July 17, 2022
Stocks & Markets
Painful first 6 months of year…worst start for US Stocks in 50 years. If you read nothing else from here forward, this short video sums up the quarter nicely. 😂
Times like this reinforce the need to have a financial plan in place and stick with it.
Let’s take a step back though and consider the following: If you invested $10,000 on Jan 1, 2017, you’re still doing VERY well. Hard to believe, but it's true. If you were in technology, you’re killing it, and even if you were in conservative value stocks, you’re doing just fine.
* FATMAANN = Facebook, Apple, Tesla, Microsoft, Amazon, Alphabet, Netflix, Nvidia
Government stimulus and Fed actions drove massive market mania in the last couple of years. Many (including me!) feel a huge sense of loss recently, but if you step back and just look over the last ~5 years, returns are healthy and markets appear to be normalizing.
Said another way.
Inflation
I wrote about inflation being a concern in my Oct 2021 newsletter and at that exact time our Treasury Secretary was still calling it “transitory”. The Fed didn’t begin raising rates until March 2022! AND the Fed was still buying securities in the open market (i.e. Quantitative Easing) to the tune of $20 billion in March 2022! Here’s their last purchase:
Why am I showing you this? Because it's crazy. The Fed was still buying Treasuries when inflation was rampant. The government issues debt (i.e. treasuries) to fund expenditures, and then the government (the Fed) buys them. Printing money.
Now we are all paying the price…high prices!
Below is year-over-year inflation in June compared to September:
Our government overspent and the Fed fell asleep at the wheel. 20/20 hindsight I suppose. I like Ray’s Dalio’s take. My favorite punchline:
“...while tightening reduces inflation because it results in people spending less, it doesn’t make things better because it takes buying power away. It just shifts some of the squeezing of people via inflation to squeezing them via giving them less buying power. The only way to raise living standards over the long term is to raise productivity and central banks don’t do that.”
In short, The underlying US economy and demand is strong and that’s a great long-term outlook for markets. Job openings of 6.9% continue to exceed the unemployment rate of 3.6%; a very healthy economic indicator.
What Happens Next?
Many experts predict a prolonged bottom and more pain to come. Why?
So much uncertainty: (1) war in Ukraine, (2) supply chains (3) inflation and recession worries and (4) Fed actions. Now there may be a (5): Emerging Market Debt Crisis. Did you see the videos in Sri Lanka? More to come in other countries.
Action Items for Investors
- Have a plan, stick with it and don’t try to time the markets.
- That said, historically we see big down turns every ~10 years: 2000, 2008 and 2022. These are historically great times to invest.
- Dollar Cost Average in NOW. Keep buying slowly and consistently. We may not be at the bottom, but 5 years from now you’ll look back and be glad you were buying!
Other stuff
Housing
The median U.S. home price rose from $160k in 2010 to $418k!! Bubble? Stay tuned and be careful.
Crypto
Crypto is not a hedge to equities, as many promoters claimed. Seems it was more a speculative investment for excess capital. Check out the correlation of crypto exchange company Coinbase to Bitcoin value below.
Countless stories if you’re interested from the collapse of Terra Luna to one of Crypto’s most important hedge funds 3 Arrows. In retrospect, this all seems so obvious.
Elon backs out of his purchase of Twitter. I think they’ll simply negotiate a lower price and he ends up buying it. He did waive due diligence, but Twitter likely disclosed inaccurate data in public filings around DAU’s and fake/bot accounts. We’ll see what the Delaware Chancery Court decides.
On a related note, it is clear that Elon sincerely cares about Twitter and its importance as the public town square. Further, he essentially provides an MBA course on how he is going to turn the company into a powerhouse during the Elon Musk all-hands meeting here.
Netflix
Near and dear to my heart. And boy has Netflix been in rough waters losing subscribers and stock down 73%! But, there are reasons to be hopeful:
- Ads. They have partnered with Microsoft to roll out an ad-supported tier.
- Password sharing. Ads will also facilitate their crackdown on the 100+ million password sharing accounts. Now they can gently nudge non-paying households to the ad-supported tier.
- User-generated Content. Finally, with advertising, and TikTok eating their lunch and others', there are strong arguments to move into “user-generated content”.
- User-generated content will drive billions in ad revenue. $6.9b for YouTube last quarter alone. The content is “free”, so the margins are enormous.
- It’s an engineering challenge, which is why it's a perfect area for Netflix to engage; and near impossible for traditional studios to follow.
- 100’s of million, maybe a billion, people already have the Netflix app on their phone! Heavy lifting done.
- Netflix lost my teenagers and a lot of Gen Z. The mission to “Entertain the World” should logically include user-generated content.
Recommendations
- Frank Slootman - CEO Snowflake. Why? Old school solid leadership lessons.
- Interview with Antonio Gracias. Why? Invigorating and inspiring the resurgence of US manufacturing (early investor in Tesla and SpaceX).
- Bloomberg with “the Globe” founder. Inspirational and timely. Guy goes from dotcom millionaire to broke. Crawled his way back.
- Silicon Valley - No Revenue. For a 😂 A little exaggerated, but rings familiar.
Breakaway Podcast. Check it out and come be a guest.
Take care!
Be kind. Be positive. Persevere.
Sean
Twitter: @seanjhathaway