MARKET WATCH

Sparked by the tragic violence in the Middle East, global markets have fallen a few percentage points this month. As is often the case, commodities reacted in their own manner. Canadian energy stocks are down slightly, while gold (in Canadian dollars) has surged more than 8% since the end of September.

Gold is one of the few assets that usually performs well in uncertain times. The yellow metal performed brilliantly during the early days of the pandemic, rising more than 30% as equity markets crashed. Should the geopolitical situation darken, it’s likely gold will rise further - and possibly by a large margin.

On the other side of the asset allocation ledger, fixed income, as mentioned last month, has become more noteworthy. The recent rise in interest rates means the yield provided by fixed income assets has also risen. And should rates stabilize, or fall (due to falling inflation or a recession), they will likely provide a more meaningful source of returns than we’re used to. 

And to that point, in Howard Marks’ (often referred to as the Warren Buffett of fixed income) recent memo (see below), he recommended investors consider shifting investments from equities to high-yield bonds. Marks rarely makes these types of calls, but he’s also most likely referencing American equities, which are expensive and which we are relatively underweight in. But even if his recommendation is less applicable to the international and commodity equities we own, it’s something I’ll be monitoring closely.

As always, feel free to reach out if you have any questions, and if you’re looking for more timely information on the markets, you can find them on the research section of my website, or on my Twitter, Facebook, and LinkedIn feeds.

BOOKS

Tao of Charlie Munger by David Clark: Short but powerful book of Charlie Munger quotes with accompanying commentary.

ARTICLES

New Business Boom and Bust: How Capitalism Experiments by Michael Mauboussin and Dan Callahan: Capitalism is far from perfect, but this paper, based on research covering 44 industries, illustrates why it drives so much innovation. The system’s tendency to provide outsized rewards for winners incentivizes heavy investment, which results in considerable trial and error. Consequently, when industries are born, numerous innovators enter the fray to pioneer the idea and technology that will come out the other side.

A few examples: The U.S. auto industry grew from just over 20 companies in 1895 to a peak of 292 in 1909; the number declined to just 44 companies in 1941 and only a handful remain today. The personal computer industry also followed a similar pattern as it grew from two companies in 1974 to more than 300 by 1987, declining to around 150 by the mid-1990s and considerably less now. Though tragic for those who invested their lives and savings into failed dreams, society - through the superior products and services the system creates - benefits significantly.

I really enjoyed this paper!

15 Lessons David Senra Has Learned and Relearned in the Last Year: My favourite lessons were: Learning from history is a form of leverage. You can find an edge by thinking about your industry more than anyone else. You should believe your opinion is greater than the opinions of every other person around you.

Further Thoughts on Sea Change by Howard Marks: “The overarching theme of my sea-change thinking is that, largely thanks to highly accommodative monetary policy, we went through unusually easy times in a number of important regards over a prolonged period, but that time is over. There clearly isn’t much room for interest rate declines from today’s levels, and I don’t think short-term interest rates will be as low in the coming years as in the recent past. For these and other reasons, I believe the years ahead won’t be as easy. But while my expectations may prove correct, there’s no evidence yet on which I can hang my hat. Why not? My answer is that the economy and markets are in the early stages of a transition that’s far from complete.”

The Oil Weapon Returns by Bill O’Grady: A good summary of the history of oil and the geopolitical climate surrounding it over the last five to six decades.

Projected Oil Inventories Have Been Lowered by Jeremy McCrea: “The EIA came out w/ their Short Term Energy Outlook this week. These are the largest revisions in key data points impacting crude oil markets today. Although many adjustments are small, it shows the directional bias the EIA sees with its forecasting models.”

Japan: The Land of The Rising Profits by James Montier: Seemingly out of nowhere, Japanese stocks have enjoyed strong performance this year. This GMO white paper suggests their performance has been driven by increased corporate profits garnered from lower debt and interest costs. It also puts forth that, with their historically low valuations compared to the U.S. and the Japanese currency being cheap, Japanese stocks remain a compelling opportunity.

Canso’s October Market Observer: Canso makes a strong argument that it’s still too early to own long-bonds. If you don’t have the time to read it, the chart on page 8 is worth a quick look.

Trading Economics: If you’re looking for economic data, or the suspected reasons behind recent market moves, Trading Economics is a wonderful resource. I reference it almost every day!

PODCASTS AND A CLEVER VIDEO

Rory Sutherland on Tetragrammaton with Rick Rubin: If you find marketing and music interesting, this conversation with giants from each field is worth a listen.

Founders #306: David Ogilvy: Speaking of marketing, great podcast on David Ogilvy’s book Confessions of an Advertising Man. Ogilvy, co-founder of Ogilvy and Mather, was notorious for the incredible amount of research he did to develop a campaign. His famous ad, “At 60 miles an hour the loudest noise in the new Rolls-Royce comes from the electric clock”, was the result of reading the owner’s manual from cover to cover.

The Complete History & Strategy of Standard Oil (Part I) (Part II) by Acquired: The story of Standard Oil is the story of John D. Rockefeller. And what a story. On the one hand, he ruthlessly applied legal and illegal practices to crush competition in order to build his empire. He was so successful that a host of antitrust laws were created to ensure this could never be done again.

On the other hand, he wholeheartedly believed he was doing the work of God. He felt his calling was to become wealthy by making products affordable and easy to access for the average person. To that end, he also single-handedly revolutionized the practice of philanthropy. And he gave away a huge amount of his vast fortune - so successfully that his contributions continue to make an impact on the world today.

The Complete History & Strategy of Amazon.com by Acquired: There are many reasons for Amazon's incredible success. Among them are: its study of other successful companies, especially Costco and Walmart; its obsessive focus on the client experience; never resting on its laurels; and, of course, the brilliance of Jeff Bezos’ leadership. Though not officially a trilogy, given the similarities between the companies, this podcast is best listened to in conjunction with Acquired’s episodes on Walmart and Costco.

Herb Kelleher (Southwest Airlines) by Founders: They don’t make ’em like this anymore. Herb Kelleher worked hard and played hard. He drank Wild Turkey Whisky and smoked four to five packs of cigarettes a day. When asked if he thought his prostate cancer was due to smoking, he responded “...I don’t smoke with my prostate.” He also created the most profitable airline in the history of the U.S. Fun podcast!

Well this is clever!