“We have made very little progress in life by trying to outguess these macroeconomic factors. We basically have abdicated. We’re just swimming all the time, and we let the tide take care of itself…. The trouble with making all these economic pronouncements is that people gradually get so they think they know something. It’s much better just to say, ‘I’m ignorant.’”
- Charlie Munger (2015) (thanks to Anuj for reminding of this many years ago)
"The only thing that could spoil a day was people and if you could keep from making engagements, each day had no limits."
- Ernst Hemingway, A Movable Feast (thanks Carl)
“By the time a man realises that his father was right, he has a son who thinks he’s wrong.”
- Pianist Charles Wadsworth
A. The Inflationary Shock
I find more and more of my smart friends are talking about Inflation.
There is definitely a lot out there that could provide that Inflationary Shock
A) Global fiscal policy likely remains expansionary until unemployment gets to politically acceptable levels (open ended fiscal QE);
B) De-globalisation leads to higher input costs;
C) A weaker dollar (almost always associated with a rise in inflation expectations);
D) The end of the 12-year downtrend in oil prices;
E) A lot of the disinflationary impact of disruptive technology has been seen (e.g. 32% of UK retail sales are now online);
F) Higher minimum wages in the US (Senator Biden has a plan for US$15 per hour);
G) Money supply leads inflation by 2.5 years. The Fed (and most central banks) will now also allow inflation to overshoot (unlike in 2011) and will cap bond yields (i.e. finance deficits).
And maybe inflation is the only way out.
The IMF has US debt by end-21 at 146% of GDP.
That is ~10% above where Italy started in 2020. Fiscal tightening to stabilise government debt results in deflation and 10%+ unemployment.
Defaulting is a last resort (but could be achieved by converting central bank holding of debt into zero-coupon irredeemables).
The most politically, socially, and economically pragmatic solution is to pursue fiscal QE until unemployment gets to low levels, allowing inflation to rise, and capping bond yields. A -2% TIPS yield is the solution. The UK and US are most likely to resort to high inflation.
Japan is not a template; inflation did not rise because of huge asset deflation, falling wages, and a highly reactive monetary policy – all of which are different in the EU and US.
I love long term cycles and for big trends like inflation and rates they are the big ones to follow. This chart from Stifel seemed useful.
Pivoting from inflation to equity prices, the same Stifel piece also a great long term chart plotting US equity prices.
Look carefully and you will see a lot of interesting things.
As for the discussions around multiples being high, should we adjust P/E ratios for money supply, after all the money has to go somewhere…of course this is super simplistic but you get the idea.
If you don’t want to buy Real Estate, and bonds are too low yielding and PE is too illiquid or expensive, what else do you buy?
Thank you William F for the chart.
B. Lessons from Investing in 483 Companies
Charlie Songhurst was the former head of strategy at Microsoft and now an angel investor amongst many other things. I remember when I first started seeing him on a bunch of Entrepreneur First company cap tables. He seemed to be every where.
He was recently on the Invest Like The Best podcast, where I picked up a bunch worth sharing.
Value Creation & Growth Rates
The first question every business needs to ask is a utilitarian one: “What value am I adding and who am I adding it to?”
The value of your business is going to be a function of the value you create. If you are lucky you can create a bunch and then capture some of it. The value extraction is easier is you are creating a lot of it.
How we need to adjust valuations to the present
The old way of valuing a business would build a DCF model, have some current growth numbers and then a terminal growth rate that was much slower. But we now have networked, global businesses where you can see growth spike in year 6 right when the model would tell you to use the terminal growth number.
In year 6, your business could become the market standard. A lot of our valuation tools are built for an industrial era where a) growth was much lower b) there will little network effects and c) return on incremental capital were not high.
An interesting way to look at a startup’s likelihood of success:
If you had a matrix with complexity of the industry on one axis and whether that industry is boring or exciting on other - you are going to have a lot less competition going into an industry that is both boring and complex. Think Insuretech.
While if you want competition, a lot more people will be interesting in an industry that is both simple and exciting. Think consumer retail.
The Importance of Hiring:
Many startup decks are about growth and TAM. At the early stage, it’s so much more about each incremental person you hire. And the biggest risk isn’t when you are fund raising but when you have the money and you are hiring.
There will be a rush to just get any person in who can do the job, after all the VC’s who backed you want the growth, but it’s critical to hire the right person who is not only great at the job but also makes the whole business better.
Next time you are talking to a start up about where they are going to spend the money ask about who specifically they will be hiring and why them.
C. A Few Things Worth Checking Out
1. A super article on How To Be Happier. This article is better than all the books I’ve read on the subject. Bottom line:
a) Write down three things you’re grateful for each day.
b) Practise mindfulness.
c) Learn about Cognitive Behavioural Therapy and use it.
d) Track your happiness, then do more of what you like and less of what you don’t.
2. I spend a lot of time learning on Twitter, it’s an invaluable part of my life. I also think it has the potential to be a great business and investment. Here’s a good pitch on the business & stock by Elliot Turner.
3. Ray Dalio talking about central banks, the dollar and inflation last week
We will be hearing a lot more about this in the next few months.
Education will need to change in a big way.
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