Monday, March 30, 2020

Where is Bill Gates?



Although I enjoy a TED Talk just as much as the next guy, it really makes you wonder if it is the best use of your time if you're the head of a multi-billion dollar charitable health foundation in the midst of a global pandemic. Rather than fielding questions as to what you'd do if you were President of the United States, perhaps it would be better to go through an action plan of what the Gates Foundation is proactively doing to help fight the coronavirus. Where is Bill Gates?

As the beneficiary of hundreds of millions of dollars in both Federal and State tax exemptions, the Gates Foundation holds a special place in global philanthropy. For the liberal elite, it is an invitation-only pass into the highest echelons of philanthropy. But the hairs on the back of your neck should tingle when you hear the words "philanthropy," especially when it coincides with massive tax breaks that would otherwise be funneling much needed funds into a government that is actually fighting the coronavirus with surges in public/private manufacturing of N95 masks and ventilators, an unrelenting pursuit of vaccines amongst big pharma, and most importantly, the frontline heroes (nurses, caregivers, EMTs, firefighter, doctors, etc.) who are completely overwhelmed. Where is Bill Gates?

Philanthropy, and foundations in particular, are touchy subjects. At face value, they are supposed to be the engines of direct, unbureaucratic good. And many, many are just that...they have minuscule operating budgets, shoestring infrastructure, and provide a world of good for many. To those, God bless you! My concerns, however, arise when an institution by its very mandate, say helping to alleviate global pandemics, does nothing when its very reason for relevance appears on the global stage. Then it is only morally right to ask questions. Where is Bill Gates?

A higher power lens needs to focus on the billions of dollars pledged and committed to private foundations when operating expenses run into the hundreds of millions, corporate infrastructure is grandiose, and financial control of donated assets remains intact to the donor(s). As taxpayers on the hook for capital gains and income taxes, we all should wonder why the U.S. Treasury isn't the first choice for billionaire philanthropists...especially when foundation mandates are ignored in the face of calamity. Something is seriously wrong when citizens of this great country are deprived of the economic and social benefits of hundreds of billions in sheltered assets. Where is Bill Gates?

When the last vestiges of the coronavirus are ultimately mopped up throughout the world, including the inevitable secondary and tertiary waves, we're going to need a "Marshall Plan" of restoration. Similar to post-9/11, there will be societal changes. The economy itself will shift, and survive. A reckoning needs to occur right quick, however, answering the question of why those with so much did so little. COVID-19 is going to leave generational scars on this country, especially in terms of income and wealth inequality. The salve, echoed by Truman and Reagan alike, was the philosophy Gen George C. Marshall coined with the comment: "There is no limit to the good you can do when you don't care who gets the credit." It's time to strip mega foundations of their tax-exempt status and restore accountability to the taxpayer. Where is Bill Gates? Who cares.

Friday, March 27, 2020

Climbing a Wall of Worry


It has often been said that stocks climb a wall of worry. Coronavirus is going to put this maxim to the ultimate test in the weeks, months, and years ahead as investors digest news cycles that seem to circulate in discrete 15-minute increments of despair, hope, jubilation, and despair again.

Coronavirus appears to be the most challenging wall of worry for bullish investors to climb in at least a generation. What to do? Like any good coach will tell you, having a playbook is essential. In terms of relevant coronavirus playbooks, I am a big fan of Laura Spinney's "Pale Rider" which describes the course of the Spanish Flu.

As previously mentioned on this very blog several weeks ago, COVID-19 closely resembles the spread of Spanish Flu from 100 years ago. Although not identical, both diseases share eerily similar traits. More importantly, in my humble opinion, is what we can glean from a societal impact and recovery timeline as useful takeaways.

Given the exponential growth rate of infections throughout the globe, and the denial still present in many countries (Mexico/Sweden) that the "Pale Rider" is coming, I think there is the distinct possibility it could be much worse. Ignorance may be bliss, but denial is not a good strategy. I also believe there are vast societal changes coming our way along the scale of 9/11. You know a crisis is real if it affects behavior. This one will.

Prior to 9/11 airport security was present, but for all intents it was simply a quick screening...i.e. gun/no gun. After the Twin Towers fell, the world as we knew it fundamentally changed in terms of security protocols. I suspect something similar will happen in regards to coronavirus. This brings us to the proverbial "wall of worry" that stocks need to climb in order to regain their highs. What will lead to an economic recovery?

I think a two-pronged solution is in order to beat the coronavirus. First, we need to flatten the curve nationwide immediately. Although roundly criticized, Bill Ackman's interview on CNBC last week (18 March 20) was spot on; much of what he said came to fruition rapidly, several of his ideas still need to be implemented. His thesis: The coronavirus cannot live (long) without a host. If you want to flatten the curve, shut down the USA for a month.

The second prong, which needs to be worked concurrently, is to laser-focus on restoring positive cash flow on a national level; from large companies to small business, cash flow is essential to survival. There are undoubtedly certain industries which are going to take longer than others to recover, especially customer-facing ones which have significant exposure to geographic movement and human sanitation. Via paradigm shifts in behavior and societal norms, however,  many industries can be up and running within weeks. Success in flattening the curve and an economic "jumpstart," however, both rely on a key factor: Trust.

One of the first questions many portfolio managers are asking is: "What will survive?" From there a lot of speculation ensues as to: "Who has the best balance sheet" or "Who stands to gain market share?" But ultimately all that matters is: "What brands do I trust?" That's the lynchpin to the entire economy. Trust. Trust is going to result in sales which will result in cash flow which underpins survival. Trust is essential.

The founder of Salesforce, Marc Benioff famously remarked last year that "trust" has become the coin of the realm, commenting that "Trust has to be the highest value in your company." I echo this philosophy, and also believe that is exactly what will help investors climb the wall of worry ahead. Logistics, supply chains, manufacturing, safety, sanitation, all of them and more, are completely dependent upon trust.

Saturday, March 21, 2020

Every Day is Prime Day Now


As Coronavirus shuts down most of the United States, Amazon's vertical integration with retail sales, Whole Foods, streaming video, AWS, and logistics has effectively made EVERY day Prime Day now.

What was once a yearly event to find any, and all, the products that you needed at special prices with fast shipping and backed by a brand you can trust, has become the de facto method of survival for thousands of households in America. Every day is now Prime Day.

Jeff Bezos left the hedge fund D. E. Shaw & Co. in 1994 to start Amazon as an online bookstore, three years later it went public. Over the next 25 years Amazon aggressively moved into retail sales, grocery sales, streaming video, internet infrastructure, and logistics. These "five pillars" have now formed the backbone of one of the most valuable, and essential, companies in history.

The coronavirus spread has laid bare the value of vertical integration in terms of a stable supply chain that can be accessed at any time, anywhere. Through thousands of incremental improvements over the past 25 years Amazon has harnessed the "new" technology of the internet to leverage the customer experience. 

As its namesake implies, virtually anything can be purchased on Amazon now including vital food and beverage supplies online while Whole Foods adds a large physical footprint across the country. Not only can consumers purchase needed physical goods and supplies, Amazon also offers arguably the best video streaming platform. Prime Video allows viewers to select from thousands of educational to entertainment videos which are included in its membership, but also the ability to purchase or rent virtually any digital product ever produced. Finally, for those working from home AWS offers a compelling platform to build a business and work. Tying all of this together is one of the best logistics systems in the world. 

Amazon's laser focus on being customer-centric has allowed it to leapfrog the competition in multiple industries, grabbing market share from staid businesses and transforming the retail landscape. Along the way it has built tremendous trust with the consumer allowing it to dovetail into seemingly disparate business lines like streaming video, food, and logistics which in hindsight all helped to cement the consumer experience into one where every day is now Prime Day.

Friday, March 20, 2020

Bioterrorism



The Wuhan coronavirus (COVID-19) will go down as one of the most effective acts of bioterrorism in history. If you want to destroy global capitalism and democracy, viruses are the ultimate Trojan Horse. Viruses destroy the very fabric of an open society by concentrating power in the hands of a few to make vast economic, societal, and political decisions without a single vote. Basic freedoms, like movement, are restricted.

Viruses are especially dangerous in countries that value human life highly because those countries are willing devote almost limitless resources to testing, treating, and caring for all segments of their society, especially the most vulnerable. If you want to take down a democratic society, a viral pandemic is an extremely effective agent to accomplish that goal.

Whether accidental or strategic, the results of the WuFlu have been dramatic; from an economic and social impact its devastation is global in scale on par with a World War. The story of "the Wuhan," however, starts not in November or December of 2019, but rather several decades before, when the seeds of destruction were first sown with something so seemingly benign as counterfeit goods.

The New York Times has an excellent article entitled "The Chinese Roots of Italy's Far-Right Rage" that helps frame the current disaster in terms of product theft, industry destruction, and ultimately killing of the former residents. In summary, the article details the initial theft of hundreds of Italian textile brands (linen, shoes, clothing, etc.) by visiting "tourists" who took pictures of all the products and factories while in Milan, then subsequently began making identical copies in the 1980s. The result was a flooding in the market of counterfeit goods. These goods led to the destruction of the industry because the Italian factories had a higher cost of goods for raw materials and labor; the authentic Italian goods, however, couldn't survive against their inferior clones despite the value difference in quality. 

In the decades that followed, Italian factories were systematically purchased by Chinese Nationals who brought over their own family and friends thus displacing generations of Italian families. While the New York Times story was written specifically about the Italian fashion industry, it applies generally to nearly every industry in every country with particular emphasis on manufacturing and pharmaceuticals. If there was a branded successful product, the strategy over the past 40 years has been to clone it, sell it, and capture the industry. In recent years this has been prevalent noticeably in software platforms.

Over the past 40 years global manufacturing has largely moved offshore. Coronavirus is simply the icing on the cake; not only have the products, jobs, and industry been destroyed, but the very residents of those areas are now being killed. The coronavirus pandemic is the final indication of what has happened to democratic Western Society since globalism has pushed industry to embrace "free trade" agreements like NAFTA...cheap goods and executive comp were the costs of losing a nation's self-reliance.

In times of crisis, allies evaporate, borders close, and citizens are left wondering why a country isn't self-sufficient. Fear, panic, and hate are not going to be the answers in the weeks and months ahead that will make this country stronger. Rather, it will be the collective awakening of our society, especially amongst GenX, of the need to seek greater political power and rapidly ween the United States off of dependence on foreign manufacturing; we have an abundance of God-given resources in this country capable of making the USA self-sustainable. A "New New Deal" should be a sustainability movement laser-focused on repatriation of industry. "Made in the USA" means a lot.

Saturday, March 14, 2020

Demand Shock


The United States of America has entered a period of severe negative demand shock. Negative demand shock occurs when demand collapses across multiple economic sectors simultaneously. As the Wuhan coronavirus has spread in this country it has triggered a panic not seen in the stock market since 1987...and it presumably will last significantly longer. Much longer. Think 1929ish.

Entire industries have been laid low, namely: airlines, cruise lines, hotels, casinos, restaurants, sporting events, and education to name a few. There undoubtedly will be secondary and tertiary impacts such as the hundreds of thousands of small business that cater to these industries as well as the millions of employees whose livelihoods are intricately woven into supply/demand chain of our economy.

From an economic standpoint, Wuhan coronavirus has most likely triggered a recession. It is hard to conceive of our economy, which is 70% consumer-dependent, bouncing back from the Wuhan coronavirus quickly, especially since there will be many lingering concerns in regards to travel, safety, and trust.

The path forward is an arduous one. First, large segments of the American population will be exposed to the Wuhan coronavirus. Second, many Americans will undoubtedly be infected with this disease, with victims typically being the elderly and/or those with underlying medical conditions. Our most vulnerable. Third, it's not going away quickly.

Self-quarantine time alone is running at a minimum of 2 weeks, but there are staggered results popping up all over the country. What I mean by this is that another cluster might easily pop up in a month, or 2 months, or even next year. Wuhan coronavirus is the proverbial "whack-a-mole" scenario.

What does this all mean? Based on the existing infection rate it is probable that many millions of Americans will be infected with the Wuhan coronavirus and thousands will die. As America is a country that values life highly, this will have severe economic and social ripple effects; demand shock is the most obvious initial wave. Another rational wave is going to be societal push-back against viral originators responsible for deaths and economic destruction. Human nature is what it is. As previously stated, it is highly likely we entered a recession last week. We definitely entered a bear market. 

What's an investor to do? Price discovery has significantly altered the trading prices of many stocks, especially in the most affected sectors such as airlines, cruise lines, oil, etc. to name a few. Given that nobody really knows when the Wuhan coronavirus will be contained, it is important to focus on sustainability and that usually translates to quality of balance sheet and earnings.

There are many industries that do not seem sustainable if all of their demand collapses. I would avoid them. Survivors? There will be many survivors, namely in the food and beverage industries, many of which are actually experiencing tremendous demand. I like those sectors. Finally, there are some sectors (like tech) that have extremely large installed userbases which don't disappear overnight and given quarantine conditions might add to their installed userbases. I like those as well.

In times of uncertainty, having cash is a good thing; you might miss out on a quick turn of events and maybe not capture all of the upside, but when survival is on the line it is better to survive. Ultimately the Wuhan coronavirus will be contained at some level. The jury is still out on what level. Until that time it makes a lot of sense to focus on quality cash flow and survivability.