Does it matter?
Lunch at the Club Recap
Jamie White presented his latest investment idea at Lunch at the Club this past week. Lunch at the Club is our monthly virtual presentation where investors share their best ideas. For only $100 per year, become a Co/Investor Club Premium Member and attend our monthly investor presentations!
James White joined Polaris Capital Management, LLC as an Investment Analyst in January 2018. Mr. White brings valuable non-traditional research skills to the team. His keen observation, data gathering, interviewing and tactical problem solving skills offer heightened research perspective on global companies. His extensive travel and operational experience benefit the team, as does his formal medical training (Master’s of Science in physician assistant (PA) studies) and experience in health care and pharmaceutical related companies. Prior to joining Polaris, Mr. White was a consultant for U.S. government intelligence agencies. He was selected into a special task force created to advise policy makers on strategic planning. Mr. White also was a staff PA at Chesapeake Regional Medical Center and served in the armed forces as a Navy SEAL. In June 2021, Mr. Whitegraduated cum laude from theExecutive MBA Americas program, earning a Cornell University MBA and Queen’s University MBA while continuing to work full-time atPolaris.
Jamie White previously presented Global Blood Therapeutics (GBT) on September 15th, 2021 at Lunch at the Club. The closing price the day of the presentation was $25.97.
Pfizer to Acquire Global Blood Therapeutics for $5.4 Billion to Enhance Presence in Rare Hematology
Does it matter?
Inflation seems to be one of the few things less popular than central bankers. Whether the latter can tame the former is top of mind for investors and the media these days. When the Fed talks tough about taming inflation, stocks go down. When someone catches wind (or creates a rumor) that it might slow rate hikes to support the economy, stocks go up.
Whether it was the wind or rumor or technicals or randomness, stocks went up last week. The S&P 500 was up 4.7%, and the Nasdaq climbed 5.2%.
Part of the reason for the rise was some renewed hope that the Fed will slow hikes to 50 basis points instead of 75. There were some hints that some Fed governors may be starting to worry a bit and that maybe after an expected hike of 0.75% in November, the pace will slow down.
The actions of the Federal Reserve will undoubtedly swing markets in the short run. Central bank action worldwide has distorted the price and amount of money available in economies for a long time, and the year 2022 is feeling the effects of those distortions.
It shouldn’t be surprising that the economy eventually has trouble adjusting when you affect credit and interest rates so significantly. As James Grant wrote in an issue of Grant’s Interest Rate Observer in January of 2005, when discussing Friedrich von Hayek’s Nobel Price speech two decades earlier:
Beware the nostrum of printing money to boost aggregate demand, he warned. Such a policy is, of course, inflationary, but the problem goes deeper than that. Money printing distorts prices and wages, the traffic signals of a market economy. Responding to the wrong signals—spending on red and saving on green—people take the wrong jobs and capital flows into the wrong channels. All were misled by the wrong prices, or, in the past couple of years, by the wrong interest rates.
Hayek’s December 1974 warning and description of the hangover from the misallocation of resources as the economy tries to adjust to reality neatly summarizes the issues the Fed is trying to grapple with today:
The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity. The fact is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing; not because, as this view is sometimes misrepresented, this unemployment is deliberately brought about as a means to combat inflation, but because it is now bound to occur as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerate.
We saw massive and unprecedented fiscal and monetary stimulus when Covid became a reality in 2020. And remember, the Fed was still easing as late as March of this year.
The media often summarizes the Fed as wanting to raise rates to bring about a recession, which will lead to job losses and cool the inflation they seem so committed to stopping.
But that’s only part of the story. The other part is that many of these job losses are already likely to occur—whether we enter a recession or not—because capital and jobs flowed to areas of the economy that were unnatural and temporary as a result of the actions taken by central bankers and policymakers around the world.
People took jobs (or were paid to stay at home) in fields with temporary demand. Many of those people might have found their way to other jobs in other industries if things had been different. Instead, we find ourselves in a world where we continuously see job cuts announced by technology and other companies that benefitted from the post-Covid economy. In contrast, many construction and service-related companies can't seem to raise wages enough to find qualified help.
When it comes to your portfolio, does any of this matter?
In the short run, people will judge and analyze the success of central banks in fighting inflation; and the mood central bankers seem to be in as they cross the street, buy their morning coffee, or walk their dogs. Any and all of that may cause the market to swing wildly from one day to the next.
But much of that is unpredictable and thus not very useful. And over the long run, it matters little.
The Fed started easing and lowering rates in September of 2007, which did little to help the downturn that would unfold over the following 18 months. Whether or not it’ll help this time more than temporarily is anyone’s guess.
For the long-term investor, focusing on the companies, funds, and other assets that make up your portfolio is likely to be time better spent than guessing what the Fed might do, or how the macro economy might unfold.
As we mentioned a couple of weeks ago, some of Warren Buffett’s best investments happened in the 1970s, when people were worried then about similar things they are today. The same is true of Ken Langone, who bought shares of Handy Dan's—a precursor to The Home Depot—for 2 times net earnings in 1976. And there are plenty of other examples of great investors and business leaders seizing long-term opportunities while the rest of the world worried about short-term things they had little control over.
“The financial world is so complex and unpredictable that a fair amount of our analysis will prove to have been flawed…. A dirt-cheap price is an anchor to windward against misperceiving current situations, or being unable to make accurate forecasts.” —Martin J. Whitman (“Dear Fellow Shareholders”)
“We have always told our clients that the object of investing is not just making money. The object is to build assets to support your lifestyle. And you should never adopt an investment approach that could jeopardize your lifestyle.” —Gene Hoots (“Pay Attention to the Thin Cow”)
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