Wednesday, March 7, 2018

A Tale of Two Markets

It was the best of times, it was the worst of times...the NASDAQ's heavy tech components roared to new 52-week highs on almost a daily basis, while iconic global consumer brands struggled to keep their heads above water. What happened?

I have noticed a massive decoupling in the stock market over the past 5 years, and over the past year in particular. Typically defensive consumer staple stocks have gotten hammered...and we're talking Bear Market territory for many of the largest brands in the world (a Correction is a 10% selloff from a stock's high, while a Bear Market is defined as a 20% or more fall.)

How could this happen when rates are still at historic lows, unemployment is low, the global population continues to grow, and the economy is booming? Not so fast. The economy IS booming, BUT in CERTAIN sectors. Consumer staples (think toothpaste, diapers, soap, hot dogs, macaroni & cheese, bleach, tissues, paper towels, etc.) have for decades relied upon BRANDING to charge a massive premium over a similar generically produced product. Who ever orders just a "cola" from a restaurant? Or asks for carbonated water and sugar? No one. Consumers have been steered towards brands since birth. An interesting thing is happening though, and it seems to be accelerating.

The oft-cited force of "tech disruption" has uniquely impacted classic brands in a singular way; consumers can now price shop globally and have orders filled at signifiant discounts to traditional full retail prices. Rather than laser-focusing on innovation, distribution, and consumer satisfaction what I've seen are major brands saddling up with lean manufacturing to such an extent that employees have to justify ordering pens or toilet paper. This is a race to the bottom.

The flip side of the coin are the tech innovators who leverage their massive economies of scale and state-of-the-art logistics to provide an unrivaled consumer experience. Many of them are pure software companies, some are not, but the result seems to be the same: extremely satisfied customers who have developed TRUST in the brand. So much trust, that these tech innovators can repeatedly launch offshoots of their core brands into a captive consumer market that actually embraces the new product or service. And many of these products or services directly compete with established legacy brands.

The game plan needs to change for legacy brands to thrive; the old vertical mindset of acquiring lowest cost raw commodities, manufacturing with razor thin margins, spending billions on marketing, and capturing the global consumer from birth is giving way mightily to logistical systems offering consumers ease...and better prices.

Monday, January 1, 2018

Happy New Year!

Wishing all my readers & their families a very, very happy, healthy, and prosperous New Year! I can think of no better quote to kick off the new investing year than from my main man Marcus Tullius Cicero.  He writes of a greater good than simply a full belly and entertainment, a fullness of life "which bread and circuses can never appease."

While many of the working poor and middle class have been locked in a political bickering war amongst themselves for at least a generation, the wealthy have consolidated their power. Much of this has been accomplished by providing the proverbial bread & circuses of yore. I find it hard to believe the pinnacle of human existence is captured on a sports field or with the legalization of a plant, but that's where we're at in this country now. I encourage readers of this blog to talk with their friends and family about wealth; how to create it, how to sustain it across generations, and what the greater good is that they seek.

There is tremendous opportunity in this country and abundant resources to accomplish dreams and goals that would seem impossible simply to a generation ago. Space beckons. Science calls. There is poetry yet to be written, lines of code yet to be keyed, and cures waiting for genius undiscovered. We can and must do better as a species. Resolve to invest wisely.

Wednesday, November 29, 2017

Positioning To Win...Big-Time

The Darwinian battle for survival has a lot to do with EXCEEDING the Jones, rather than just keeping up with them. Traditionally what has been a pillar of the American Dream is the belief that one's children will have a better life; better education, access to opportunities, health, etc. Indeed, it was John Quincy Adams who remarked that "I am a soldier so my son can be an engineer and his a poet." How does that translate in today's society?

Reality dictates that to achieve this goal of a progressively better life for ourselves, our children, and their children one major accomplishment MUST be achieved: growth. By definition, the Earth has limited natural resources, and as humans our time is probably the most valuable resource. Along those lines, maximizing time (surviving) is paramount to achieving growth. And there is a very specific definition of growth I like to use fellow financial farmers: making sure your portfolio is growing consistently in EXCESS of true inflation...which I estimate is easily in the double digits.

Double digits? How could this be? The Federal Reserve is HOPING that their metrics indicate "inflation" rises to 2%. Please take a look at the chart above illustrating historic real wage growth and notice something really, really nasty occurred around the year 2000. That's essentially when the internet really began to take off, and was quickly followed by major world events including a massive recession and multiple global wars. The global economy's PRODUCTION has more than recovered in the nearly two decades since, but the real wages haven't....and neither have the jobs.

Real wages have remained stagnate and U.S. manufacturing jobs are at 1941 levels. Explosive growth in productivity hasn't benefited the typical line worker at all. The number of jobs has collapsed and compensation long associated with those jobs has has been replace largely with the rise of a massive service sector dubbed The Gig Economy. The problems with The Gig Economy are legion; no pension, limited healthcare options, and low wages. Where is all that "productivity" i.e. prosperity going? To the owners of said businesses, who are typically either private equity concerns or publicly traded companies both of which have founders with stratospheric wealth.

So how you do position to win? First, throw out the 2% inflation dictum championed by the Federal Reserve. Second, put a personal growth plan together that targets a sustainable, LARGE growth rate in excess of your true inflation (cost of housing, healthcare, education, etc.) Third, implement said plan. There are multiple industries with stratospheric growth...I know where they live, and so will you after some research. Give me a call if you need help finding them. Look at those industries and professions intensely from both an employment perspective and ownership mentality. The future remains very bright for those pursuing ownership interests that are laser-focused on generating cash flow...and there's nothing to say you can't love what you do and benefit the world while you do it. If you want to position yourself to win big-time, formalizing a growth plan and executing it are essential...Invest Like A Farmer.

Monday, November 27, 2017

Middle Class Squeeze

It is often said a picture is worth a thousand words, so financial farmers I encourage you to click and expand the above picture depicting the "Middle Class Squeeze."

If you feel like you've been working harder than ever just to pay for basic life needs like rent, medical care, child care, or higher education have. Over the past twenty years real family income has fallen nearly 10% while costs of essential services have skyrocketed. 

Much of the plunge in real income is due to the complete and utter destruction of the traditional manufacturing base. Productivity remains at an all-time high, but the jobs have disappeared. It is analogous to a cluster of neutron bombs going off in multiple cities across the United States, particularly in areas succinctly defined as NOT coastal America.

Technology is great...until it gobbles up all the manufacturing jobs and essentially hobbles an entire class of people. Probably the greatest article I've ever read about this ongoing phenomenon is entitled "Why Software is Eating the World" originally published in the Wall Street Journal on August 20th, 2011. If you do one thing today (besides read my blog of course!) please take a moment to read that article. It is brilliant.

Wealth creation, and concentration, has largely come at the expense of higher-paying middle class jobs. What I term the "technorati" (or in stock market parlance FAANG...Facebook, Amazon, Apple, Netflix, and Google) have swelled in market capitalization to ENORMOUS levels. But it's not just FAANG...the list can easily include any number of their peers: Adobe, Microsoft, etc. Even "new" startups like Uber and Airbnb largely leverage existing infrastructure (cars and homes) to derive profits as a software company. They manufacture nothing, except benjis.

Obviously shareholders, and in particularly founders, have made tremendous profits. But at what cost? It is going to be nearly impossible to to rebuild the middle class base in my opinion. If anything, there will be further wealth stratification into binary classes; the "Alphas" and the "Betas." Upward mobility has basically stalled for an entire generation, save for those smart and lucky enough to latch on like Velcro to the runaway tech horse.

A potential solution is tricky in a democratic republic that values, indeed prizes capitalism, and loves a Horatio Alger story in every successful person. The reality, however, is starkly different. Dynastic wealth is alive and well...and growing across the political spectrums...and that is the true enemy of meritocracy in the world.

The middle class has the votes and needs to elect pragmatic politicians willing to broach traditionally taboo subjects like true inflation (the Federal Reserve calculates inflation in tons of soybeans rather than legit metrics like housing, education, healthcare), tax avoidance (via "non-profit" foundations which collectively have avoided billions in taxation), and monopolies which clearly violate the Sherman Antitrust Act. Unless the middle class acts, the shenanigans will continue; wealth will concentrate amongst the top Alphas leaving a proverbial ocean of Betas to fuel them.

Monday, November 13, 2017

Toy Monopoly?

Rumors swirl of a potential deal uniting Rhode Island-based Hasbro with West Coast Mattel, as reported by the Wall Street Journal. If indeed Barbie does say "Yes" to G.I. Joe it would create a toy monopoly having nearly every major toy brand or franchise under one roof: Star Wars, Marvel Comics, DC, Transformers, Disney, etc.

As traditional mom-and-pop retail stores shutter, and even old stalwarts like Toys R Us declare bankruptcy the toy majors (of which there are really just 3 left: Lego, Hasbro, and Mattel) are increasing relying on the direct-to-consumer sales path. (Read as "") This isn't good for traditional retailers...and it probably isn't going to be good for consumers either down the road.

Jamie Dimon released a chart on this subject several months ago visually detailing the consolidation in the number of publicly traded companies. I have included it here for your review fellow farmers:

Over the past 20 years there has been a nearly 50% decline in the number of public companies. The strong are getting stronger...and the weak either are acquired or go out of business. What we SHOULD be seeing in a healthy economy is the steady growth of NEW public companies coming to market which enrich and employ an increasing number of people. We are witnessing just the opposite; fewer companies employ fewer people with fewer products and higher prices. Textbook monopolies are forming all over again. What might be good for the stock market and corporate America might not be good for the American social order.

Sunday, November 12, 2017

Some believe the economic bifurcation of America is well under way; billionaire investor Ray Dalio recently was interviewed on CNBC about this pressing issue. As the head of Bridgewater Associates, one of the largest hedge funds in the world, Dalio has a unique investment process championing "radical transparency," an approach that analyzes facts with stand-alone openess. It has provided him over the years with unique insights that have resulted in an enviable track record for his hedge fund. Bottom line, Dalio is right...a lot.

Economic bifurcation is a deeply troubling, even embarrassing, issue for many billionaires to address because it cuts to the very core of their social standing, success, and political leanings. Make no doubt, there is a growing and potentially violent Civil War 2.0 brewing in this country, although it is concealed in large part via faux political unrest...and something even worse. Let me explain.

Don Henley's song "Dirty Laundry" bemoans the intrusiveness of "journalism" into people's lives, and more importantly the exploitation of "news" for profit.

Fast forward from the 1980s and what Henley's song translates to is clicks, pure and simple divisive clicks. The money is made on Facebook and Google, indeed all advertising, on user engagement from advertising. And those dollars don't roll in unless the product is purchased, and in Facebook and Google's monopolies that means clicks. And lots of them. Billions of dollars resulting from clicks.

The economic bifurcation of America is in large part due to POLITICAL bifurcation which has pitted American against American while the oligarchs have consolidated wealth and political power. It has been said the "greatest" minds of our generation have been singularly dedicated to optimizing clicks. And optimizing clicks means feeding targeted content to users' mobile devices. Period. That content has been sliced and diced into an irresible curated feed specific to each, allegedly, non-idenfiable user.

What does all of this have to do with Investing Like A Farmer? A lot. Much of the bifurcation in our country has resulted in the loss, or perceived loss depending on your economic situation, of the availability of upward economic opportunity.  Opportunity in America has traditionally meant blue color manufacturing jobs with quality wages, health care, and a retirement pension. The loss of these manufacturing jobs, and the swell in the opioid epidemic, I believe, is no accident.  The timeframes sadly overlap; over the past 15 years we have seen the utter collapse in blue color manufacturing jobs coupled with an unparalleled spike in opioid deaths.

What does big tech (Facebook, Google, Amazon, Apple) have to do with the loss of manufacturing jobs and the rise of the opioid epidemic? Consolidation in tech into niche monopolies of scale has eliminated many traditional manufacturing jobs, which has lead to a spike in slack human labor capital which no longer has access to quality wages, health care, or retirement pensions. This in turn has lead to a cultural shift into alternative sources of pleasure...or pain relief. Hence, a strong argument can be made that the rise of the opioid epidemic is a direct result of the loss in blue collar manufacturing jobs.

I believe there is a distinct relationship amongst opioids, tech, and manufacturing jobs. I suspect tech continues to prosper with further monopolization and consolidation. The tech titans will not willingly release their incessant drive towards full automation, ownership control, and elimination of human jobs. You can bet on further cannibalization of margins across retail and manufacturing...and any other industry with high are margins is susceptible to tech compression. Big Tech's cost of capital is virtually nil and their monopolistic scale is unprecedented in the annuals of human history.

Sadly, the most "promising" sector might just be in the inevitable misery that the loss of blue collar manufacturing jobs will cause, namely the rise of the Vice sector; tobacco, alcohol, gambling, etc. The Vice sector is poised to continue its recent trend of strong growth as the Caesars implore the masses to vote for them via appeasement with "bread and circuses." 

So what's the trade? How can you survive this economic bifurcation? Buy assets early and often, hold for the long-term, and leverage the power of compounding. Ownership interest is paramount to deriving economic benefit.

Tuesday, November 7, 2017


By 2020 the United States population is estimated to reach 340 million, but of that total some 300 million people will effectively be serfs; low-income, low-wealth members of a caste with limited social mobility. It will be nearly impossible to escape serfdom as wealth permanently consolidates amongst the richest ~10% of the population.

How do you avoid becoming a serf? Landowners from medieval times to now have fared well; the "lord of the manor" typically doesn't wind up becoming a serf, although it can happen if land ownership rights are abolished (think Soviet Union or China during their respective communist purges of the 20th century.) Education is key. Owning assets (cashflow positive) is vital.

Recently hedge fund billionaire Ray Dalio has identified this disturbing trend as being the result of two distinct economies in the United States; he is 100% right, but miserably late to identifying something that this blog pinpointed years ago. Mr. Dalio, however, is the lone billionaire voice this author has read even remotely advocating for a wealth transfer to protect the social order. Don't bet on it though, as hearty readers of this blog know, the Forbes 400 control vast amounts of global wealth disproportionate to their net value to the world...and along with that they control the politicians and media outlets. Make no doubt, the game is stacked.

The simple solution is to retroactively establish equity accounts for USA citizens composed of common stock transferred from ultra high net-worth individuals (say net worths of $500M+ are getting a hair cut.) Think of this as TRUE Social Security: shares in Google, Microsoft, Apple, Amazon, Facebook, Berkshire Hathaway, etc. are transferred into a retirement savings account for every USA citizen. The very companies that have been allowed to establish monopolistic businesses in the United States (and often globally) help restore the Middle Class. I think voters would be a lot more excited about $100,000 appearing in a bona fide personal retirement account than a measly $1300 tax savings proposal.

Under the guise of philanthropy many billionaires are stashing their stock in non-profits, which allow them to maintain control (or their heirs) with beneficial tax treatment (read: no taxes). This does little to benefit the Middle Class from which these billions are siphoned. A strong Middle Class is good for everyone, even the ultra rich.

But real farmers don't complain, and that's not what this blog is all discard the idea of wealth transfer and instead think about wealth creation and protection. Wealth creation is the product of owning assets that are cash flow positive, beneficial tax treatment, and protection of said ownership interests. The future isn't going to belong only to those who can code, but also those who can secure a solid asset base composed of real estate, equities, and education. Seek these out for yourself and the ones you love, because the monopolies grow stronger by the day.