Author Archives: SMS

Influential Reads – August 2020

Reading Time: 2 minutes

August 2020

Good month all the way around.  I have re-made my commitment to stop scanning the major news sites.  They give me anxiety for a variety of reasons.

Updated stats through August:

ArticlesBooks
January794
February781
March962
April964
May1273
June493
July780
August933
September
October
November
December
Total69620

Here are my most influential reads – in no particular order:

  1. An expert on human blind spots gives advice on how to think – “And so consequential decisions tend to be the ones we don’t have experience with. They’re exactly where there’s stuff we don’t know, and that’s exactly those types of situations where we should be seeking outside counsel.”
  2. The End of the Beginning – “Economic policy will hamper mean reversion.”
  3. Where to find the hours to make it happen – “The hours don’t suddenly appear. You have to steal them from comfort.”
  4. Why Would Anyone Own Bonds Right Now? – “There are no easy answers in the current low rate world we’re living in.”
  5. Why Markets Don’t Seem to Care If the Economy Stinks – “The most visible and economically vulnerable industries are also among the smallest, based on their market-capitalization weight in major indexes such as the S&P 500.”
  6. The Times that Try Stock-Pickers’ Souls – “There is no new era.  Stocks are still worth the present value of their future cash flows.”
  7. What, Us Worry? Lack of New Stimulus Hasn’t Roiled the Markets – “As pointed out here a few weeks ago, the unprecedented $5 trillion in fiscal and monetary aid pumped into the economy during the second quarter exceeded total gross domestic product for the period.”
  8. Staying Focused with a Simple Method – “When you notice yourself avoiding something hard or uncertain … the method is to turn towards it.”
  9. Focus Week: Rediscover Depth – “For the sake of concreteness, here is one specific strategy among many that I’ve found to be effective: read two chapters from a book every day; with at least one of the chapters read in a scenic or otherwise interesting setting.”
  10. 51 Years Later, the Cuyahoga River Burns Again – “Late last year, the Trump administration made changes to the Clean Water Act that strip its protections from 60 percent of streams in this country, along with 110 million acres of wetlands.”

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.

Influential Reads – July 2020

Reading Time: 2 minutes

I got shut out on books.  Did I mention moving sucks.

Updated stats through July:

ArticlesBooks
January794
February781
March962
April964
May1273
June493
July780
August933
September
October
November
December
Total69620

Here are my most influential reads – in no particular order:

  1. Creating Impeccable Structure for Your Life – “We deeply feel the messiness of our lives.”
  2. Best Route to Wealth: Savings or Earnings, a Debate – “The things we own, and more broadly the lifestyle we lead, often end up owning us.”
  3. The 100 hour asset – “We’re all so busy doing our work that sometimes we fail to build a skill worth owning.”
  4. How a $30 digital product cleaned up at the Grammys – “YoungKio’s story shows that creating small digital projects is a fun, accessible, and “non” gatekept path for creative expression with a ton of optionality.”
  5. 4 Surprising Steps to Achieve Your Long-Term Financial Goals – “A much better approach is to look directly at your wants and desires. Don’t ignore them. Instead, understand them.”
  6. The Things We Take With Us When We Move – “Sparks Joy.”
  7. Chris Wallace masterfully turned in what might have been the best TV interview ever with President Donald Trump – “Watch for yourself. Ultimately, how the president did is your call. But there’s not much debate about how Wallace did. He was excellent.”
  8. Intel ‘Stunning Failure’ Heralds End of Era for U.S. Chip Sector – “Intel Corp.’s decision to consider outsourcing manufacturing heralds the end of an era in which the company, and the U.S., dominated the semiconductor industry.”
  9. Low Real Yields – You Can’t Avoid Them – “Indeed, if you can figure out a way to buy an asset without locking in the fundamental reality that the real risk-free rate is -1%, please let me know.”
  10. The Grifters, chapter 1 – Kodak – “I mean … I knew things were bad in Rochester, but I didn’t know they were that bad.”

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.

Influential Reads – June 2020

Reading Time: 2 minutes

And the pendulum swings the other way…

We moved this month, which cut into my reading time and impacted what I was willing to read.  Also, the news is not terribly informative these days, since I am pretty sure nobody knows what is going on.

Updated stats through June:

ArticlesBooks
January794
February781
March962
April964
May1273
June493
July780
August933
September
October
November
December
Total69620

Here are my most influential reads – in no particular order:

  1. The next big problem for the economy – “Social distancing means financial Armageddon for commercial real estate and municipalities in coming months”.
  2. Don’t Lose the Thread. The Economy Is Experiencing an Epic Collapse of Demand – “Other data points to a severe but slower-moving crisis of collapsing demand that will affect many more corners of the economy than those that were forced to close because of the pandemic”.
  3. America is losing the stomach to fight Covid-19 – “So what is likely to happen? The most likely outcome is a second coronavirus wave in the coming months. Many assume the virus goes quiet when the temperature rises. There is no scientific consensus on this.”
  4. The Weekly Review: A template for this sacred ritual – “The most productive people practice a sacred ritual: The Weekly Review.”
  5. Farewell Yield – “After four decades of falling interest rates, it seems safe investments offering attractive yields have finally disappeared.”
  6. Beware Fed Bond Buying’s Unintended Consequences – “More than $1 trillion of investment-grade corporate bonds have been brought to market this year, at twice the year-earlier pace. High-yield issuance is running more than 50% higher, at $180 billion.”
  7. Don’t Return to the Office Until You Read This – “You should be identifying the core workers that you need to be physically present…Everyone else stays home.”
  8. A Tidal Wave of Bankruptcies Is Coming – “A run of defaults looks almost inevitable. At the end of the first quarter of this year, U.S. companies had amassed nearly $10.5 trillion in debt — by far the most since the Federal Reserve Bank of St. Louis began tracking the figure at the end of World War II.”
  9. Trust Masters, not Models – “So look for those people in market space: the ones who can tell by the sound of the squeal what is really going on under the hood. They won’t always be right, but they will have the best guesses…especially when something unusual happens.”
  10. Higher Ed: Enough Already – “It’s time to end the consensual hallucination between university leadership, parents, and students that in-person classes will resume in the fall.”

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.

Influential Reads – May 2020

Reading Time: 2 minutes

Crushing my book reading goal!  Also a high number of read monthly articles as I made a concerted effort to read some older stuff I had saved.

Updated stats through May:

ArticlesBooks
January794
February781
March962
April964
May1273
June493
July780
August933
September
October
November
December
Total69620

Here are my most influential reads – in no particular order:

  1. Getting Rich vs. Staying Rich – “Scrappiness and the ability to think differently turns into complacency and the desire to keep things the same.”
  2. Death of the office – “Offices have always been profoundly flawed spaces.”
  3. No Inflation For Years to Come – “In the meantime, Unemployment, food, and lack of rent payments are a much, much bigger issue than fear of inflation from the same people who have been fearing inflation for 3 decades.”
  4. Inflation Shocks, Inflation Vol Shocks, and 60-40 Returns – “the potential results are so asymmetrical”
  5. The Economic Recovery Rests on Getting Consumers to Spend. It Won’t Be Easy. – “The $22 trillion U.S. economy rests on people buying stuff; consumer spending accounts for 70% of total economic output.”
  6. Americans Didn’t Wait For Their Governors To Tell Them To Stay Home Because Of COVID-19 – “The Cuebiq data suggests that behavioral changes were largely driven by people making a voluntary choice to stay home rather than being forced to do so by a state-sanctioned stay-at-home order.”
  7. The Risks – Know Them – Avoid Them – “It serves to highlight that being in an enclosed space, sharing the same air for a prolonged period increases your chances of exposure and infection” Stephen here: a glaring omission is airplanes?
  8. Work and the Deep Life – “If you subscribe to deep career thinking, by contrast, you focus intensely on training high-value skills, like an athlete looking to maintain an edge.”
  9. How I learned to be better at active listening as a manager – “Conversations are a tricky thing—especially when it comes to difficult topics, like receiving/giving feedback, or talking about a very personal topic. As a manager, this is the real work.”
  10. Nobody Knows What Is Going On – “If there’s one thing we know for certain about this pandemic, it’s that we know almost nothing for certain about this pandemic.”

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.

Barely Enough Time to Miss One Payment

Reading Time: < 1 minute

As the impact of the COVID pandemic unfolded, the speed at which the fiscal and monetary responses were rolled out seemed almost too fast.  My thought was that people barely had time to miss one mortgage payment.

Well, the data is in for April and it seems like lots of people did just that.  

“At 6.45%, the national delinquency rate nearly doubled (+3.06%) from March, the largest single-month increase ever recorded, and nearly three times the previous single-month record set back in late 2008.1” 

Data is only available through April.  May will be interesting.

  1. Black Knight’s First Look at April 2020 Mortgage Data  (https://www.blackknightinc.com/black-knights-first-look-at-april-2020-mortgage-data/)
  2. Calculated Risk Blog (https://www.calculatedriskblog.com/2020/05/black-knight-national-mortgage.html)

A Word: Hertz Bankruptcy

Reading Time: 2 minutes

A word on the Hertz Bankruptcy.

One of the most leveraged companies in one of the most impacted industries, managed to limp along and delay the inevitable for almost a full quarter. The Hertz filing is likely just the tip of iceberg…

I wrote previously that the velocity of change is much more difficult for companies to handle than the magnitude.  Hertz had to deal with both.  The travel industry has been one of the most impacted (velocity & magnitude) sectors during the COVID pandemic and response.

Hertz’s fleet of 700,000 vehicles, which are mostly rented from airports, has largely been idled due to the slow down in travel caused by the pandemic.  Complicating the matter is the value of these assets are falling as vehicle sales slow and used car prices fall.

Hertz also has $21 billion in long term debt. 

All of these factors combined into this bankruptcy filing came with lightning speed – relative to filings – adding Hertz to the short list of companies in the “no coupon club.”

Bankruptcy filings are going to be a lagging indicator. And there’s going to be more to come.

The Recession No One Believes In

Reading Time: 6 minutes

The recession no one believes in is here to stay.

My vantage point for the COVID pandemic and response has been somewhat unique – sitting here in Lower Deer Valley Utah since mid-March.  I am fortunate to fall into a line of work that transitioned to work from home seamlessly.  However, that’s not the case for many, especially around here.  No tourists, no work.

The same concept applies to many parts of the economy.  No shoppers, no store sales.  No diners, no restaurant sales.  No vacations, no travelers.  No sporting events, no ticket sales, etc. 

The likely outcome appears to be a fairly broad, deep, and lengthy economic recession (80% probability).  But that expectation looks to be in the minority using the S&P 500 as a proxy of the consensus view.

Source: MarketWatch

There seems to be a disconnect between the reality on the ground and expectations.  I think there are few things going on:

  • Velocity of the pandemic & response
  • Lag in economic data & company reporting
  • Demographics of those impacted by initial shutdowns
  • No single source of issues
  • Hope for a rapid return to normalcy

Velocity: I wrote earlier about the absolute stunning velocity of the global shutdown due to the COVID pandemic.  It’s almost incomprehensible.  It’s like nothing anyone alive today has ever experienced.

Lag: Given the speed of the fallout and the fact that impacts to U.S. companies did not truly start until mid-March, barely any of the financial impact is being reported in Q1 financial reporting.  Q2 results will be telling.  Those won’t be available until July; still two months away.  Same issue with most economic data; it’s a lagging indicator and barely incorporating the impacts yet.

These next two charts are not helpful – folks have barely had time to miss one mortgage payment and it’s not in the data yet.

Demographics: The initial stay at home orders have had a disproportionate impact on certain cohorts.  Many white collar workers (like me) simply picked up our laptops and started working from home.  No fear of lost income.  No major life setbacks – other than Mrs. SFTE zoom-bombing my meetings.  Not the case for many lower wage, retail and service jobs.  

Guess which of these cohorts is more invested in the market?  Hint: The groups not being impacted (yet). So be careful about using their views to assess the current state.

Source:  During the Great Financial Crisis, the source of the issues was concentrated in the financial system.  I’m not sure if the breadth makes the current situation better or worse over the longterm, but it does make it harder to understand.  

Headlines like this are more tangible than hand-made cardboard signs in windows of thousands of small businesses.

“A single death is a tragedy; a million deaths is a statistic.”  ― Joseph Stalin 

Return to Normalcy: There’s also quite a bit of hope for a rapid return to normalcy.  I’m all for hope, but let me quash that notion.  I would love to get back to normal, but that doesn’t exist anymore.  This is like 9/11 in terms of resetting normal.  I will never touch an ATM or gas pump handle with the same innocence again.  There is no f-ing way I am getting on an airplane any time soon. “Any environment that is enclosed, with poor air circulation and high density of people, spells trouble.”  

Mrs. SFTE would fight you tooth and nail if you tried to take her into a restaurant.  Those dentist appointments for mid-Summer, cancelled.  Check with me in six months (and no, I will not have two cleanings back to back so no pent up demand here).  Summer sports camps, ha.  Summer vacation plans, cancelled.  This is all lost income to someone, somewhere.

Yes, we’re a bit weird, but I bet not that weird.  If you haven’t noticed, this virus can kill you.  I’m 101% against being killed.  My guess is so are most people. That is why the data shows trends like this:

Source: FiveThirtyEight.com

So if people did not wait for stay at home orders to alter their behavior, how much will changing those orders affect their behavior? Not enough to make the recession go away.

Here is some economic data we do have:

The Initial Claims graph just broke the y-axis:

Lots of jobs have been lost (stunning velocity):

Unemployment rate is currently worse than at the peak of the Great Financial Crisis:

Approximately 70% of the economy is based on consumer spending, so no good news in this chart:

The handicap to the magnitude and duration of the recession is the amount of fiscal and monetary intervention being deployed.  This also falls into the incomprehensible and unprecedented category. 

However, by and large, these measures do not seem to be creating jobs, simply offsetting the financial impact of the shut downs.  At the end of the day though, it is jobs that matter.  Jobs will drive spending, and spending drives over two thirds of the U.S. economy.

“A better measure for how real people experience the business cycle: the ebb and flow of jobs creation. Losing your job is a recession; finding employment represents recovery. Looking at the business cycle through this lens paints a more complicated picture.

Perception on Main Street is always important for recoveries, and that will be true in the extreme this time. Given the sharp, dramatic jobs losses, which will probably get worse, sentiment in the broad population will be highly relevant for charting the path of the post-recession trend. On that front, jobs will arguably be the most relevant stat.

With that in mind, consider how private employment has fared on a rolling one-year basis in the past. As the next chart below reminds, the labor market often contracts through a recession and for a number of months after the downturn officially ends, based on NBER dates. In some cases, a positive one-year gain in private employment doesn’t arrive until several years after the recession’s official end.” Source: CapitalSpectator.com

Based on history, jobs do not recovery quickly from recessions:

And the jobs picture is likely to continue to deteriorate.  My sense is that there are also a lot of tough decisions going on in corporate boardrooms all across the nation.  You don’t know what Q2 is going to look like for most companies, but by now the current reality is fairly clear for most managers.

This chart is through March:

My investors are encouraging all their portfolio companies to renegotiate leases, defer 401k payments, stretch payments to vendor, and renegotiate contracts.  There is someone on the other side of each of those decisions who is going to be missing some income.

Somewhat obscured by the COVID pandemic is an oil crisis and simmering trade war, each with their own economic fallout. The oil crisis is threatening a major source of high paying jobs in many parts of the U.S.  The opposite was true during the Great Financial Crisis, when the budding shale boom was counteracting that recession

So, as you assess the likelihood of a deep and prolonged recession, keep in mind that the velocity and disproportionate initial impact is creating distortions in the data and news cycle. 

Broader impacts are coming.