It's getting a little scary out there. The US and Russia are flirting with armed conflict in Syria, and there is shooting in Yemen today as the US took out some Yemeni coastal radar sites after they fired missiles at one of our ships. There are now so many different nations and interests involved in various Middle East conflicts that you don’t have to be Tom Clancy to imagine a scenario that gets us to some version of World War Three. Of course, the media is far more concerned about Trumpkins and Shillary to the point that even a political news and politics junkie like me rarely flips the TV off MLB Network or CNBC anymore.’
The markets are also ignoring the geopolitical tensions, but that will change very quickly if things escalate. Geopolitical risks are the single biggest risk factor facing this market, even more, dangerous that the weak global economy and potential for falling earnings. The West has no idea how to deal with Vladimir Putin, and he seems quite willing to continue the game of chicken he has going in the Middle East.
The good news is that Bob Dylan has won the Noble Prize in Literature. The Swedish Academy cited Mr. Dylan for “having created new poetic expressions within the great American song tradition. The Swedish Academy's permanent secretary, Sara Danius said that” "If you look back, far back, 2,500 years or so, you discover Homer and Sappho, and they wrote poetic texts that were meant to be listened to, that were meant to be performed, often with instruments, and it's the same way with Bob Dylan.” Anyone doubting that Bob Dylan deserves the prize for his poetry set to music merely needs a bottle of wine, some good headsets and copies of Blonde on Blonde and Blood on the Tracks Albums to realize just how deserving he is of this award.
Of course, Dylan also wrote probably the best lyrics ever about Wall Street when he penned:
Idiot wind, blowing every time you move your mouth
Blowing down the backroads headin’ south
Idiot wind, blowing every time you move your teeth
You’re an idiot, babe
It’s a wonder that you still know how to breathe
A new note from John Fernald of the San Francisco Fed suggests that when it comes to GDP growth we have hit a new normal and it is a lot lower than years past. He wrote “Estimates suggest the new normal for U.S. GDP growth has dropped to between 1½ and 1¾%, noticeably slower than the typical postwar pace. The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks. And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality.”
Lower GDP as the new normal means that interest rates are going to be a lot lower for a lot longer than many had hoped as well. While some may think this is great for the markets at some point, we have to consider the words of Bill Gross of Janus and others who believe that lower rates are bad for the economy. In his latest outlook, Mr. Gross wrote “a commonsensical observation made by yours truly and increasing numbers of economists, Fed members, and corporate CEOs (Jamie Dimon amongst them) would be that low/negative yields erode and in some cases destroy historical business models which foster savings/investment and ultimately economic growth. Our argument is that NIMs (net interest margins) for banks, and the solvency of insurance companies and pension funds with long-dated and underfunded liabilities, have been negatively affected and that ultimately, the continuation of current monetary policies will lead to capital destruction as opposed to capital creation.”
It certainly makes out job harder as investors. No matter what rates are it is hard to justify paying the current high multiples for companies that will be lucky to grow by single digit over the next several years. We need prices to reset lower for me to get excited about establishing new positions.
It will ultimately be good news for our bank stock investments. The mandate is to grow or sell, and it is going to be hard to grow in a lower or longer environment. This is going to drive increased merger activity and I don’t care if my banks are buyers that are able to gain assets and achieve the scale needed to increase profits or if they are sellers that throw in the towel and sell their bank at something around the current 1.35 times multiple that is the average deal price. Either is a solid outcome for me as a long-term investor in community banks.
This is going to be a fantastic weekend of playoff baseball, and I have a pretty well-stocked Kindle I need to read down to empty by next Tuesday when we get the biggest new release day so far this fall season. We have a new book from Randy Wayne White, John Sandford and the newest entry in The Pendergast series by Preston and Child. The new release list for recreational readers is a gold mine for the next few months, and I am looking forward to some great late night reading ahead. There isn’t much of the business and finance front that catches my eye, but I read so much of this stuff during the week, and have read most of the classics in the field that its hard to impress me enough to buy the book. The two recent books I think everyone should read are Wesley Grays Quantitative Momentum and Tobias Carlisle’s Concentrated Investing, so if you have not yet picked this up, I would suggest you do so ASAP.
Let's be careful in a rich market and dangerous world lest we find ourselves