December 10, 2024
Merry Christmas
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In the comments below we want to take several steps back.
For sure, we are enormously optimistic about the potential for policy changes that can strengthen the U.S. economy by lowering costs and increasing growth rates. And the potential for the resulting rise in living standards for those who work both hard and smart will be a definite plus.
However, there are a couple of overriding factors that tend to directly affect investment returns that need to be addressed before year-end, so our readers have a realistic understanding of the investment landscape for 2025 and beyond.
Two major factors do NOT go away regardless of which political party holds the reins of power in America. The first factor is the massive pile of debt that must be serviced, not just in the U.S. ($35 trillion) but all around the world. The second factor is directly related to the first factor. It is the “addiction to lower interest rates” that these massive piles of debt produce in the behaviors of all elected officials and dictators.
We will save the lectures on the importance of clean national, state, and local balance sheets as well as the importance of cost-conscious policies, and the inherent wastefulness of bureaucracies. We will also avoid the temptation to offer opinions on political solutions and specific policy choices.
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Instead, let’s accept as reality these TWO factors: 1) massive debt to service and 2) the addiction to low interest rates. Once we concede these TWO basic facts, we can counsel you realistically.
The obvious danger of massive national, regional, and local debt is the potential for widespread bankruptcies. The less obvious but more pernicious danger with the problems debt creates is persistent inflation.
In short, governments including the U.S. which has the advantage of hosting the world’s reserve currency (the dollar), have tremendous incentives to keep interest rates low. And if elected officials act as expected, without promoting abundant supplies of everything necessary to produce MORE products and services, inflation will run wild.
So, it is a tricky equation. Supply-side policies mitigate inflation. And yet supply-side policies require guts from politicians for non-economic reasons.
Let’s assume that rates continue to be kept relatively low, as they have been for the last fifteen years or more. “Relatively low” interest rates produce “relatively high” stock and bond price valuations. When compared to bonds, it is important to understand that stock prices are not static. Over time the companies that deliver increasing streams of cash flow for the benefit of stockholders generate superior returns for stockholders. However, the starting point for stock prices during eras featuring relatively low interest rates is relatively high. So, as 2024 winds down, stock prices are not cheap. And stock prices do NOT figure to get significantly “cheaper” anytime soon.
This reality puts pressure on stock selection, simply because persistently low interest rates drive up the market values of most assets including stocks and real estate.
So, the number of on-sale bargains in the market for stocks is practically non-existent. And the valuations on truly well managed companies with clean balance sheets, high returns on shareholder equity, low capital spending budgets, and pricing power for their products and services, almost never come “cheap” in relatively-low-interest rate environments.
What is an investor to do?
If you are looking for income, ask your investment advisor about building positions in bonds issued by credit worthy borrowers with the length of the maturity dates spread out.
If you are looking for growth in capital without regard to current income, you need to remain committed to the strategy of owning positions in truly well-managed companies with durable competitive advantages that include, clean balance sheets, high returns on shareholder’s equity, relatively low capital spending budgets, and pricing power for their products and services.
In the interim, improved economic performance by the U.S. economy and the economies on other continents can help create a tailwind for well-selected investments. However, the “addiction to lower interest rates,” that massive piles of debt all around the world produces, means there is less margin for error on stock selection and credit quality analysis.
As usual, competent professional advice is a must for the navigation of this emerging landscape.
Finally, the ongoing development of Generative Artificial Intelligence represents the beginning of a new era in economic history. It produces both glorious investment opportunities and serious obsolescence risks.
These are truly exciting times. We cannot wait to see what happens as 2025 approaches.
Best wishes to you and your family for a Merry Christmas, a healthy, happy, and prosperous 2025.
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November 19, 2024
Post Election Results
The presidential and U.S. Senate election results became known between the time when the U.S. financial markets closed on Tuesday November 6th and reopened Wednesday November 7th. Determining which party would control of the U.S. House of Representatives took much longer.
In the end, control of the executive and both legislative branches will be in the hands of Republicans. What does this mean for financial markets?
For starters there will be no pre-emptive taxes on capital gains, which would have produced an avalanche of artificial sales of stocks.
It also seems unlikely that the sunset provision of the estate tax exemption amount will fall, which would have also resulted in artificial liquidations of stocks due to deaths.
Additionally corporate income tax rates are unlikely to rise, meaning net income for shareholders will not be reduced.
If we take a few steps back, we see a pattern that suggests tax policies are less likely to punish companies and their shareholders. When shareholders are punished this creates incentives to sell stocks.
What about tariffs and the unskilled laborer pool?
Tariffs are an open question. The immediate impact would be higher prices of applicable imported goods with some offsets produced by decisions on the part of domestic companies to reverse decisions to outsource manufacturing outside U.S. borders. Additionally, tariffs will also encourage foreign manufacturers to locate manufacturing plants within U.S. borders.
As for the unskilled labor pools, it is difficult to predict the overall impact of efforts to deport more people living in America illegally, until more is known about the scale of the deportation operations. Early indications seem to point to a more immediate shift towards much stricter control of the borders coupled with the deportation of those who have committed crimes in the U.S. or who have ignored existing court orders to leave. Much of the undocumented labor force is tied to the underground cash economy in the United States. This means data points like their contributions to GDP or payroll tax flows are already EXCLUDED from the statistics and balances respectively.
What policy changes should investors watch for that would tend to produce much higher levels of GDP, booms in shareholder income, and higher revenue flows into tax coffers without an increase in inflation?
The answer lies in improved energy policies and other measures that encourage greater supplies of goods and services. History is clear on the efficacy of supply-side economic policies highlighted by the assertions of great economists like Arthur Laffer and Thomas Sowell. Supply side economic policies work. If the incoming administration embraces these policies, the United States could experience an economic revival comparable to the great peace-time expansion records of the 1981-1989 period, after a major bout of inflation between 1977 and 1981.
The early signs of market anticipation are encouraging. The stock market rocketed during the second week of November, with little change in interest rates beyond a widely anticipated rate cut by the Federal Reserve.
We are optimistic about the future. The overall potential for economically helpful policy changes is high.
Additionally, advances in Generative Artificial Intelligence will help drive down costs in a wide range of businesses and industries.
We see upside for consumer confidence, advanced data networking demand, advanced equipment to improve computing speeds, advanced software services, and companies that are well-positioned in data gathering, analysis and cloud storage. We also see potential for exceptional niche insurance companies with dominant market positions.
Happy Thanksgiving!
Commentary 11-7-24
The 2024 Election
We all know the outcome of the 2024 election now, especially the financial markets. The markets don’t wait around. They process and react to information regarding the election and everything else that is relevant in real time.
Inauguration day is January 20, 2025, but the markets won’t be biding their time until the formalities are over. The markets are busy recalculating all assumptions of what lies ahead.
It is best to take several steps back from the turmoil and heated rhetoric that every election brings to our doorsteps and think about the bigger picture and the longer term.
Detaching from the emotions of the political arena can be more difficult for some than others. However, because pursuing a rational perspective on investments is the key to success, emotional detachment is critical.
Much of what is proposed by both sides during election seasons has little or no chance of becoming law. However executive orders are real, and therefore public policy can be tweaked significantly with the use of executive orders. Executive orders are the method by which policies that are not mentioned in election campaigns often become policies, until the next election.
The movement of the stock market on Wednesday was the aggregate initial reaction of the anticipations and expectations of all willing market participants making transactions to reflect any changes they see coming. The same is true of the bond market which reflects borrowing costs and the rewards for lending.
While stock prices went up yesterday, so did interest rates. What does this all mean?
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Fundamental Principles
Fundamental Principles are crucial to understand because they do not change. Fundamental Principles hold true over much longer periods of time and often forever. Understanding fundamental principles is the most important aspect of holding rational views on investments.
The great conundrum for those who are far along on the aging path (I am 68 years old now) is we do not know how much time we have left in this world. It might be a conundrum for the aging, but it is irrelevant to the markets. The markets don’t care how much time we, as individuals, have left. They never have and they never will
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What is relevant?
In general terms there are at least two things that are relevant. The first is the tug of war between optimism and pessimism. The second is the numbers game and how the real numbers relate to optimism and pessimism. In the end, inflation produces pessimism and instability. Alternatively, a strong currency produces the opposite effect. Yet even a low inflation environment with a strong and stable currency does not necessarily provide a road map for rational investments.
If one is investing for appreciation, one must still identify strong companies, with powerful financial characteristics and durable competitive advantages. And if one is investing with the objective of producing income, one must seek out assets that produce immediate cash, most often interest-bearing instruments that are safe in terms of the credit worthiness of the borrower.
Fixed income investors should ALWAYS put creditworthiness first. And they should spread out the length of maturity of the instruments they hold, so that there is never too much or too little principal coming due for re-investment at any one time. Your investment advisor can help you do this.
Growth investors would do well to listen to our podcast series, “A Rational Perspective on Investments.” You can download that three-part series by clicking on each segment using the drop- down menu on the main page of this website.
Our mission in producing the series was to help you think about thinking. We don’t make specific investment recommendations in the podcast. But in a general sense, we use the series to help point you in the right direction.
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Full Disclosure
Full disclosure is important. Kristi and I remain shareholders of Westwind Capital Management. We have a long history of working together with the principals and we benefit financially when you use their services. We encourage you to seek out their advice. They have a great team of trained professionals.
Final Initial Thoughts
What does a second Trump presidency mean to the investment markets?
It always pays to be a long-term optimist. If your investments are not capable of transcending your political orientations, they are not good enough.
We see great opportunities ahead based on the historical patterns. We also see risks. This will never change.
Holding shares in companies that have:
1) fortress balance sheets,
2) relatively low capital spending needs,
3) pricing power,
4) consistent demand for their products and services,
5) relatively high returns on shareholder equity,
6) solid growth rates for revenue,
7) intelligent management teams
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are essential to sustained equity investment success.
These pre-requisites never go out of style. And America will continue to be a bastion of stability in a sea of turmoil around the world. Those who correctly identify companies with these characteristics that retain the characteristics, will be rewarded.
Finally, we want to once again direct your attention to our three-part podcast series, “A Rational Perspective on Investments.” If you take the time to listen to this series, you will find yourself on the same page we are on, and as our commentaries are continuously posted on this site, they will make even more sense to you with the background of our assumptions more firmly based in your minds.
Commentary 10-29-24
The noise is reaching a feverish pitch as the interminable election season heads for the finish line.
Anyone who thinks they know who will win has more insight than we do.
There is a continuous fog of illusion out there in the media space. And there is so much deceitful posturing in play to confuse the voters, it is just too difficult to weigh the seemingly infinite number of variables associated with outcomes.
Once the makeup for the House, Senate, and Executive Branch are more clear, the outlook for public policies affecting capital formation will clear up a bit.
There’s at least one irrefutable fundamental truth in these periods that always prevails. And it is that winning politicians will always, regardless of party affiliation, make sure the problems they solve first, are their own.
There are simply too many examples to cite, that suggest this is true.
So, suffice to say, if your investment structure is reliant on one party or the other prevailing, your strategy is flawed.
Only shares of extraordinarily well-managed and dominant businesses with impeccable financial characteristics capable of transcending politics will stand the test of time.
And only fixed income strategies that withstand the test of time, can work effectively enough to stave off a portion of the cancerous effects of inflation.
Will and Ariel Durant, the great historians of the 20th century said in the Lessons of History, that economic history is replete with inflation and that “money (currency and short-term instruments) is the last thing a wise man will hoard.”
We will let the dust settle next week, and then come back with some comments that look into 2025 and beyond, once the landscape develops more clarity on things that politicians can destroy with one stroke of their partisan pens.
Commentary 10-24-24​
The decibel levels in the marketplaces that represent places for capital deployment are at hysterical pre-election levels. This makes listening exceedingly difficult.
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Once the election outcome has been determined, some of the smoke and a lot of the noise will clear, and we will return to a more reasonable sense of predictability, in terms of where policies are headed that can have an impact on the margin.
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In the end, relying on sound fiscal policies, a controlled federal bureaucracy, or intelligent use of debt by lawmakers will remain a pipe dream.
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Still, America has built in advantages that domestic politicians shamelessly exploit in ways that boggle the mind. It is noteworthy that leaders of Russia, China, and India are meeting to discuss ways to diminish the impact of the U.S. dollar being the world reserve currency. Of course the answer is these nations could begin by building more trust in what they do. Good luck with that possibility.
Despite gross mismanagement by both major U.S. parties, mismanagement in America is relatively benign, when compared to that of Russia, China, or India, not to mention all of Europe and Japan.
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For the foreseeable future, the U.S. dollar will remain the world reserve currency. And the great leaps forward in innovation and wealth creation will continue to rely heavily on a small number of the best run companies in the world, most of which are American. The task of figuring out which companies fit this category is neither easier nor more difficult than it has always been.
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The rewards for wise capital deployment in equities remain enormous, as do the risks.
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The direction of interest rates remains an open question. My experience tells me that a short stint of tighter monetary policy in the U.S. has not put out the fires of inflation. It is an advantage for America to be able to "export" a fair portion of our inflation rate.
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Stay tuned for an update after the election noise and smoke clears.
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Synopsis of:
Answering the Great Question
“Diversions, Detours & Dead Ends”​​
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Synopsis: Petri Dish Foundation’s new eleven-part documentary series emphasizes compelling historical and scientific evidence. The evidence is tied directly to the methods used by various powerful ruling educational bureaucracies in the 21st century, to perpetuate the widespread perception that these institutions are uniquely qualified to serve as mankind’s sole trusted gatekeepers of the "truth."​​
The film segments are sequenced to illustrate distinct historical patterns encompassing thousands of years of human history. Layer after layer of cohesive evidence, from the physical, historical, and behavioral sciences are the cornerstones of the film.
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Part 1 of the film begins with a well-hidden, but profound assertion made by Albert Einstein in 1936. Einstein's position on what everyone who "seriously pursues science eventually concludes," is a direct contradiction of what is being taught to students at K-12 and higher education institutions today. Einstein's assertion was discovered in a private letter discovered in his personal papers after his death in 1955. The conclusion Einstein expressed so unequivocally in this private letter is not shared with students. This exclusion serves as the first of many examples of overt diversions, detours, and dead ends this film examines. That Einstein's most important assertion regarding the "answer to the great question" has been shielded from millions, if not billions of students for almost seventy years prompted the thorough investigation conducted in this film.
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The opening segment of the film also provides evidence of a litany of other similar tactics routinely practiced by ruling educational bureaucracies in possession of enormous power, wealth, and social status in the 21st century. The film illustrates why these patterns are not new. Instead, they date back thousands of years. Each example of practices and policies highlighted, can best be described as self-serving to the institutions, instead of serving the mission of seeking truth. The initial segment finishes up with the exposure of absurd characterizations of the findings of Watson and Crick regarding the astonishingly complex properties of DNA.​​​
Part 2 introduces corroborating evidence of the patterns of the opening segment. An examination of the eruption of academic scandals over the last two decades continues the theme. In the spotlight are over 10,000 retractions of “peer reviewed” scientific papers published in scientific journals in 2023 alone. Ten thousand annual retractions amount to more than 27 bogus scientific papers being published every day of the week, 365 days a year, only to be later withdrawn, usually after independent investigations. Part 2 reveals the fact that both Harvard University and Stanford University exposed themselves in 2023, and 2024, as high-profile educational institutions that have gradually created environments where scientific fraud has become rampant.
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Part 3 explores the sweeping implications of the 2022 Nobel Prize in Physics award for work on Quantum Entanglement. Revealing statements by the Nobel Committee itself, of the presence of “philosophical issues,” are thoroughly dissected in this segment. Suddenly at issue, are previous false “cause and effect” assumptions associated with mysterious information transfers at the particle level. The segment explains physical laws of the universe are now "blowing the minds" of the greatest scientific thinkers of the modern era. Nobel Prize winning laboratory findings regarding Quantum Entanglement can now best be described as, “supernatural.” Perhaps not coincidentally, this same description fits the mysteries related to the origins of infinitely complex coding in DNA, as well as the fundamental properties of prayer that have been described by scores of theologians for thousands of years.
Part 4 takes its cue from the Nobel Prize Committee's statement in Part 3 that "philosophical issues" require in new depth discussions, thanks to the latest advances in the field of physics. This segment follows the lead provided by former NASA planetary scientist Dr. Robert Jastrow. Comparisons and contrasts of theological evidence trails associated with the world’s four largest religions (Hinduism, Buddhism, Islam, and Christianity) including their philosophical foundations are examined in the light of the latest scientific advances. Well established findings in controlled studies by behavioral scientists are used as primary tools in this segment, simply because they represent the most reliable method of analyzing witness testimonies to corroborate the veracity of their statements.​
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Part 5 illustrates the many ways in which mathematics is now being selectively applied in higher education institutions as if it were a retractable tool. This segment reviews how five different world-changing scientific advances were all deeply dependent on mathematics. That some mathematical illustrations have been deemed not useful to preferred narratives promoted by ruling educational bureaucracies regarding origin of life studies, explains for viewers why this produces irreconcilable scientific contradictions. The evidence regarding the consequences of withholding of corroborating mathematical proofs, points directly towards intent to create diversions and detours that run directly counter to scientific methods, producing dead ends in all origin of life research projects.​
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Part 6 focuses on two very profound philosophical questions posed by a student. This student requested that the following two questions be addressed, 1) “Why is there so much pain and suffering in the world?” 2) Why should any student believe “the spirit” Einstein identified as being "manifest in the laws of the universe that is superior to man," is NOT completely detached from human pain and suffering?
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This segment addresses this student's questions carefully, since grief, pain, and suffering are widespread maladies affecting the human condition throughout the entire world.
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Part 7 explores the evidentiary patterns that distinguish teachers from educational institutions. Patterns of “mission abandonment” by institutions controlling education systems throughout human history are laid bare, while some of the most remarkable accomplishments of historically influential teachers are explored.
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This segment focuses on the powerful influence of Machiavelli’s teachings regarding integrity by those in the 21st century by institutions that acquire and retain power, wealth, and social status.
This segment finishes with a contrasting examination of Isaac Newton's astounding scientific credentials, as well as his profound assertions regarding the attribution of answered prayers to his brilliance. ​​​​​
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Part 8 provides overwhelming new evidence that puts Harvard University back under the integrity microscope for a second time in the series. Eyewitnesses in this segment include Derek Bok who served as president of Harvard University for 20 years (1971 – 1991) and Harvard faculty member Dr. Robert Coles, who was awarded the Presidential Medal of Freedom by President Clinton in 1998. These two men, intricately familiar with the culture at Harvard, supply chillingly predictive testimonies forecasting current events that place Harvard and many other higher education institutions in the “mission abandoner” category. It is clear these highly esteemed Harvard official’s assessments of the lack of emphasis on integrity in higher education institutions, now point directly towards the existence of the current negative feedback loop producing the lax environment where instances of academic fraud scandals in higher education now take place as a matter of routine.
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Part 9 supplies even more powerful evidence supporting the troubling theme of the entire film series. In this segment, the number of perpetrators identified expands geometrically. The examination of an announcement by the NCAA, which is the rulemaking business partner of hundreds of higher education institutions, involves an astonishing $2.8 billion settlement offer made in May of 2024 to compensate more than 14,000 student damage claims. Amazingly, the damages involved in this compensation offer apply to past, present, and even future damages to students.
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This segment explores more than a dozen disturbing reasons why mission abandonment by higher education institutions in this area of our culture has produced these enormous damages. Once again, the overwhelming evidence corroborates distinct patterns of self-serving behaviors by higher education institutions highlighted in previous segments in the series.
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Part 10 begins with the recognition of a phrase coined by the late great Dr. Dallas Willard, a professor at the University of Southern California. According to Dr. Willard, "The Great Transition," is the period one enters immediately after one recognizes he or she has the freedom to choose their own teacher. The stunning contrasts between the teachings of Machiavelli and Jesus, including the examination of concepts such as “inclusion, anger, contempt, and condemnation," are explored in this segment.
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Additionally, this segment reveals evidentiary results of a double-blind controlled scientific study confirming the efficacy of prayer. Context is provided that ties biased policies at higher education institutions, to their dubious accommodations of other powerful bureaucracies, resulting in diversions of research funding away from all additional studies of the possibility that prayer might have power.
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Part 11 continues to make extensive use of the teachings of Dr. Dallas Willard in his book, The Divine Conspiracy. In this final segment, the mountains of evidence presented in the previous ten segments are tied together. To help viewers digest the body of evidence, the segment includes basic interpretations by Jim Spence, the series author.
All eleven segments of: Answering the Great Question can be previewed in advance at petridishllc.com right here on this site.
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Starting Friday August 30, 2024, the Petri Dish YouTube Channel, a new episode will be released each week.