Investment Climate July 2019
Despite a brief correction in May, the general trend in stock prices since the beginning of the year has been decidedly upward. Our growth portfolios have continued their relative outperformance.
While we are quite pleased with these recent outcomes, we continue to be impressed with the prospects for the future of our portfolio companies. It is noteworthy that our portfolio has had more turnover in the last couple of years than in the previous twenty as there comes a time when prudence takes precedence and it is necessary to position for the next great narratives, themes and theses. We have been doing that fervently of late and are confident that we are in front of significant opportunities in areas such as medical technology, distributed ledger computing, security, manufacturing processes, ultra-low power sensor processing, omni-channel retail, augmented/virtual reality, computer graphics rendering, 5G edge computing, financial technology and enterprise software, just to name a few.
We are often asked about what we think could derail the current favorable market conditions. We would start by saying that while conditions have improved significantly in the last couple of years (lower regulation and corporate tax rates), conditions are still not ideal. If we were granted all of our wishes, what would that look like?
A low, flat tax rate across ALL forms of income and all entities, individual and business, with an inflation adjustment for capital gains.
A repeal of Sarbanes-Oxley, Dodd-Frank, Regulation FD, and streamlining the process it takes for a company to go public. These regulations were all put in place with the best of intentions, to stop fraudulent activity in the financial markets. But fraud was illegal before all of these rules were put in place, and it is still illegal today. Perhaps if regulators spent their time finding and prosecuting fraud instead of forcing the 99.9% of honest people working in the financial industry to comply with all these rules and regulations, there wouldn’t be a need for them.
Less government spending. The amount of money the government spends is staggering. Regardless of the department (Defense or any other), the government is simply too large and drains resources from the productive economy. We don’t fixate on deficits, per se, but the pure size of government results in dollars being allocated too often to unproductive endeavors. That needs to stop.
A gold standard. That’s right, dust it off and bring it back! The Federal Reserve does not cause economic growth. But it sure can keep it from happening. And it is simply too powerful with its dual mandate of price stability and full employment. Price stability? Just look at a long-term chart of the value of the U.S. Dollar and let’s talk about price stability! We have long advocated that the dollar should not be strong or weak, but STABLE. We want our businesses to not have to worry about what the value of the dollar is going to be in the course of their business activities. The Fed is in the news quite a bit lately with the talk of them lowering rates. We tend to think that they probably don’t need to lower rates but that is not really the important issue. Rates could be appropriately much lower, and with a continued upward slope to the yield curve (short term rates lower than longer term rates) if there was true price stability. The only reason this rate discussion happens is because the Fed “manipulates” those rates, and therefore the dollar. If you don’t think we are right, just look at a chart of interest rates for the first 150 years of the existence of the USA.
Okay, we’re done.
And we emphasize that we don’t think any of this is going to happen; but if it did, we would see an almost immediate, and probably significant, revaluing of the prices for our businesses upwards.
That said, we continue to heed the word of our mentor, Dick Taylor, who would say: “We get by in spite.” We won’t let “perfect” get in the way of “good enough.”
Have a great summer!
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