I had a money manager say something to me the other day that struck me as odd—so I thought I’d dig in a bit to see if I can rationalize his comment. He said, “We are all using the same data” when I asked him about an opinion that I heard from someone else about the stock market over the next few months. His basic point was that the market is about valuations & fundamentals” (more) and significant deviations from intrinsic value are rare, and markets usually revert rapidly to share prices commensurate with economic fundamentals. Therefore, if you use tried-and-true analysis of a company’s discounted cash flow to make your valuation decisions you will be fine over the long run.
I think the most important thing he said was “over the long run”. Because some investors do have access to fundamental data (private feeds) that others don’t and if a proprietary feed is faster and gives the investor a ‘speed advantage’ in trading then that is an unfair advantage. For example, if the price of a stock goes from $100 a share to $95, and you know that and someone else doesn’t, it makes sense to sell at $100 to a buyer when the investor knows the price is now $95. If you are a high-frequency trader and you know prices are changing millions of times a day across many securities, you can make a great deal of money.
Some investors also have access to “alternative
data” like satellite imagery to analyze information such as parking lots, web
scraping to track items such as consumer preferences and geolocation data to
analyze information such as consumer traffic to certain stores. With tools like Artificial Intelligence/Machine
Learning the new Quant 2.0 Wall-Street geniuses can take proprietary
fundamental feeds and these new alternative datasets and do Algorithmic
trading to uncover value faster than any old school hedge fund manager (example).
But at the end of the day, you don’t have access to any of these tools… So, if you can suffer through all the volatility and you trust that your money manager is on top of your portfolio’s underlying fundamentals then yes, the market can still work for you over the long run. However, just know that many strategic investors will have made a lot more money than you, on those same investments, by leveraging better tools and quant 2.0 type talent.
…you can throw all this long term investing out the window if you have a mere $7.5 billion to invest and then Bridgewater Associates can do it for you and you will likely do very well.
While the Quant’s and AI-powered algorithms can crunch numbers and make an investment decision, they can’t offer the human touch and it has become evident to me that the human touch is an essential component to long-term investing—net: you need a coach to get you through the stress of the volatility–get a good money manager.
I just started reading Ray Dalio’s new book “Principles For Navigating BIG DEBT CRISES” and I decided to ask my money manager about his thoughts on some of the concepts in the book. My first question was what he thought about the USA’s National Debt situation and if it was going to have an impact on the future economy/stock market. His answer, “it’s been an issue for years and if you worried about it you would have never made any returns.” He pontificated about a few other charming variables but for a guy that likes more detail, it was NOT a great answer—so let’s start digging and taking some notes. Ray’s book makes some assumptions that the reader understands these concepts so it’s good to do a review as I forgot most of what I learned in high school finance (wait, they didn’t teach finance in my high school–well, they should…).
We must start with the basics: What is credit, trust, spending power, and debt?
Debt is money a borrower owes in the future to a lender. Credit is the trust which allows a lender to provide money to a borrower where that borrower repays the money (and usually interest) at a later date. Credit creates both spending power and debt. The key is to use the borrowed money productively to generate enough income to pay back the debt.
The national debt of the United States is the funds that the
country borrowed (via selling securities issued by federal government agencies
such as the Treasury). If the federal government runs a “deficit” (spends
more than it takes in) the country has to borrow to cover the delta and this increases
You can find details here but ~28% of the debt is held by intra-governmental agencies and the rest (public debt) is held by foreign governments other governmental entities (Federal Reserve and state and local governments), mutual funds, private pension funds, holders of savings bonds and Treasury notes, banks, insurance companies, trusts, companies, and investors.
Note that the US published National Debt number does NOT include Medicare, Medicaid and Social Security—these are considered “unfunded obligations”. It’s estimated that the US has between $47 Trillion and $210 Trillion of unfunded obligations (here or here).
A debt-to-GDP ratio under 100% simply indicates that the
economy produces and sells goods and services enough to pay back debts without
incurring further debt. Here is a chart that shows this % since 1900 –note that
we were over 100% around the time of World War II. The current ratio is~106%
How does the USA’s debt-to-GDP ratio compare to other countries?
You can find a chart comparing all countries here. If you take all the countries around the world
and sort them by the % highest to lowest you will see the following:
How do we stack up if you include unfunded obligations in our numerator?
So, what’s the problem?
Borrowing is OK if it allows for development. However, if the return on the loan is such that it doesn’t produce enough to repay the loan then we are essentially bankrupt. We see above that for several recent years the US has been borrowing from its future. How much is too much?
By the end of the 20th century, the United States dollar
(USD) was considered the world’s most dominant reserve currency. Most countries
hold most of their reserves in USD. Why? It’s because the United States has:
large, liquid financial markets capable of taking huge investments
a reputation for safety and rule of law, so that other countries are willing to invest billions and billions of dollars in that country’s government securities
a willingness to run current account deficits indefinitely since that’s the counterpart of a capital account surplus.
Being a dominant
reserve currency causes the country’s currency to appreciate due to foreign
demand. This then dampens growth, and it
causes unemployment (US exports would be more competitive, and more people in
the US would have jobs making goods for exports).
The fact that the
USD is the world’s major reserve currency is one of the main reasons why it has
run a current account deficit for most of the last 30 years. (known
as the Triffin dilemma).
So, what are the benefits of being the country with the
dominant reserve currency? From
Michael Pettis in 2016 “it isn’t easy
to list these benefits because for all the conviction that they are
substantial, few analysts can identify them except very vaguely. The main
benefits seem to include:
It lowers US government borrowing
It allows Americans to consume beyond
Outstanding currency notes provide
The US sells economic insurance.”
Others are pointing out that the debt will cause the US to lose it’s reserve currency status and it has already started (see here). Others refute that it will happen (more) – “the US dollar will continue to be the dominant reserve currency for the next several decades unless the US government itself decides to prevent or limit the ability of foreign central to accumulate reserves in US dollars”.
Take the following propaganda with MAJOR CAUTION GIVEN THE SOURCE but if you want to see a very negative view of the US debt situation from the RUSSIAN accounting firm Awara read “An Awara Accounting Study on US Economy 2018: Signs that the US Debt-Fueled Economy Might Actually Collapse” found here. “it is clear that the present US economic system will not survive over the coming 5 to 10 years. Massive changes in the economic model would have to be undertaken either in an organized fashion (hardly imaginable) or through a mega financial crisis.”
One of the best debates that leans toward the US debt NOT having a big impact on the future economy can be found here at a podcast that I enjoy called: Money for the rest of us
Net/Net: It’s really hard to tell when/if the US National Debt will eventually sink our economic ship and I think my money manager gave me the best advice he could as I’m sure he has no clue either…