more discerning with their purchasing power. When large banks and brokerages repurpose old
products and marketing schemes, or broadcast “feel good” television and radio
commercials of seniors walking on a beach, some in the public see through those
efforts as simple-minded attempts to part them from their money. As each dollar
becomes more precious, the community is demanding ethics changes from those to
whom they give agency and accountability for public service on their behalf.
One
of those public services is water. It is
not just a commodity or utility, it is a necessity for life. My investment units have actively been
engaged in this space for nearly four decades creating model portfolios and
investment strategies related to solving (and, yes, profiting from) these
complex issues and now we finally see the media earnestly allocating more
coverage to socially responsible causes, perhaps engendered by climate change,
population migration, or military conflict around the globe. The allocation of scarce resources, like
water and food, demonstrates a systemic inequity in how depleting natural
resources are obtained and distributed. Much of the worlds’ sewer systems are
antiquated and crumbling. Billions of
dollars will be required to remediate water-related projects. Similarly, the
retrieval and creation of arable farmland is an arduous task for future
generations around the globe. New infrastructure creation linked to recovery,
purification, and delivery of potable water represents one of the most
important financial (and moral) opportunities of this century. Hunger and drought are as important to
eradicate as is hatred and dislocation.
The
price for waiting on these, and other, social issues will only increase over
time. For example, desalinization of
ocean water might be expensive but it is the most effective way to create useable
drinking water from an unlimited source. Water is one of the few commodities on
our planet that is either directly or indirectly linked to the production of
nearly all products. Put another way,
without it the global economy would be rendered purposeless and impotent.
Because
our industrial, commercial, and capital base depends on the viability (and
enthusiasm) of its citizens, there really is no greater mission than to (1)
acknowledge and appreciate one’s personal largesse and (2) to look out for the
well-being of our neighbors.
Conclusion
After
a strong start to the year we predict the economic momentum continues. Earnings were better than expected in many
categories while the Fed continues to signal a slow and steady hand on interest
rate policy. From a macro perspective we
are early in the post-Covid recovery game.
It is so important to look at the forest, not the trees……macro, not the
micro. Technology, Non-Cyclicals,
Commodities, and Financials should perform well in this upcoming quarter. The market will never be “happy” with its surroundings;
that’s the nature of the beast. But
managing risk and employing prudent asset allocation weightings is my job, and not for the faint of heart, anyway.
The
forces exerted upon the financial markets are prolific. At each day’s close someone is either happy
or sad. Talking heads in the media or at
political rallies might try to assuage our anxieties or color our opinions, but
each of us innately knows our own boundaries and capacity for risk and reason. Fear is not the problem. The real problem is when we are misled or
lied to.
As
sure as the market surge is real, there will come an inevitable parabolic reversion
back to the mean as was occurring in the final weeks of this past quarter and,
thus, our enthusiasm and patience will be tested anew. And when that happens there had better be
honest brokers and businesses quickly stepping up to quell our fears and get us
back into the game. Inertia is not a
choice. We have to accept our shared
responsibility to each other and leave a better place to our heirs. No one really “owns” their time here on this
planet. They only serve as humble
caretakers of the rich bounty it provides, nurturing it for those who follow.
Suggested
Balanced Account Asset Allocation, Q2 2024
Equities: 56%
Fixed
Income: 40%
Cash: 4%
