What We’re Reading (Week Ending 26 May 2024) - 26 May 2024
Reading helps us learn about the world and it is a really important aspect of investing. The late Charlie Munger even went 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 26 May 2024):
1. How I Think About Debt – Morgan Housel
Japan has 140 businesses that are at least 500 years old. A few claim to have been operating continuously for more than 1,000 years…
…These ultra-durable businesses are called “shinise,” and studies of them show they tend to share a common characteristic: they hold tons of cash, and no debt. That’s part of how they endure centuries of constant calamities…
…I think this is the most practical way to think about debt: As debt increases, you narrow the range of outcomes you can endure in life…
…I hope to be around for another 50 years. What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps?
One-hundred percent. The odds are 100%.
When you think of it like that, you take debt’s narrowing of survivable outcomes seriously…
…I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool.
But once you view debt as narrowing what you can endure in a volatile world, you start to see it as a constraint on the asset that matters most: having options and flexibility.
2. Economists Aren’t the Best at Predicting the Economy – Tyler Cowen
Out of curiosity, I recently cracked open The American Economy in Transition, published in 1980, edited by Martin Feldstein and including contributions from other Nobel-winning economists, successful business leaders and notable public servants. Though most of the essays get it wrong, I found the book oddly reassuring…
…For instance, many authors in the book are focused on capital outflow as a potential problem for the US economy. Today, of course, the more common concern is a possible excess inflow of foreign capital, combined with a trade deficit in goods and services. Another concern cited in the book is European economies catching up to the US. Again, that did not happen: The US has opened up its economic lead. Energy is also a major concern in the book, not surprisingly, given the price shocks of the 1970s. No one anticipates that the US would end up the major energy exporter that it is today.
Then there is the rise of China as a major economic rival, which is not foreseen — in fact, China is not even in the book’s index. Nether climate change nor global warming are mentioned. Financial crises are also given short shrift, as the US had not had a major one since the Great Depression. In 1980 the US financial sector simply was not that large, and the general consensus was that income inequality was holding constant. Nor do the economics of pandemics receive any attention.
So you may see why the book stoked my fears that today’s economists and analysts do not have a good handle on America’s imminent problems.
As for opportunities, as opposed to risks: The book contains no speculation about the pending collapse of the Soviet Union. Nor are the internet, crypto or artificial intelligence topics of discussion…
…Then there are the things that haven’t changed much over the decades. Peter G. Peterson, who helped to found the fiscally conservative Peterson Institute, has an essay in the book worrying about the federal deficit.
The piece that most resonated with me, contrary to expectation, is by Paul Samuelson. Samuelson is the one contributor who realizes he doesn’t understand what is going on in the world. He starts by mentioning how forecasts in 1929 and 1945 failed to see the future very clearly. He hopes that the 1980 contributions will be luckier. “The facts tell their own story,” he writes, “but it is not the simple story that so many want to hear.”
Perhaps true reassurance comes from knowing that, all things considered, the US economy has done quite well since 1980.
3. The Cazique of Poyais: a Real Estate illusion in the new world – Javier Pérez Álvarez
After fighting in the South American wars of independence, Gregor MacGregor returned home declaring himself Cazique (kind of a tribal prince) of an imaginary Central American country called “Poyais.” His utopian paradise promised unparalleled wealth and opportunities, attracting hundreds of investors who, unfortunately, not only ended up losing their fortunes but also their lives…
…Gregor MacGregor, known as the Prince of Poyais, Cazique, and His Serene Highness, was a Scottish soldier who became one of the most notorious conmen of his time. He was born on December 24, 1786, into the MacGregor Clan, a family with a strong military tradition…
…At sixteen, Gregor joined the British Army just as the Napoleonic Wars were breaking out. Serving in the 57th Foot Regiment, he quickly rose to the rank of lieutenant within a year.
In June 1805, at the age of nineteen, he married Maria Bowater, a wealthy and well-connected woman, the daughter of a Royal Navy admiral. This marriage secured his social position, and he bought the rank of captain, avoiding the traditional path of promotion that would have required seven years of hard work…
…After his wife’s death, he faced financial difficulties, and his social aspirations crumbled. It was then that his interests turned to Latin America, inspired by the Venezuelan revolutionary general Francisco de Miranda.
Selling his property in Scotland, MacGregor sailed to Venezuela in 1812, presenting himself as “Sir Gregor” and offering his services to Miranda, who appointed him colonel and commander of a cavalry battalion. Despite some initial successes, his ambition drove him to rapidly ascend the ranks, achieving the position of General of Division in the armies of Venezuela and New Granada by the age of thirty…
…Then in 1820, MacGregor came across the swampy, inhospitable coast of Nicaragua, known as the Mosquito Coast. Here he persuaded the leader of the indigenous people to give him land to create a colony. A dream of empire began to take shape.
The self-appointed Prince of Poyais reappeared in London in 1820. He was seeking investors and colonists looking for a new opportunity across the Atlantic in a new world full of possibilities…
…He commissioned a book, illustrated with engravings, describing the country with “total” accuracy…
…Taking advantage of his past as a British Army officer, he managed to gain the sympathy of high society. Nothing has ever been more important than good marketing and PR. The Crown recognized him as a foreign dignitary and, to foster relations between the two countries, honored him with the title of Sir (finally). At that time, just as it happens now, brokers didn’t care what kind of securities they sold as long as they made money from them. Thus, in 1822, Sir Gregor managed to place “Poyais State bonds for stabilization” worth £200,000. These bonds were traded alongside securities from other already recognized states, such as Colombia, which had gained its independence in 1810.
After this, MacGregor took it a step further. He opened offices throughout Great Britain that sold land to colonists who wanted to start a new life in Poyais…
…Many were convinced. Hundreds of enthusiastic colonists spent their savings buying land in Poyais and the corresponding passage overseas…
…In 1822, the first emigrants arrived on the country’s shores in two ships. At the location where the capital should have been, described in detail in the book by the “Black River,” there was nothing. The place the colonists had arrived at was known as the “Mosquito Coast.” The natives themselves avoided that place due to its terrible climate…
…Nevertheless, typical of human psychology, the colonists’ discontent turned against the ship’s captain who had brought them, for it was he who was there. Somehow, he had made a mistake, disembarking them in that godforsaken place and immediately setting sail. No one thought to doubt Sir Gregor. The few natives there could not care for the colonists. Many fell ill and died.
The survivors returned to Great Britain in the autumn of 1823. Surprisingly, no scandal occurred. The emigrants continued to believe in the word of the Prince of Poyais…
…Naturally, all those who invested their money in Poyais bonds lost it. However, it must be said that the returns on these bonds were in line with other investments made in Latin America during those years. On many occasions, the solvency of real states was no different from that of fictional countries like Poyais.
4. 4 Economic Charts That Might Surprise You – Ben Carlson
Large corporations aren’t feeling inflation’s impact. Consumers hate inflation. Small businesses aren’t a fan. Politicians don’t like it much either.
But large corporations?
They seem just fine when it comes to profit margins…
…And the explanation:
Corporations are paying higher wages and input costs but they simply raised prices to combat those higher costs.
Corporate America puts profit first, second, and third, which is one of the reasons the stock market is so resilient.
If it seems like corporations always win it’s basically true. They know how to adapt regardless of the macro environment…
…When Russia invaded Ukraine in the spring of 2022, the price of oil quickly shot up from around $90/barrel to $120/barrel.
Energy experts and macro tourists alike came out with $200/barrel predictions. It made sense at the time!
That war still rages on, along with an additional conflict in the Middle East. In the past, this would have sent oil prices skyrocketing. The oil crisis was a big reason we had stagflation in the 1970s.
Not this time around. Oil prices are back down to $80/barrel. On an inflation-adjusted basis, oil prices are essentially flat since 2019 just before the pandemic…
…The U.S. becoming the biggest oil producer in the world is one of the most important macro developments of the past 20-30 years, yet you rarely hear about it.
This is a huge deal!
5. What It’s Like to Be a Regional Fed President On the Road – Tracy Alloway, Joe Weisenthal, Tom Barkin, and many others
Tracy (11:02):
What’s the biggest constraint on your growth right now? Is it getting the materials? Is it availability of contractors? What’s stopping you from selling even more?
Albert (11:14):
I guess for us it’s going to be more financial institutions understanding our business more. I think the supply chain issue for us, it’s okay, as we have access to different supplies, but it’s more of having a backing of a financial institution, for us.
Tracy (11:37):
So credit?
Carport Central employee (11:38):
So credit. But our turnaround time in our industry, luckily it is pretty quick, but because of the fabrication time and their time schedule for commercial projects, they are not able to pay us, let’s say within maybe 90 days.
And our credit terms are, say, net 30, net 45. So basically we have to have a reserve of cash. You know, it’ll come in, but it’s just a delayed situation. So the growth that we’re seeing, we’re actually being restrained because of not having access to the capital that we need to actually move forward.
Tom (12:14):
And what are the banks telling you when you go talk to them and say ‘I got a business and I got a lot of demand and I just need a little more capital?’
Carport Central employee (12:19):
Well, I think right now it’s mostly because of the way the economy’s going. They’re really, they’re not as free telling you ‘Hey, come on in, let’s help you.’ It’s more like ‘Eh, let me see if I can, I don’t know if I can,’ that kind of situation, not like it was before.
Tom (12:34):
But it’s access rather than rate because you could say ‘Oh, they’ll give it to me. It’s just costing me too much.’
Tom Williams (12:39):
Yeah, I think it’s more access. I think people are more reserved with that…
…Joe (16:20)
So you mentioned when we talked about the sort of anecdotal learnings, the examples you gave were sort of either confirmatory or maybe inform something at the margins like, okay, maybe there’s still more juice on the public sector for [the] labor side. How often does it come up where people will start consistently saying something that, oh, this is really not showing up in the data yet, and it’s sort of an early signal of something that later on you say ‘Yep, there it is, playing out in the numbers.’
Tom (16:48):
I’d say every quarter there’s something like that. So in the fourth quarter last year, in October, you may remember the numbers were really, really frothy. And I wasn’t hearing any of that in the market, and I actually came out and said ‘t’s just not consistent with what I’m hearing.’
Joe (17:02):
The inflation numbers?
Tom (17:03):
No, the demand numbers, the consumer spending numbers, the retail sales numbers were very frothy. That’s not consistent. I’d say today we just got a retail sales report recently that was quite strong and I’m hearing decent consumer spending. I’m not hearing that strong. And maybe I’ll be proven wrong by the time this airs, but that’s what I’m hearing.
So I do hear things that are different and then I hear some number of things that are in advance. May of 2020 in Bristol, Tennessee opened, Virginia wasn’t open. It was right at the end of the first part of Covid and I talked to a developer who said ‘Oh my God, the malls are packed.’
And that was before any of us knew that the opening of the economy would lead to that kind of spending. You know, that’s a good example. I’ll also get a reasonable amount of, I’ll call it segment specific information. You know, how are higher income consumers thinking versus lower income consumers? Or what’s the job market for professionals versus skilled trades? And so the overall number may be the same, but you’ll get some insight into what’s really driving it..
…Winston-Salem Rotary Club member (20:37):
To the extent you can, can you give us any flavor of what you all discussed in your interest rate meetings? And secondly, do you have favorite economic benchmarks you find very useful?
Tom (20:49):
You know, what I’m mostly interested in is real-time information. You’re trying to figure out what’s actually happening in the marketplace. So I get credit card spending every week, year-over-year, and during Covid, I got pretty calibrated on what that means in terms of retail sales.
But that’s something I look at closely to try to get a sense of demand. Consumer spending’s 70% of the economy. On the labor market, the jobs report that comes out every month is clearly the best, most secure thing. But I take some comfort from the weekly jobless claims, because it’s at least a real time measure of whether layoffs are accelerating, which is what you’d see if the economy turned south.
And I think you kind of get the point. I’m trying to figure out is there any risk of the economy turning? That’s really what I focus on.
In terms of the meeting, maybe I’ll give you a 10-day look at it rather than just the meeting itself because the weekend before, 10 days before the meeting, the weekend 10 days before the meeting, we’ll get, the staff does a 200-page vertical text, greatest analysis of the economy you’ve ever seen. And it’ll include domestic and international and financial markets and lending markets and different scenarios for where the economy might go and different monetary policy operations. And so it’s a brilliantly done piece of work.
Tom (22:15):
At the same time, Jay Powell sends around his first draft of what the statement might be. And so we work all weekend and into the week, debating how we want to talk about the economy and whether we like that statement.
We’ll offer Jay — I’m giving you this background so you understand me — we’ll offer Jay our perspective on this statements. He always likes mine best. That’s not actually true. I’m making the point, the statement that we issue the Wednesday of the meeting has largely, not always, but largely, been pretty well-vetted by the time you get to the meeting.
So we don’t go to the meeting and try to line edit a statement. For the most part, every time that the chair has a bad press conference, that’s because we’ve line edited the statement in the meeting and we send them out there two hours after the meeting to go defend it, which is, I think in my judgment, a little bit of malpractice. But we do it sometimes in the meeting itself.
There’s often a special topic and so the staff will present some papers on the special topic and we’ll have a debate about it. Then we all go around and talk about economic conditions. So I’ll say ‘I’ve been in the district for the last seven weeks and here’s what I think I’ve learned, and here’s what I take solace from in the recent data and here’s what I think are some interesting conclusions you might not have otherwise thought about.’
Then we all talk about the statement, pretty productive meeting. It’s a reasonably formal meeting. It’s not really flippant. There’s not tons of humor in there. You know, it’s a pretty serious meeting, but it’s also, every word is transcripted. So if you’re having trouble sleeping, you can go get them from five years ago…
…Tracy (45:55):
This is another theme that comes up regularly in Tom’s meetings. Big and small companies seem to have experienced a lot of the economy of recent years in very different ways. We asked Tom about this.
Tracy (46:08)
Do you notice a big difference between what larger companies are saying versus smaller companies?
Tom (46:12):
I do. Smaller companies are still struggling to fill workforce jobs. They’re still struggling to fill jobs. And that’s in part because there was more capacity to raise wages in the larger companies than there were in the smaller companies.
And we were with one earlier today, but when you go to a smaller company, you do hear that kind of constraint being much bigger. During the supply chain shortage era, you absolutely heard that the big companies had a lot more benefit than the smaller companies. And I think when it came to the margin recapture cycle, the big companies have led the way on that. And a lot of small companies are still saying that they’re working to recapture margins.
Joe (46:54):
Being able to compete on wages isn’t the only edge that larger companies have in the current environment. Many of them have also been able to refinance their debt. Contrast that with the smaller company, Carport Central, which told Tom that bank lending is becoming a constraint on its business.
Tracy (47:10):
That might be one reason, according to Tom, that economic growth has so far defied the gravity of higher interest rates. They just haven’t flowed through to some parts of the economy just yet.
Tom (47:20):
Well, so the data that I keep coming back to is interest payments as a percent of either personal disposable income or corporate revenue. And those numbers have only now finally gotten back to 2019 levels. And that’s because a lot of individuals paid down their credit cards and refinanced their mortgages, and a lot of companies paid down their debt and refinanced their debt.
And so the in aggregate impact of having the Fed funds rate at five and a third versus where it was basically at zero hasn’t really flown through the aggregate economy. Now it’s certainly flown through to individual parts of the economy.
And the most surprising things to me, obviously, the residential market, where you’ve got the 3% mortgage holders who don’t want to trade into a 7% mortgage and are unwilling to sell their house. But behind that is that 92% of mortgages are fixed rate, okay? So that’s different than what the economy was 15 years ago.
In commercial real estate, multifamily, you hear about a set of people who really can’t develop anymore, want to turn in the keys, whatever version of it. And another set of people who are owners who are feeling actually just fine.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have no vested interest in any companies mentioned. Holdings are subject to change at any time. Holdings are subject to change at any time.
