US corporate margin reset

I’ve been highlighting the need for US corps to “reset” margins to make up for the excessively asset-light business models that have come to the fore the past three decades. Has the Great Reset begun? Perhaps. Empirical Research Partners, LLC has a report out today highlighting that Capital Expenditures are up 20% ytd for the S&P 500 vs. earnings that will barely be positive. Is this the beginning of that new spending? We shall see. If so, companies that can afford to invest during the downturn should do so. Those that can’t will continue cost-cutting/hewing to the prior model. On the capital …

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Decision making in Russia.

Decision-making under conditions of uncertainty is hard, even when you have “good” information. And we necessarily assume that high-level policy-makers have at least a marketplace-range of information as an input into the process. But what if we’re wrong? What if the information available to, for instance, the leader of a country, is so poor, that the decision-making necessarily following from it is exceptionally bad? Garbage in; garbage out. That scenario would explain (but not excuse) what heretofore seems inexplicable: R’s invasion of Ukr and its subsequent decisions to double-down, triple-down, etc. In the most recent issue of Foreign Affairs Magazine, Boris …

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The US midterm elections.

This is my statement on the midterms. It will not sway anyone, but given the high stakes, I wish to be on the record.  Across the nation, the ballot offers voters two very poor options. The first is the radicalized party in power offering a dizzying array of bad policies, in energy, in social matters, in economics, in education. The challenger radical party would toss out the nearly unique, pathbreaking system built up over the past 250 years. They would do so in the service of an organized crime family led by a grifter-in-chief who finds sedition and supporting hostile …

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“Company loyalty will make you poor.” Really?

This recent job advice on social media caught my eye, as it was posted almost to the day of my 20th work anniversary at my current employer.  That coincidence set me thinking about the nature of employment in the modern age.  And from that perspective, hitting two decades stands out. I’m posting this on LinkedIn, which is a website designed mostly around getting a new job, not keeping your old one. And I work in financial services, where the poster’s advice of jumping from lilly-pad to lilly-pad is assumed by many to be the way to fame and fortune. And …

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Down markets and higher returns.

The market has declined by 25% in nine months. No one is particularly happy about that, but the rapid reset of prices does provide an opportunity to remind investors about basic investing math. In this case, the issue is expected future returns after a sharp move in the market, either up or down. And that math is somewhat paradoxical.  Consider, for instance, investment in the income stream—the dividends—of a diversified portfolio of stable publicly traded companies. The cash yield at time of purchase in 2021 is 4%. Fast forward to September 30, 2022, and the price of the portfolio has …

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For want of a nail, a shoe was lost…

The United States has now had more than three decades of neo-liberal globalism which has favored outsourcing, off-shoring, margin improvement and earnings growth above all else. Encouraged by the capital markets, corporate America has privileged short-term efficiency over long-term efficacy.  Capital spending on hard assets is down as a percentage of sales; intangibles are up. A benign post-Cold War geopolitics and an addressable labor cost differential allowed us to import deflation. We’re not quite at the “virtual” enterprise level, but we’ve moved beyond the polite and acceptable “service” economy that replaced our prior “manufacturing” engine.  At the same time, declining …

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“Once more unto the breach, dear friends, once more.”

The universally respected and admired Michael Mauboussin has chimed in on the now political issue of share repurchase programs. His opinion piece in the FT this week in defense of them tries to clear up what he considers “confusion and sloppy thinking” critical of buybacks. Cliff Asness, his equally formidable ally in support of buybacks, has made similar points in print recently. Wrestling with either of these finance heavyweights is done at one’s peril. But I can’t help but add some additional color around their assertions from the perspective of a dividend investor. I’ve spent the past two decades competing …

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Dividend investing is! sustainable investing

Dividend investing was “sustainable” decades ahead of the current frisson of ESG-based sustainability. Think about it. The attraction of an income stream—whether of a publicly traded or closely held asset—is its value over time. Whereas a “price only” asset can be bought or sold tomorrow with the intention of profiting from a change in price a week or month from now, an income stream-based asset delivers its worth over many years. Investors might agree or disagree as to the current value of that income stream—and put a changing, daily price on it—but the NPV of the income stream is measured …

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Stock market drawdowns during retirement…..

A follower wrote in to suggest a stronger assertion of the value of dividend-focused investing for retirees concerned about drawing down their portfolio. He argues that for those investors, the sequence of their returns matters hugely, especially in a market not moving up steadily. (He was responding to my post about the difference between a harvested capital gain vs. a dividend payment.)  He writes: “The argument goes that there’s no difference between an income stream derived from selling stocks or one derived from amassing dividends. But that isn’t true. Selling stocks in a bad year means selling more stocks. Dividends …

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A dollar may be fungible; how it is generated is not.

The recent market sell off has provided investors an opportunity to reconsider a fundamental belief in modern finance and investment. And that is that investors are indifferent between the two forms of return, a harvested capital gain or a cash dividend payment. That notion underpins pretty much all of modern stock market investing, from the calculation of return, to the capital allocation of corporations, to the behavior of investors. In short, it’s a biggie. And in a rising market, it looks like a pretty good assumption, since most of the time the market is up, open and liquid. The belief …

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The Language of Career Transition 2/x

A continuation of a LinkedIn post on career transition: 2/x In retrospect, I liken my career transition mostly to learning a new language.  By language, I mean not high-school French, but language in the broader sense of a means of communication, an agreed-upon set of references, of metaphors and understandings. Music and mathematics are languages in that sense, and recognized as such. Computer coding languages are narrower but the same. Trained in history and having learned Russian, I was completely mute in regard to the language of business, finance, and investing. I don’t want to downplay the technical skills involved …

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Twitter Posts from February 7, 2022 to the present on the geo-political situation in SE Europe

One month in, got some right; got some wrong. Will continue to update, at east for a while. March 20, 2022 A forceful reminder of why, particularly now, we should be engaging Russian culture more, not less. Please read this. As Morson fans already know, Saul is incapable of dull or shallow thinking. https://quillette.com/2022/03/19/putins-russian-and-pushkins-russia/ March 20, 2022 Sadly, the death toll from WW I continues to rise, yes, the First World War. The decisions/treaties/boundaries (Sykes-Picot, Soviet “Union”, etc)/movements associated w/the “Great War” and the years immediately following (1918-1922) are still driving today’s geopolitical and military realities. The tragedies of WW …

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The NBN interview with the editors of The Life Cycle of Russian Things.

This collection of articles, edited by Matthew Romaniello, Alison Smith, and Tricia Starks, takes up the history of material culture over the past several centuries of Russian history. Widely diverse objects such as maps, textiles, building materials, cigarette cases,fish guts (yes…), samovars, samizdat, and even the T-34 tank are viewed in light of their role in Russian society. Hence the collection’s striking and unusual title: The Life Cycle of Russian Things: From Fish Guts to Faberge, 1600 to the Present (Bloomsbury Academic, 2022).   Tune in for my conversation with the authors: the NBN interview

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Episode 23: Paul Schmelzing on the long-term decline in rates

Financial historian Paul Schmelzing takes on many of the assumptions of 20th century financial economics–about risk-free rates, real rates, risk premia–and suggests that they fail the “out of sample” test.  How has he done that? By meticulously creating an 800 year data set that indicates more than six centuries of declining returns. In the process, he takes on Thomas Piketty’s claim that returns on financial assets have consistently exceeded broader economic growth, leading to ever greater economic inequality. Not so says Schmelzing. If you are thinking about asset allocation for the next decade or so when rates are supposed to return …

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Episode 22: Ed McQuarrie on the importance of 19th c data for your 2022 asset allocation.

Consider the shibboleths of our trade, deeply embedded in our risk models, our IPSs, our return expectations: stocks are better than bonds over time, stocks are risk assets, bonds are risk-control assets, a resulting equity risk premium, with real growth from equities.  What if it turns out that these are not exactly true? What if these conclusions are based on incomplete data? That would be a problem, wouldn’t it?  And what about the present time, what’s unusual about it compared to earlier investment periods? These answers and more when  Edward McQuarrie, retired business professor from Santa Clara University, joins me …

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A meditation on trust in finance. Yes, you read that correctly.

I have been wondering about the role of trust in modern finance. To judge by the academic literature and the dominant rules and formulas, it has no role whatsoever. I find that paradoxical, to say the least, because trust is inseparable from participating in modern society. Everyday we make judgments, including economic and financial ones, based primarily if not exclusively on trust, as opposed to a calculation of odds, risks and rewards, costs and benefits. Academics refer to these daily challenges as exercises in “decision making under conditions of uncertainty.” Modern finance tries (and has failed) to quantify that decision-making …

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Leading from the middle: The NBN interview with John Roy Price

History is told, it is said, by the victors. And so it is in regard to Richard Nixon. We all know how his presidency ended. What too few of us recall or bother to learn is how it started. In his new The Last Liberal Republican: An Insider’s Perspective on Nixon’s Surprising Social Policy (UP of Kansas, 2021), John Roy Price details how in Nixon’s first few years in office, the President ardently tried to lead from the middle to eradicate the widespread poverty that had so characterized his own upbringing. It is a view of Nixon and a big-tent, policy-driven Republican Party that …

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Episode 21: Getting perspective, with the brilliant & wide-ranging Will Goetzmann

How does an art historian, TV producer and art museum director end up teaching quantitative finance? I am joined by Will Goetzmann, the Beinecke Professor of Finance at Yale’s School of Management, to discuss the virtues of changing careers, being interdisciplinary, and following your curiosity.  He is one of the most interesting people you are likely to encounter.    

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Episode 20: The economics of education, with university president David Finegold

Ever wonder about the economics of higher education? Are the people in the classroom, “students” or “customers”? Who is accountable to whom?  Who is in charge? Chatham University President David Finegold joins me to view higher education through the lenses that we often use to examine businesses: value creation, accountability, and future trends. It makes for sober listening.

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