Dear Thoughtful Investor,
Recently Bill Gross was on Fox Business discussing his view of the risks posed in the market today. The caption was fitting, it just said, “Bill Gross, Legendary Investor”. You may be familiar with Mr. Gross, he started PIMCO almost 50 years ago and is basically the godfather of fixed income investment management. Once the manager of the world’s largest mutual fund, he left after over 40 years at the company he founded. I spent four years at PIMCO under Gross’s tutelage - not him directly [although we rode the elevator together one time while I was carrying a bag of groceries - my lunches and snacks for the week - and he was extraordinarily interested in what I was packing], but his philosophy had permeated the walls by the time I got there and furniture seemed to echo his sentiment, not to mention the portfolio and account managers.
My colleague at Trueline Capital and I have been bantering on central banking, the Fed, and monetary policy the last three or four weeks. I implored him to read The Creature From Jeckyl Island, the morbidly eye opening 800-page magnum opus from Edward Griffin on the history and future of the Fed (this is recommended reading for any thoughtful investor). We covered our office’s white board in a giant schematic of how the fed creates fiat money backed by debt that is lent to commercial banks and multiplied through fractional reserve banking and finally lent out to We The People before we are taxed thereby sending it back to the Treasury that birthed it.
Bill makes an extraordinary comment that might be easy to miss. At 5:45 he says, “Productivity, which is the essence of growth, real earnings growth, is basically much lower than what it was simply because secular [long-term] forces are simply limiting our ability to grow despite fiscal and monetary stimulus.” Let’s deconstruct that: real earnings growth, and therefore the individual’s standard of living, is driven by increases in productivity and some mystical “secular forces” (we’ll address) are limiting that productivity even through the government (fiscal) and central bank (monetary) are trying their best through low interest rates, quantitative easing (the central bank buying stocks and bonds directly), Trump’s proposed tax reform, etc. Trish Regan had just asked, “Bill, how does that change? I mean the Fed can’t do anything else, right? And other central banks are just effectively propping things up artificially in your view, how do we actually start to generate some real growth so we can justify valuations?”
Regan asks the key question, the hypothesis to addressing the crisis in to 2008 was: do everything possible to save the banks and other ‘critical financial infrastructure’ and flood the market with cash until the real economy picks up again with increases in productivity, innovation, and the investment in real goods and services by real businesses. What ACTUALLY happened was that all the money that flooded the system just went into financial assets, not real assets. The financial economy grew but the manufacturing economy was stagnant. The increases in the stock market were due to investors being pushed further out the risk spectrum because yields were so low on ‘safe’ assets like bonds, that to generate returns investors had to put money in riskier assets (equities, etc) so demand went up for those assets and prices went up accordingly. Then Trump was elected and investors had the expectation that a Trump Administration was going to repeal Obamacare (which is very expensive for businesses covering their employees healthcare) and implement tax reform that would inspire investment in the ‘real goods and services’ economy. Bill is stating that he thinks those expectations are overblown, and given the gridlock in congress over passing real legislation and the media’s focus on “Russian hacking” it’s hard to imagine the kind of progress being made that would really jumpstart the economy.
“So what do we do?” my colleague asked when we finish watching the clip. “You mean ‘we’ as in real estate investors? Or ‘we’ as in Real Estate Fund Managers?” “No,” he cut me off, “like We The People.”
That’s exactly right. That’s the question that matters to us as Thoughtful Investors. What do we do? We do this:
1) Invest in your own productivity. With such little growth in productivity in terms of human capital, we differentiate ourselves by learning more - this does not mean go back to school and rack up a $120k in student loans for an MBA (more on student loans later) - this means learning a skill. Are you an accountant? Learn to do some social media marketing. Or code in Python.
2) De-Lever on anything you absolutely cannot lose - like your principal residence - but Lever Up in your areas of core competency. In other words, if you own a business take advantage of low interest rates to accelerate growth in your business’s competitive advantage but avoid racking up debt on non-income generating purchases.
3) Shift your portfolio toward hard assets. Silver, gold, real estate. Buy a rental property - heck, invest in a construction debt fund ;)
We will spend lots of time on each of these in the future.
A Thoughtful Investor