Juggling Dynamite

The discussion below with Campbell Harvey is insightful. The ‘could this time be different’ questions are common, but in reality, GDP growth is routinely revised lower months and years after initial estimates, so the fact that recent quarters have reported still positive GDP growth to date, does not mean that a recession may not be already here or imminent.

The more useful take away for investors should be that equity returns after curve inversions tend to be “grim” as Harvey explains.  While value management rules have underperformed ‘growth’ during the recent momentum-driven ‘QE’ years, over the long run true value disciplines outperform because they tend to lose less than price-indicriminate ‘growth’ buyers once bear markets start.  During bear markets ‘growth’ investors typically give back years of previous gains in a matter of months, and then spend years thereafter trying to make back their losses.  This tends to be inefficient and traumatic in real life.

The bottom line is that whatever one’s chosen discipline, bear markets are part of each economic cycle and we are overdue for the next one.  If your plan is to ride it out and hope you recover in the long run, so be it.  But if your plan is to hope you will get away with staying long and not go through the give back cycle, you are woefully ill-prepared.

Campbell Harvey is a Professor at Duke University and a partner at Research Affiliates…Campbell cites the fact that 7 out of the last 7 recessions had been presaged by a yield curve inversion – which is what happens when it longer-term bond yields fall below shorter-term bond yields in the Treasury market. He believes that this phenomenon occurs when the market participants begin to grow more pessimistic about the economic outlook. The behavior of executives, lenders, borrowers and investors can change enough during these times to actually become a self-fulfilling prophecy – producing a negative feedback loop that drives a weakening economy into a full-blown recession.

Recessions are a normal part of the business cycle, although they can be painful to live and invest through.  Here is a direct video link.

As discussed in our August 2018 client letter ‘Busting Trust(s)’ and more recently in Rejecting the highly destructive ‘shareholder first’ mentality, sustainable business models benefit not just shareholders but also other essential stakeholders like customers, employees, suppliers, community as well as the ecosystem and tax-funded infrastructure on which civil societies depend.  After a dark period of deeply destructive thinking, smarter business models are now on the rise.  Making sure our regulations and policies support and require this is part of the transition needed.  See more in Michael Spence’s recent Project Syndicate piece The End of Shareholder Primacy?

“…an even more exciting feature of the shift toward socially conscious corporate governance is that it opens the door for new, more creative business models. Already, some of the world’s most impressive companies (in terms of returns to investors) have built business models around solving economic and social challenges.”

Some business leaders have understood the multi-stakeholder model from inception and have been working with it successfully for many years. This discussion with fashion designer Eileen Fisher offers some insight.

Fashion designer Eileen Fisher tells WSJ’s Veronica Dagher why she’s committed to sustainable fashion and what motivates her to meditate on death.  Here is a direct video link.

Excellent article in the Globe today on the opportunities urging Canada to evolve with the modern world.  There’s good growth here, if we can see it.  The price for resisting this turn–as many others have learned before us– is economic hardship and lost income.  If we embrace the evolution and position ourselves to benefit, the upside is enormous:  “If Canada takes just our pro-rata share…our clean-tech industry will dwarf our auto sector.”  See:  The energy status quo is being upended. How will Canada respond?:

With Canadian energy executives and politicians ensnared in endless regulatory and climate debates, global forces of technological disruption that respect no borders pose the real threat to Canadian economic health.

No policy or established incumbent could prevent, or even slow, prior tech disruptions such as the industrialization of agriculture, automation of manufacturing or digitization of communications. Global energy systems are today going through a similarly inevitable and deep disruption, driven by innovation and steep cost reductions in renewables and electric vehicles.

While we bicker about pipelines to tidewater and the effects of a tiny incremental price on carbon, the cost of solar and wind continue to plummet – driven by the inevitable declining cost curves associated with all technologies as they scale, from cellphones to drones. Batteries are doing the same. The threat these technologies pose to the status quo is based on (largely Western) innovations brought to industrial scale by an aggressive Chinese state. Neither the pace of innovation nor scale of production show any signs of slowing. Indeed, the opposite is true. Fast-forward a decade or two: Cleantech will take down incumbent energy industries that make the same old assumptions about demand for their product…

But we have to stop being distracted by the past. Incumbent industries hold our national narrative on energy in a headlock, defending yesterday’s success stories – not defining or shaping tomorrow’s. That dynamic doesn’t serve our long-term national interest.