Past, Present & Future
First, we stand in solidarity with the citizens in Ukraine who are suffering tremendous hardships due to unfortunate geopolitical forces outside of their control.
The past two years
We wrote last week that easing COVID restrictions will help with inflationary pressures by reducing global supply chain complexity. Many mask mandates are ending next week, and companies like Google are calling employees back to the office by the end of the month. Ukraine has completely taken over headline news, and rightly so. It’s incredible how fast the dominant narrative can change.
Sticky inflated prices should start to subside from here. Lumber futures and oil futures are in the steepest backwardation in history (as far back as the data goes, ~1970). That sounds jargony, but that’s what’s it called. Backwardation in the futures market means you can place orders for oil or lumber two months from now at prices that are 15-20% lower than today’s price. The international shipping industry is also minting a generational fortune, and it’s so profitable that Biden threatened pricing regulation during this week’s State of the Union address.
The past two years have introduced incredible challenges for politicians, leaders, investors, business owners and everyday citizens. We are experiencing regular aftershocks today via geopolitical events, social unrest, extremely high and low market prices, and constant narrative changes. During the chaos, the Fed is actively working towards removing as much financial stimulus from the economy as reasonably possible. Every negative surprise, like Ukraine, works against the Fed’s incremental goals.
For investments to produce attractive returns, there needs to be evidence of future positive growth rates. Broad economic growth comes from population growth, productivity growth, and the additional use of debt. Population growth rates have slowed to near zero in developed nations. That means we are reliant on additional debt and productivity growth in the form of automation, new applications of technology and innovation.
Fear narratives sell well. Grantham, Gundlach and Dalio collectively manage hundreds of billions amassed largely via fear-based narratives about bubbles, negative return forecasts and changing world orders. Even Vanguard forecasts US equity to grow at a 2-4% annual rate for the next ten years with “16% median volatility”, which introduces many problems for portfolio managers and beneficiaries.
By contrast, Warren Buffett’s general positivity about the wonders of the American economic growth engine is far more appealing and has worked out for him and his shareholders in the face of persistent skepticism, wars; you name it. Five years ago, Buffett broke his streak of ignoring “complicated tech” by investing in Apple. To date, that Apple investment is the most successful investment by any professional investor ever, with just over $130 billion in unrealized gains. It’s tempting to fall into fear-based narratives, but optimists have a far greater chance of producing successful results once their thesis plays out. Warren Buffett has posted 20.1% annualized returns over the past 56 years, roughly double the 10.5% of the S&P 500, although he’s underperformed over the last ten-year period. In recent years, Warren Buffett’s team has gone further into the tech sector, investing in Snowflake (data analytics) and NuBank (Brazilian digital bank).
Even if the entire US stock market or global economy doesn’t grow much over the next decade, there can undoubtedly be sectors that experience consistent and rapid growth. As mentioned above, commodity-based businesses are having an incredible run for the first time in a decade due to Covid. Those businesses will likely try to hold onto their extraordinarily high prices as long as possible, but that will fade over time. When you look under the hood of the US economy for evidence of consistent earnings growth, it’s evident that there are many opportunities to own great businesses that can produce consistent returns for many years.
The highest growth industries that have generated consistent positive earnings are, in no particular order: life sciences equipment, healthcare services, software, payment processing, communications equipment, semiconductors and related equipment, tech hardware, water utilities, industrial machinery, consulting services, interactive media, e-commerce, capital markets and consumer finance.
The unprofitable but highest potential emergent growth industries are industry-specific software, applied AI, genetic health treatments, space technology, robotics, climate tech, renewable energy, ad tech, cloud computing, battery tech, health tech and blockchain innovations.
Markets will continue to react to shocks from demand, supply, war, liquidity, Fed actions, and so on. There is a bright future in there as well.
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