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Questions

We often have discussions in the office that consist primarily of asking questions. Sometimes they are questions we don’t think people are asking enough, sometimes questions we are sick of hearing and most often questions which we can’t answer. Not questions that only we can’t answer but rather ones that no one can answer based on real facts. I find these discussions very helpful and thought it might be interesting to expand the conversation and include our readers. It’ll usually just be stream of consciousness on my part, whatever comes to mind, but sometimes we’ll try a theme. So, this is the first edition of what I hope becomes a regular feature called Questions.

Why did the US yield curve steepen after Draghi’s comments last week? Draghi said that “deflationary forces” are being replaced by reflationary ones and bonds sold off worldwide. The yield curve in the US steepened along with those in Europe. The 10 year yield has risen 20 basis points in five trading days so nominal growth expectations rose after his comments. Real growth expectations rose too as TIPS sold off. So either investors believe that Draghi knows something they don’t or that ending QE – which is what this implies – is positive for growth. With central bankers’ credibility in the toilet I’m left wondering if all the world’s QE has actually been counterproductive. 

Why doesn’t anyone ever talk about the supply side in the health care debate? The debate around reforming health care always revolves around demand side issues – how many people are covered by insurance – and the supply of insurance. Hardly anyone talks about the supply side of healthcare itself. Simply providing health insurance is not providing health care. Part of the healthcare problem is cost. We spend 17% of GDP when the rest of the world is spending roughly half that amount. And we don’t appear to be getting any value for the extra spending; health outcomes are pretty much the same. There are two ways to reduce the cost of something, reduce the demand or increase the supply. Almost our entire discussion is about how to increase demand by insuring more people. Why don’t we concentrate on increasing the supply of health care? 

Why is the Fed suddenly so hawkish now that a Republican is in the White House? There are some differences between the economic data today and two years ago but the differences aren’t large and aren’t all in the same direction. GDP growth was actually higher two years ago. Q1 2015 year over year growth was 3.31% versus today’s 2.1%. Inflation was slightly lower then but the PCE deflator has been sub-2% for most of the time since 2012 and has recently turned lower. The unemployment rate was quite a bit higher so I guess that might be the difference but the Phillips curve hasn’t worked for a long time to predict inflation. I don’t think Yellen and the other Democrat members of the board are consciously biased but I’m sure there are plenty of Republicans who will think they are. But I do wonder if there isn’t some unconscious bias. We’re all guilty of it and surely members of the Fed are too. 

When will Amazon face some anti-trust scrutiny? Amazon’s entire business model would seem to consist of predatory pricing to gain market share. That’s good for consumers as long as it lasts but can we count on Jeff Bezos – or more accurately Amazon shareholders – to always be so generous? At some point, shareholders are going to demand profits and AWS isn’t going to be enough to justify the stock price. 

When did the trend of lying as a sales tactic become so popular? We have received a number of phone calls recently at our office that start off with the salesperson saying something like this: “I’m just following up on my call to “so and so” last week.” Then they go into whatever their spiel is. In several of these calls we know they are lying because they reference a call to someone who is either no longer with the company – and hasn’t been for a long time – or they refer to someone who is on corporate filings but doesn’t work at the company. Why does anyone think this tactic will be successful? How could starting the relationship on a lie be the right path? And, by the way, these are not scams; they are real companies trying to generate sales. 

Why do so many people in the investment business act as if things are normal? The daily commentary about markets is for the most part the same commentary I’ve been reading for the last 30 years of my investing career. How are earnings? What’s going on with the economy? Is the market over or undervalued? But things are far from normal right now. The world’s central banks have expanded their balance sheets to something like $17 trillion. The BOJ owns a very large chunk of the Nikkei. The Swiss National Bank, according to SEC filings, owns $63 billion of stocks, most of them US. Why is the SNB buying US stocks? And of course, these same central banks have huge bond holdings, not all governments. The ECB owns nearly 85 billion Euros of corporate bonds. In a way, what we’ve seen over the last decade is a kind of stealthy, slow motion nationalization of private assets. That is worrisome for reasons that have nothing to do with what happens to the stock market over the next six months or the next year or the next decade.

Will the stock market fall when the Fed shrinks its balance sheet? Everyone knows the stock market rose in lock step with the Fed’s balance sheet. If the balance sheet goes in reverse will the stock market too? I suspect the answer to that question is yes but frankly I don’t know. The only parallel I can find in history is the post WWII case and yes shrinking the balance sheet pushed stocks lower. But that is only one data point, not nearly enough to draw a conclusion. I wonder too if shrinking the balance sheet might mean lower stock prices but also a better economy. That’s something I’ll try to write on as it comes nearer.

That’s all I’ve got for this edition of questions. When I think of more – and I always do – I’ll be back. I’d love to hear feedback on these in the comments section and I’ll do my best to reply promptly.