What We’re Reading (Week Ending 15 January 2023) - 15 Jan 2023
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 15 January 2023):
1. How Complex Systems Fail – Richard Cook
Complex systems are intrinsically hazardous systems.
All of the interesting systems (e.g. transportation, healthcare, power generation) are inherently and unavoidably hazardous by the own nature. The frequency of hazard exposure can sometimes be changed but the processes involved in the system are themselves intrinsically and irreducibly hazardous. It is the presence of these hazards that drives the creation of defenses against hazard that characterize these systems.
Complex systems are heavily and successfully defended against failure.
The high consequences of failure lead over time to the construction of multiple layers of defense against failure. These defenses include obvious technical components (e.g. backup systems, ‘safety’ features of equipment) and human components (e.g. training, knowledge) but also a variety of organizational, institutional, and regulatory defenses (e.g. policies and procedures, certification, work rules, team training). The effect of these measures is to provide a series of shields that normally divert operations away from accidents.
Catastrophe requires multiple failures – single point failures are not enough.
The array of defenses works. System operations are generally successful. Overt catastrophic failure occurs when small, apparently innocuous failures join to create opportunity for a systemic accident. Each of these small failures is necessary to cause catastrophe but only the combination is sufficient to permit failure. Put another way, there are many more failure opportunities than overt system accidents. Most initial failure trajectories are blocked by designed system safety components. Trajectories that reach the operational level are mostly blocked, usually by practitioners…
…Human practitioners are the adaptable element of complex systems.
Practitioners and first line management actively adapt the system to maximize production and minimize accidents. These adaptations often occur on a moment by moment basis. Some of these adaptations include: (1) Restructuring the system in order to reduce exposure of vulnerable parts to failure. (2) Concentrating critical resources in areas of expected high demand. (3) Providing pathways for retreat or recovery from expected and unexpected faults. (4) Establishing means for early detection of changed system performance in order to allow graceful cutbacks in production or other means of increasing resiliency…
…Change introduces new forms of failure.
The low rate of overt accidents in reliable systems may encourage changes, especially the use of new technology, to decrease the number of low consequence but high frequency failures. These changes maybe actually create opportunities for new, low frequency but high consequence failures. When new technologies are used to eliminate well understood system failures or to gain high precision performance they often introduce new pathways to large scale, catastrophic failures. Not uncommonly, these new, rare catastrophes have even greater impact than those eliminated by the new technology. These new forms of failure are difficult to see before the fact; attention is paid mostly to the putative beneficial characteristics of the changes. Because these new, high consequence accidents occur at a low rate, multiple system changes may occur before an accident, making it hard to see the contribution of technology to the failure…
…Safety is a characteristic of systems and not of their components.
Safety is an emergent property of systems; it does not reside in a person, device or department of an organization or system. Safety cannot be purchased or manufactured; it is not a feature that is separate from the other components of the system. This means that safety cannot be manipulated like a feedstock or raw material. The state of safety in any system is always dynamic; continuous systemic change insures that hazard and its management are constantly changing.
2. “Portrait of a Disciplined Investor” – Alex Morris
On January 8th, 2022, Lou Simpson passed away at the age of 85.
Lou, who grew up in Highland Park, Illinois, attended Northwestern University for a short stint before transferring to Ohio Wesleyan University, where he earned a double major in accounting and economics in 1958; two years later, he earned a master’s degree from Princeton (Lou was an economics professor at Princeton from 1960 – 1962). After Princeton, Lou returned to Chicago to work at Stein, Roe, and Farnham, becoming a partner at the investment firm in 1969; after, Lou moved to Los Angeles, where he would eventually be named president and CEO of Western Asset Management.
In August 1979, Lou joined GEICO as an investment manager after meeting with Warren Buffett (“Stop the search. That’s the fellow.”). He clearly made a quick impression at GEICO: in the 1982 shareholder letter, Buffett called Lou “the best investment manager in the property-casualty business”.
Over the next three decades, Lou was responsible for managing the auto insurers’ investments, which grew to $5 billion by his retirement in 2010.
How was Lou’s track record at GEICO? In a word, astounding.
Thankfully, in the 2004 shareholder letter, Buffett disclosed the annual performance of GEICO’s equities portfolio under Lou’s management (the section was titled “Portrait of a Disciplined Investor”). As shown below, an investment of $1,000 in 1979 was worth ~$101,600 by 2004 (>100x growth), compared to ~$23,700 if it had been invested in the S&P 500 (compounded returns of ~20.3% for GEICO’s equities, or roughly 700 basis points higher than the ~13.5% annualized for the index over the same 25-year period)…
…As outlined in GEICO’s 1986 annual report, Lou’s investment approach had five key guidelines: (1) Think independently; (2) Invest in high-quality businesses run for the shareholders; (3) Pay only a reasonable price, even for an excellent business; (4) Invest for the long-term; (5) Do not diversify excessively (Lou has often mentioned Buffett’s 20-hole punch card idea).
Here’s how Lou described his process (applying those guidelines): “My approach is eclectic. I try to read all company documents carefully. We try to talk to competitors. We try to find people more knowledgeable about the business than we are. We do not rely on Wall Street-generated research. We do our own research. We try to meet with top management… What we do is run a long-time-horizon portfolio comprised of ten to fifteen stocks. Most of them are U.S.-based, and they all have similar characteristics. Basically, they’re good businesses. They have a high return on capital, consistently good returns, and they’re run by leaders who want to create long-term value for shareholders while also treating their stakeholders right.” (We also know that he liked to operate with a small team, not an army of research analysts: “He supervises only two employees, an assistant and an analyst… ‘The more people you have, the more difficult it is to do well.’”)
In addition, Lou considered management quality a key part of the investment decision: “One of the things I’ve learned over the years is how important management is in building or subtracting from value. We will try to see a senior person and prefer to visit a company at their office, almost like kicking the tires. You can have all the written information in the world, but I think it is important to figure out how senior people in a company think.”
3. Investing lessons for 2023 – Chin Hui Leong
If there was a single villain that caused the 2022 market crash, most would point their finger at rising interest rates. But not everyone may be learning the right lesson here.
In particular, the market crash last year may have persuaded some investors to equate rising interest rates to falling stock prices. This way of thinking may cause them to sell at the next sign of a US Federal Reserve rate hike.
However, such a conclusion ignores how unusual last year’s interest rate increases have been. According to data compiled by the Visual Capitalist, the effective federal funds rate rose past the two-percentage mark within six months in 2022, its fastest increase in more than three decades. That’s abnormal, to say the least. In comparison, the US central bank took 36 months to reach the same rate level in its previous rate hike cycle between December 2015 and December 2018.
Furthermore, avoiding stocks within this three-year period would be a mistake. For example, shares of Amazon and iFAST Corporation would have netted investors returns of 164 per cent and 349 per cent, respectively, if both counters had been held from the start of 2016 till the end of 2022.
Missing out on the basis of misguided beliefs would be detrimental to investors…
…Finally, investors tend to put too much weight on recent events. This bias could be especially egregious after last year’s market crash. Given the beating that investors have taken while holding stocks, some may end up waiting on the sidelines.
Instead of holding back, investors may wish to consider the odds of a market downturn.
For context, wealth manager Ben Carlson pointed out that the 2022 performance of the S&P 500 was among its worst ever in history. Last year’s decline of nearly 20 per cent was only exceeded by the major market crashes in the past, such as the Great Depression in the 1930s, 2002 dot-com crash, and the 2008 global financial crisis.
That, in my eyes, is the definition of an abnormality. To be clear, it’s not to say that another 20 per cent decline is completely out of the question. But what we can say is with every passing year, the odds of a positive outcome increase, based on historical data stretching back to the 1920s.
Considering the probabilities, I would argue, would be a better way to think about the future, compared to reacting to the stock market’s performance over the past 12 months.
4. RWH020: The Disciplined Growth Investor w/ Fred Martin – William Green and Fred Martin
[00:58:25] William Green: That’s a very profoundly important point. And hence it is and it’s, you wrote to me the other [00:58:30] day, I think we may have uncovered the greatest risk manager of all time, the climber, the documentary free solo.
[00:58:36] William Green: And wonder if you could talk a bit about this guy, Alex Honnold, who is a master of I, I don’t know how many of our listeners have watched the movie. There’s a great documentary that called Free Solo that’s about this guy Alex Honnold, who decides to climb, I think it’s El Capitan. So this 3000 or so foot sheer granite, aha.
[00:58:56] William Green: Cliff, I mean, he gave me a heart attack just watching the thing. Can you talk about what you can learn from someone like Hon about dealing with uncertainty, dealing with risk, de mitigating risk in a really intelligent, thoughtful way? Since we don’t know what can happen or what will happen, we can guess what can happen, but we don’t know what will happen.
[00:59:15] William Green: Did you watch the documentary? Yeah. And then yesterday I watched something about the filming of the documentary, which is terrifying in it, its own Right. And you know, one of the things that he, that the cameraman said while making the film is that they had to record part of it with remote cameras because he said he didn’t want them to see him die because they were friends of his.
[00:59:36] William Green: Sure. Okay. So during the most dangerous bit, they actually had to set up remote cameras.
[00:59:39] Fred Martin: Oh my God. Okay. So it’s so funny. So Rob is working on, he’s spearheading the piece on risk. This has been in our hands for years. Right. This idea of trying to get better. And I really believe if you really want to learn something, well teach it, you know?
[00:59:52] Fred Martin: And so the teacher always learns the most. And so he writes this thing on.
[00:59:56] William Green: This is Rob Naski, who’s your right hand write chief investment?
[00:59:59] Fred Martin: He [01:00:00] starts with free solo. And I freak out about it because I’m going, you know, wait, we’re not talking about falling off cliffs here. And then, but as I started thinking about it more and more, and I about a month ago I called Rob up and I said, I think I’m not looking at this right.
[01:00:11] Fred Martin: This guy was one of the greatest risk managers of all time. And we need to look at it. I need to look at it differently and say, my goodness, he took this thing with a binary outcome, and he made it. And there were a thousand little threads to make that. And so this has to do, this is really deep stuff, but what this has to do with is risk and risk mitigation.
[01:00:36] Fred Martin: Okay? And what’s in your control and what’s not in your control. And so what he did is he systematically, he climbed it many times. He was a very stur climber. He was physically fit, and he practiced those moves with a rope over and over again. Right now. He also is part of the thing. One of the things that struck me as so profound in the whole thing is, I don’t know if you remember the movie he was going to climb and he got part we up and said This isn’t right.
[01:01:02] Fred Martin: And he went back down again. I don’t know if you remember that. And I remembered that I’d forgotten that. Yeah. I thought, oh my goodness gracious, this guy, he’s got the risk meter going in his head, he’s not ready, it’s not right. And he knows that this isn’t the right day and just think of the humiliation. He must have fell in the def sense of deflation because he, because you don’t just show up when we, he is having a climate.
[01:01:25] Fred Martin: You build to it; you’re all fired up. You start up there and you part where up and [01:01:30] goes, well not right, comes back down.
[01:01:32] William Green: It’s interesting also, Fred, I saw an extraordinary video of him last night where he was teaching a famous Scandinavian climber to free climb. And he said to the guy, when you get stuck, just be patient and take the time to figure it out.
[01:01:45] William Green: He said, you get in trouble when you’re in a hurry. So when you can’t figure out how to get out of it. Oh goodness. Just pause. Be patient and give yourself time to figure it out. And I, you know, and he’s talked about not letting your emotions spiral out of control when you were stuck. And so there’s a kind of an incredible ability to get his ego under control.
[01:02:05] William Green: That’s astounding.
[01:02:06] Fred Martin: This is you should, by the way, you should try to get him on your podcast.
[01:02:10] William Green: That would be great. Yeah. He’s a fascinating guy.
[01:02:12] Fred Martin: I just, well, just because if you look, he had a binary outcome, but he also had the ability to practice over and over again. Every He climbed it.
[01:02:22] Fred Martin: Right. Anyways, I mean, he stacked a lot of things in his favor. He didn’t guarantee that he didn’t fall, but boy, he sure did a lot of risk mitigation. He also, there is another idea that we’re also, we’re debating, and that is, Buffett said this many times, so it is possible to get the market return.
[01:02:42] Fred Martin: You can buy an index, an s and p 500 index, but anybody can do it when you try to get an excess return. The field gets really narrow and it becomes all about process and implementation, and the ability to take intelligent risk if you’re going to do superior results, because if you try to do superior, you may end up with [01:03:00] inferior results.
[01:03:00] Fred Martin: So this kid had the potential to rise to the top of this, but he had to really do risk mitigation to make it, and it’s true investing. As you move up the food chain, as your performance gets better, you better really manage the risk because it’ll kill you. And so I’m still turning my head over on his comment about be patient.
5. Jay Gould: The Dark Genius of Wall Street – David Senra
[00:48:29] And so one of his first advantages derives from the fact that he had this monk-like dedication. He studied and read everything. This is not the sexy part of business by any means, but it’s something that you and I have seen over and over again. The most explicit statement of the importance of studying regulations came all the way back from the guy that founded Trader Joe’s. I read his autobiography, it’s called Becoming Trader Joe. I did a podcast on it, it’s number 188. And he says in that book, “As I learned time and time again, success in business often rests on a minute reading of the regulations that impact your business.” And that comes into play. This is how he gets involved in railroads for the very first time.
As Gould knew, the New York General Railroad Act of 1850 … That must make for good reading, right? Or for fun reading. The New York General Railroad Act of 1850 allowed directors or railroads to issue bonds of their own on their own authority to finance expansion. It also permitted the easy conversion of these same bonds into common stock and then back again into bonds. Jay must have quickly realized that just a small percentage of Wilson’s bonds … Wilson is the guy offering to sell bonds in this R&W Railroad for 10 cents on the dollar. So this is why Jay realized, “Oh, I got to jump on this right now.” Jay must have quickly realized that just a small percentage of Wilson’s bonds when converted would establish a controlling interest in the R&W Railroad. Wilson offered Jay all of his bonds at just 10 cents on the dollar. So this is where we see Jay take control of his first railroad. This is something he’s going to do for the rest of his career. Thereafter, for a solid year and a half, Jay is 27 years old at this time. I should bring that to your attention. Thereafter, for a solid year and a half, Jay spent four to five days a week working to improve the infrastructure, traffic, and profitability of the R and R railroad. And we see this monk-like dedication again. What he didn’t know about the railroad business was considerable. And so he made a point of learning it. He says, “I left everything else and went into railroading. I took entire charge of that road. I learned the business and I was president and treasurer and general superintendent. I kept at my work.”…
…[00:52:54] And so in 1865, Jay sold control of the R and W to this guy named William T. Hart, who was a steamboat entrepreneur who like other old Steamboat entrepreneurs, Daniel Drew and Cornelius Vanderbilt saw the future and was now interested in redwood. So that’s an important part. Why are all these… What is it taking place? What do you know as a steamship operator, right? You’re in the business of transporting goods and people from one spot to another. Now they’re building out railroads, which just seems to be a way larger opportunity than steamboats. So Hart saw this, Daniel Drew saw this and Vanderbilt saw this as well. And so just like Vanderbilt before him, Hart is like, oh, I have a steamboat business. Let me combine it with a railroad business. So he had taken control over… These names are so hard. I’m just going to, it’s irrelevant what it’s named. Do you want me to say Rensselaer and Saratoga? It is a bigger railway than the one at this point that Jay has control of.
So he’s going to merge. He’s going to sell, his interests are going to merge. Jay realized more than a hundred thousand dollars on this one transaction. That seems like a lot of money. There’s single transactions that Jay does later in his life that he makes 40 million on. It’s bananas. Jay realized more than a hundred thousand dollars on this one transaction, his first truly enormous payday, but he was not done. A week later he and Hart incorporated this other railroad. So essentially they’re all combining, they all have the same playbook, right? That’s what I meant up was like, yeah, you could see the same opportunity, but if you’re more creative and your execution is better, you’ll yield better results. So they just take a bunch of small railroads and they consolidate them and make them into larger railroads.
[00:54:30] And this is why Jay tells us exactly, because we see a note that he wrote his partner, just a guy named Hart. I believe that consolidation will prove both essential and inevitable for a score or more roads in the coming decade. He’s predicting the future and he is right about that. Far better than mere cooperation is tight coordination, close vertical integration, economy of scale and unchallenged market domination whenever possible. So that’s Jay’s playbook that he’s writing when he is in his twenties. That’s what Hart’s trying to do. That’s what Drew, Vanderbilt, Rockefeller, Morgan, all these guys are doing the same thing at this point in time. And so he is like, let’s not stop here. What is his advantage? Ever since boyhood, he had a fascination with maps. How crazy does this… All these experiences he could not have predicted when he telling your sister as a teenager, what was he? 15, 16?
Hey, surveying, making maps, studying to terrain, understanding the strategic ports, how to link quarries, forests, and other resources together in a transportation network. All of that, there’s no way he could have predicted what he’s going to use that skillset 10 or 12 years later, which is exactly where we’re in at this point. So he’s like, listen, I had a fascination with maps. Now the one-time surveyor scrutinized his maps with a freshly engaged eye. He studied the small railroads, dotting, and landscape. As one would study the pieces of a complex jigsaw puzzle, pondering which among the myriad possible combinations might yield maximum economy and profit that is not exclusive to Jay Gould.
We have studied multiple entrepreneurs on this podcast that were obsessed with the physical landscape and they used their understanding of the physical landscape to gain an advantage over their competitors. Is that not what Sam Walton did? He was the only retailer in the south that had his own plane. So he’s flying over, he’s studying traffic, but he can get it down really low. Studies traffic patterns. He picked out what? If my memory serves me correct, the first 130 Walmart locations himself out of his little Cessna plane. It’s the same thing that Rockefeller was doing when he set up his first refinery in Ohio, way before he had… At one time he was what? Refining I think 90%. He owned like 90% of all the refinery market in the United States. Way before that, he realized, hey, I should set this up so I can actually transport the refined oil by both railroads and by boat.
[00:56:49] And now we see Jay Gould taking the same idea and applying it to hey, which railroads give me a strategic advantage if I can overtake and consolidate them. That’s really cool. It’s really cool to me at least. And what’s even like cooler is the fact that he’s like, oh, I found my life’s work. This is what I’m going to do forever. Oh, this is so good. This is Jay’s words, this is what makes it like exciting for me. We are at a moment he wrote where there is a particular inevitable future waiting to be made. I see things very, very clearly. I feel inspired with an artist’s conception. My road is laid out before me in the plainest of ways. He’s talking about his path in life, not his railroad. He felt as if all the wheels had finally been installed in his life. Not only did he have professional focus, but also the meaning that is family, a wife, and child. This is so good.
Check out this writing. A wife and child to fight wars and build castles. Now that I am in this place, it is a puzzlement to me how I endured before. Everything prior seems to have been boxing in the dark, scraping without reason. Now I have my road to walk and my reason for walking it. So not only do I know what I’m doing in my life, I’m dedicating it to the consolidation of railroads and the building up of railroads. But I’m doing it for my family.
6. The Semiconductor Madman – Brent Crane
When Zhao took over Tsinghua Unigroup in 2009, the Tsinghua University-adjacent firm1 was struggling with both its purpose and its profits. Zhao shifted its focus from consumer electronics to semiconductors at the perfect time: just four years before Beijing published its National Integrated Circuit plan, a component of the Made in China 2025 initiative, which called on China to domesticate 70 percent of its semiconductor needs by 2025 and reach parity with leading international chip companies by 2030. Beijing went on to flood the industry with an estimated $100 billion.
Zhao put all that money to use. He identified high performing smaller companies and gobbled them up — spending tens of billions in the process. Unigroup now has 286 subsidiaries, two of which — UNISOC and Yangtze Memory Technologies Co. (YMTC), an Apple supplier — are major players in the global chip industry, specifically for older model chips, such as chips for 3G.
Given his swashbuckling style, Zhao — himself worth $2.2 billion last year — earned the nickname “the semiconductor madman” within the industry. Yet, like any madman, Zhao’s daring had a downside.
According to industry insiders, he developed a reputation as something of a “serial bullshitter,” with a penchant for excessive self-promotion. For instance, numerous sources indicate that Zhao was born in November — not April, which is when he claimed Xi Jinping wished him a happy birthday.
He is also not known for being particularly strategic or wise in his financial decisions.
“Unigroup threw money around in this extraordinarily wild and reckless fashion,” says Chris Miller, an economic historian at Tufts University and author of Chip War: The Fight for the World’s Most Critical Technology. “If you’re looking to attract attention, Zhao knew how to do it.”
And attract attention he did. In July, Zhao, 55, was arrested alongside a dozen other leaders from China’s state-managed semiconductor industry.
No charges have been publicized — elite machinations in China are notoriously opaque — but the arrested individuals were targeted for “serious violations of discipline and laws,” which often implies corruption.
Others jailed include Xiao Yaqing, China’s Minister of Industry and Information Technology (MIIT); Ding Wenwu, manager of the “Big Fund”2, Beijing’s $50 billion quasi-governmental chip investment fund launched in 2014; and Diao Shijing, a former co-president of Unigroup. Others connected with the Big Fund, from academics to venture capitalists, have also been arrested or are under investigation by the Central Commission for Discipline Inspection (CCDI), an anti-corruption body.
While many observers say the arrests signify Beijing’s recognition of the enormous graft plaguing China’s chip industry, there are open questions about what the microchip dragnet means for the industry’s future, especially as Beijing’s ambitious goals come crashing into roadblocks from Washington…
… Whatever the reason, Beijing certainly has grounds to worry about its chip drive. Despite the dizzying sums invested into it, the industry remains years, even decades, away from achieving global dominance. Foreign firms are forecast to supply over half of China’s chip consumption until at least 2026, according to IC Insights, a U.S. semiconductor research group…
…Unigroup, which has since undergone “restructuring,” will remain a major player in China’s politically-charged chip sector. But the fall of Zhao and other chip giants suggests a reevaluation — some even say an abandonment — of Beijing’s silicon dreams.
Since the Trump administration, the U.S. and its allies have restricted key technologies and know-how from reaching Chinese chip firms, severely limiting China’s ability to keep pace with industry innovations. In October, the Biden administration introduced even tougher restrictions, including placing YMTC on the Entity List, which has dramatically upended China’s semiconductor grand strategy…
…“Would we be so anxious about [semiconductors] if there was no risk that Xi Jinping would invade Taiwan?” asks Willy Shih, a professor at Harvard Business School and member of an IC advisory committee for the Department of Commerce. “It’d be a very different picture. Before 2012, this never came up.”
Now that it has though, the U.S. is taking significant action. In August, Washington adopted the $280 billion CHIPS and Science Act, which will provide $52 billion in subsidies and R&D investment for chip firms operating in the United States. Intel and TSMC are investing stateside as a result. The European Union proposed similar legislation last year with a $49 billion price tag, hoping to double its global market share to 20 percent by 2030.
The Taiwanese public, polls show, are increasingly wary of the PRC as well — and its prized semiconductor industry is becoming more defensive as a result. Chinese chip firms have long been a regular presence in Taiwan, luring talent and, crucially, I.P. to mainland firms with salaries up to five-times higher than in Taiwan.
But that, like so much in the global semiconductor ecosystem, is changing. A more bellicose and Covid-closed China lessened the country’s attraction for Taiwan’s IC workforce. The Taiwanese government, too, has made it harder for Chinese firms to attract talent, banning unregistered Chinese headhunters from operating on the island. The overall result has been less poaching and more suspicion…
… So how will companies like Unigroup proceed after the dust settles? One option is to abandon advanced chips and settle for the older technologies, a strategy which the greater Chinese chip industry seems to be shifting towards.
“In the past few years, the more we tried to make up for our deficiencies, the more passive we have become,” said Wei Shaojun, an official at the China Semiconductor Industry Association, in a December live-streamed speech. “We should focus not on overcoming weaknesses, but on enhancing our strengths.”
On the flip side, China could attempt more semiconductor “moonshots” — technology advances that don’t present much prospect for profit but that are strategically important. Ultraviolet lithography machines, for example, are a vital technology that China is currently restricted from accessing by U.S. sanctions. Although the hurdles remain high, some analysts and insiders are not willing to rule out such advances. Scott Moore, a Chinese tech expert at the University of Pennsylvania likens the situation to nuclear weapons and the failures of non-proliferation.
“What technology is more tightly controlled than nuclear weapons?” he says. “But that has not stopped many countries that have said, ‘We’re willing to make any investment of resources into acquiring this technology.’”
7. No Recession – Michael Batnick
It’s a new year, but recession fears still abound. Two-thirds of economists expect one in 2023. I was also in that camp in 2022, but now I’m not so sure.
We spoke with Derek Thompson last week about the economy’s prospects for 2023, and I did a lot of on the one hand, on the other hand. I can see both sides now more than ever. He made me choose between yes or no, and I surprised myself when I said, “No recession.”
The economic data that came out on Friday made me feel better about a possible soft landing.
With all eyes on inflation, the stock market would ordinarily respond negatively to a strong jobs number, but there was something inside this report that the market loved; wages. Earnings are one of the biggest drivers of inflation; unfortunately, it’s the hardest area for the fed to influence. So when year-over-year numbers fell to 4.6%, their lowest level since last August, the market cheered. The fears of a wage spiral seem to have been overblown.
In an uncertain economy that faces a myriad of risks, the fed seems to be the biggest one. But now that we’re getting some good numbers on the wage front, the market is expecting them to slow down dramatically. So what if after all this worrying about the fed being behind the curve and then going too far too fast, they actually pull off the soft landing? We’re already seeing signs that inflation peaked and is on its way down. The job market is strong, but wages aren’t spiraling. We still need to see stabilization in the mortgage market for the housing market to thaw out, but the good news is stocks are acting like that might happen.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Amazon, Apple, and TSMC. Holdings are subject to change at any time.
