“The greatest problems are not caused by a lack of knowledge, but by the pretense of knowledge”.
That was a favorite saying of a former partner of mine, an altogether intelligent fellow who continues to do great things.
That phrase is loosely the theme of this edition of Sendero, in which I entertain members of the Saudi Royal Family, do a quick check in on where the economy stands, and come to the defense of "Americans".
For today’s musical accompaniment, I am going with 7 Seconds by Youssou N’Dour.
I Meet Saudi Royalty
“You should not talk to the woman during dinner, nor watch her.”
Those were first among a long list of instructions we received in advance of welcoming a Saudi prince and his new bride to our Bad Brothers Wine Experience here in Cafayate.
According to the VIP tour operator looking after their arrangements, they wished to learn how to mix the wine-based drinks we have on offer, followed by a tasting of our extreme altitude wines.
Afterwards, they would stay for a dinner at which I would be the only other guest.
From the starting gun, the whole thing was a bit confused. In no small part because - according to the liaison in charge of the royal couple’s arrangement - the prince doesn’t drink.
So, how, I asked myself, was I supposed to lead them in a wine tasting? Hand the glass to him, while averting my eyes from her, then describe to him the many wonderful attributes of extreme altitude wines as she listened in?
And how was dinner to work? He and I talking about weighty matters while all the time ignoring her?
Then there was the protocol about greeting them. The correct manner, I was informed, was to place my hand over my heart, bow from the waist and utter, “Your highness”.
But, under no circumstances, additional instructions made clear, was I to give her a traditional Argentine “abrazo” (hugs) or to touch her or address her in any fashion.
Would she be wearing a black burka? Probably not the ideal attire for sipping some of Cafayate’s finest, but I guess if she sloshed some the precious nectar on her get-up, no one would be the wiser.
Every day for about a week before their royal presences were scheduled to appear on the doorstep, we would receive another email with additional instructions.
“There should be no wine on the table”
“The waiter should not address them directly”
“They should be seated in a private room, out of the sight of the public”.
Frankly it got to the point where I was ready to call the whole thing off. That I didn’t was only because I had never before had dinner with members of the Saudi royal family. Couldn’t miss that, even if it meant playing the head stooge. Scraping and grovelling with hand over heart while my eyes roamed anywhere, but anywhere, other than on the princesses personage.
And so it went until finally the big day arrived, heralded by the arrival of their private jet into the small local airport.
At the appointed hour, they arrived, preceded by a tour guide I knew from previous visits.
Stepping into the entryway of our restaurant, the guide shifted aside to the royals pass, and there they were…
… a young couple, in their late twenties or early thirties wearing casual shirts and jeans. Before I could embarrass myself, and them, with the whole grovelling thing, she stepped forward and stuck her hand out boldly and we shook hands, firmly.
As it turned out, they didn’t want to blend their own drinks, or do a wine tasting - neither of them drank. They had heard about the restaurant from the tour operator and simply wanted to spend a quiet evening enjoying the ambiance.
I feel compelled to add I was very happy all the protocol had flown out of the window straight away, because this princess was a real looker. A solid 9+, if that old rating system still holds. Therefore, I would have failed rule #1 straight off.
To make a long story short, I gave them the nickel tour of the place, then settled them in our VIP tasting room for dinner on their own. This being their honeymoon my joining them seemed inappropriate, so I excused myself to enjoy dinner and a lively conversation with my son in the courtyard.
After dinner, I rose to leave and found they had moved to a table behind us, out there with the hoi polloi, and we chatted awhile.
It turned out that the whole honeymoon was somewhat last minute, as she had broken her arm just before the previously scheduled wedding. I was surprised to learn the prince had been born in Boston and raised on Beacon Hill.
In the end, I greatly regret I didn’t have dinner with them, because they were delightful people, thoroughly modern and witty. Which goes to show, people are people wherever you go.
Except, I guess, for the Saudi women, who, if they want to be the people they want to be, need to take their holidays abroad.
A Quarterly Check Up
Having spent a lot of my career in various corners of the financial industry: mutual funds, banking and investment research, I’m here to attest that the vast majority of people involved in the industry are masters of pretending they know something they don’t.
That doesn’t hold true on the operations side of the business where there are a lot of very smart people with a deep understanding of the complex mechanics involved in the modern day investment industry.
But when you go upstairs, to the lofty climes of providing brokerage and investment analysis, the majority are glorified sales people whose most ardent hope is that they won’t underperform their peers on a quarterly basis.
Should that happen, and it happens regularly, they are then required to spend a few weeks or so on the phones and in conference rooms with clients prevaricating as to why they underperformed.
Underperform in two consecutive quarters and life becomes pretty drab.
Consequently, for most of these paper gurus, 2018, during the course of which the S&P 500 lost 6.8%, must have been laborious. Most of those losses were compressed at the end of the year, with the S&P 500 losing over 13% between October 1 and New Years. Therefore, any analyst that was bullish going into the year, or who took advantage of market setbacks in the first half of the year to buy more stock, had a lot of explaining to do at year-end.
Of course, specific sectors did much worse. For example, the energy sector took a solid 23% chop to the neck. And, interestingly, even the fair-haired tech sector also fared poorly, losing about 17% in the final quarter.
Watching the losses unfold into November, it became obvious that any portfolio manager worth their salt would start selling to capture tax losses. That added extra pressure, with the S&P 500 falling just shy of 11% in December alone.
So, not a fun year for those whose business is to help people make money on their money.
Which brings me to the question, what will 2019 hold?
Readers of any duration know I believe, staunchly, that no one knows with even a little bit of certainty where the market will trade a week from now, let alone in a year.
Yet, large businesses are predicated entirely on the conceit that their in-house gurus have a magic ball or secret juice that gives them the gift of premonition. It just isn’t so.
How can I say that with such conviction?
Simple. If someone actually did know, they would have all the money in the world.
Warren Buffett, who has a lot of the world’s money, didn’t make that money by betting on the direction of the market. Rather he bet on specific companies his research told him were undervalued. Or about which he had inside information, often having to do with changing government policies and priorities.
Yet, pretty much everyone has an opinion on the market. In that regard, I agree completely with another former partner of mine, a self-described perma-bear, who is fond of saying that a person’s outlook on the market has much more to do with their mental attitude and outlook on life than it does the market.
How else do you explain the wide variances in financial headlines?
Recently the savants at Bank of America Merrill Lynch ruminated that when the market dips, investors should “Keep buying.”
However, on the very same day one of the white shoe whits at Goldman Sachs warned investors, “Don't expect significant stock market gains in 2019”.
For the record, Goldman is the second largest investment bank in the United States and BOA-ML is number three. Which is to say, they can afford to hire the best of the best and the brightest of the brightest.
And yet they take opposite views.
What about the biggest investment bank, JP Morgan? They see a respectable 10% gain by year-end 2019.
Of course the big investment banks are only a few stars, albeit big ones, in the cluttered constellation of investment prognosticators.
Using a variety of tools, systems, charts, computer programs, tea leaves, astrological signs and make believe B.S. designed to appeal to the paying public, the predictions of these fools and charlatans cover the full spectrum of what could possibly happen in the 12 months ahead.
To make the point, here is a screenshot of the front page of a major financial portal this morning.
One might categorize the outlook of today’s crop of forecasts as: negative, negative, positive, positive, very positive, negative.
So, what’s an investor to do? Throw a dart at the list and act accordingly? Or ignore the lot?
Obviously, I vote for the latter.
Having done so, one then needs to set one’s own course for making investment decisions.
For most of our portfolio I believe in focusing on companies that offer a deep value, then for a bit of excitement, we selectively load up on the disruptive companies we focus on in our RiskHedge.com project. Taking into account the inevitable pullbacks all stocks suffer in a general sell-off, these stocks should do very well over time, almost no matter what happens to the underlying economy or the markets that echo the economy.
That’s because these disruptors are not only upending the competition, but entire commercial sectors, and even the world as we know it.
Sure, another company can come along to usurp the usurper, but that is a business risk we can fairly easily analyze and monitor for.
I am quite comfortable backing up the proverbial truck on a well-run disruptor.
For further diversification, we also own smallish positions in gold and well-run gold stocks, and in selective emerging markets. And periodically, we buy the equivalent of insurance in the form of inexpensive out of the money puts. At the moment those puts are very cheap.
The Big Picture?
Just because it’s impossible to reliably predict where the economy is headed next, doesn’t mean you shouldn’t periodically take a look behind the headlines to see if anything untoward is looming that has the potential to trigger a serious setback.
When I do look at the bigger picture, as I try to do every few months, I don’t overly complicate things, but stick to a few key data points. For example...
Real Personal Income. This is the amount of money a person is earning, adjusted for inflation. Here’s what the chart looks like for the past five years.
As long as the all important consumer, the spending of which drives about 70% of the US economy, isn’t in a tailspin, why should the US economy be in imminent danger?
Bank Prime Rate. This is the rate banks charge their best customers, and the basis for all consumer rates. Of course, rising rates serve to dampen the economy, as people will tend to borrow less, and that causes a knock on effect in consumer spending. If there is a big enough increase in the prime rate, history has shown that the economy is more likely to hit a wall. This is the picture of the prime rate for the past five years.
Definitely on the rise. But it’s important to keep these things in perspective.
Here’s the chart going back to 1990.
While the recent move upwards is clear - and a bit concerning - the longer-term chart mainly serves to show just how devastating the 2008 financial crisis was, in that it caused the government to screw the prime rate down to historically low levels.
With a recovering economy, a return to something approaching “normal” levels was inevitable. But the prime rate is still nowhere near the levels it reached ahead of the last three recessions, and with the Fed recently announcing it was taking a breather from further rate hikes, we could see them come down. However, even if they don’t, all the arm waving about rising rates seems overblown based on the big picture.
Real Personal Disposable Income. Basically, this is the amount of money left over at the end of your paycheck. If the cost of servicing loans was hitting consumers where it hurt, it would show up here. Here’s the five year chart.
Now here’s the same data going back to the 1950s. As you can see, other than during some relatively short and inevitable blips, people are earning more, and keeping more, than ever.
Non-Performing Loans. Non-performing loans as a percentage of total loans are another useful indicator of whether rising interest rates are causing consumer stress. Here’s the five year chart.
As you can see, non-performing loans are going down. No real angst there.
Total Consumer Borrowing. Given the somewhat higher prime rate, and the tighter lending standards reflected in the trend towards fewer loan defaults, one might imagine that consumer borrowing would be down, a negative portend for the economy. Here’s the five year chart.
Of course, you may have your own favorite indicators that point in a different direction. If so, feel free to drop us a note in the comments section below.
However, as I see it, if the economy is about to trip over a cliff, it is not obvious.
Therefore, the choice to be fretful about the economic outlook really does come down to your personality and whether you view the world through a dark lens, or one that is somewhat brighter.
Finally, I would like to mention a favorite rationale for an impending recession. Namely that the current economic expansion, which officially began in June of 2009, will shortly rank as the longest in US history. Therefore, according to a number of pundits, the sheer weight of history alone must mean the US economy will soon tip over into recession.
Yet Australia hasn’t had a recession in 27 years, so just because the latest US economic expansion will soon be the longest in US history, doesn’t actually mean it has to end any time soon.
Sure, US government deficits continue to soar. But there are numerous countries, Japan being the paradigm, which prove a country can run massive debt to GDP numbers without obvious harm, and do so for decades.
So, don’t worry so much. It’s bad for your health.
That’s my periodic check-up. Hopefully it is of some use to you.
In Defense of Americans
A couple of weeks back my wife and I had to drive into the nearest largish city to deal with some run-of-the-mill immigration compliance paperwork (yes, they have rules about immigration here, outrageous!).
At tea time, which around here is between six and seven o’clock, we went into the hotel restaurant and ended up conversing with an English couple sitting next to us.
They were both doctors who had also worked in academia. They were dedicated wine travellers, snobs one might say, and so we got talking about the regional wines. In the end, as they were passing by Cafayate, we invited them to come to our restaurant to share a meal and subsequently met up with them a couple of days later.
While our conversations were lively and generally interesting - they had been retired and had spent over 12 years travelling to all sorts of interesting sights around the globe - here and there a few strongly held views on their part started to creep in.
For instant, as with most (all?) of the academia in Britain, it was clear they were vehemently opposed to Brexit. After this rose to the surface a couple of times, I stated quietly that I was pretty sure that come what may, Britain would do just fine, as it has for the millenia. And why wouldn’t it? That seemed to put an end to that topic.
Over the course of our interaction is also became clear that our new friends harbored a hearty dislike for Americans. For example, rattling off a list of nationalities for some reason, the husband presented the list as, “The Italians, the Germans, the French, the Bloody Yanks, the Australians…”.
Finally, given my borderline Tourrettes, I said to his wife, “I get the impression you don't care much for Americans.”
At which point the fellow explained that as young doctors they worked briefly in a hospital in the US. Early during their stay they were invited to dinner at a colleague’s house. Over the course of dinner - the story unfolded - the colleague had pointed to a painting over on the dining room wall and said, “That painting is worth $150,000.”
My new British friend related that he was appalled. Because rather than appreciate the painting for any aesthetic value, the crass American measured its value only in terms of dollars. He visibly grimaced at the memory, accented with a disappointed school teacher’s “tsk”.
It all reminded me of a time long ago when visiting the French aunt of my first wife, as we used to do with some regularity. We would always take her out to a specific Parisian Brasserie famous for pig knuckles, which the woman enjoyed almost as much as making snarky comments about the Americans.
On what I recall was the third such visit, I asked her, merely out of curiosity, “It seems you don’t like Americans. I’m a little puzzled. After all, it seems like they came to the rescue of your nation on two separate occasions, at the cost of a lot of American lives. So, what is it that makes you dislike them so much?”
At which point the staunch old Madame literally started tearing up, and in a choked voice said, “Oh, no, I LOVE the Americans! I still remember the handsome young men in their uniforms as they marched down the Champs d'Elysee after liberating the city!”
So, what is it about the Americans that cause so many other nationalities to dislike them?
Perhaps it is the general sense of exceptionalism some yanks are happy to demonstrate at every opportunity.
“Well, in America we do it this way!”
During the years of the British empire, I imagine the Brits felt much the same way as they lorded it over the colonies.
Or, maybe it’s the lack of patience many Americans show when it comes to the casual disregard for process one finds in so many places around the world.
“What? Why should I have to fill out another form? It makes no sense!”
Then there’s the tendency to directly express disapproval, often in the most strident terms, when something doesn’t go exactly according to plan.
A number of the yankees in the community here in the middle of nowhere Argentina hesitate barely a minute before dashing off an angry, accusatory email to anyone they feel may have somehow disadvantaged them.
Copied to everyone they can think of, just to grind it in.
I can tell you for a fact that the Argentines, and I guess the Brits and the French, among others, really don’t understand and certainly don’t appreciate that sort of thing. They find it impolitic and downright rude.
As one dear Argentine friend once explained it to me, “If you send me an email calling me a chicken shit you are calling my father and my father’s father chicken shits! That’s because I see it as my responsibility to act in a way that upholds the family honor that was passed to me by my ancestors.”
Then these same American email flamers wonder why the person’s door has slammed shut in their face, and stays shut.
In the defence of the American, if one insists of grouping them together as so many do, I have always found them generous and wanting to be of help. They are, in fact, by the sheer volume of their giving, the most charitable nation in the world, though in terms of individual giving, Indonesia, oddly, tops the list.
But in reality, the idea of an “American” is a misnomer.
Sure, they are a people who share a common geography. However, within the confines of its borders, there is a massive difference in the population. A Maine real estate broker and a Los Angeles gang member couldn’t be more different. Likewise an Alabama dirt farmer and a urbane denizen of San Francisco.
It is said that the United States is a cultural melting pot, but that’s not really true because there are any number of distinct cultures within its borders who are happy to remain distinct.
By contrast, though Argentina is populated by relatively recent migrants, pretty much everyone is synced up when it comes to things like music, food, language… pretty much everything. Sure, there are some regional differences in slang and the style of dress, but those differences are inconsequential when compared to the cultural mash-up in the United States.
The next time someone complains to me about the Americans, I think I’ll ask them to be a bit more specific.
And with that, it is off to other tasks which, this afternoon, involves a wine tasting. It’s a hard job, but someone has to do it.