Markets spent the last quarter in a general “holding pattern” with periods of severe up and down volatility followed by periods of relative quiet, all accompanied by low volume and ending with little progress overall for the quarter, which ended flat to slightly down. Our portfolios acted similarly. As we are now in the traditionally weak part of the year – September/October – it would not be at all surprising to see a more severe correction materialize, along the lines of 10-15% down.
There is very little to be pleased with from a policy standpoint in the current climate. The printing presses have been in full operation at the U.S. Federal Reserve (the Fed). The U.S. Congress and Executive Branch seem determined to deliver a massive tax and spending plan totaling over $5 Trillion (adding to the $4 Trillion or so they have already spent during the era of COVID). And restrictions on virtually every aspect of life on the planet either continue or are threatened to be resurrected at a moment’s notice.
In our view, none of this is necessary – so much so that we hold out hope that much of it will fail to materialize, at least the taxing and spending part. Nonetheless, massive damage has been done to businesses (particularly small ones) due to misguided policies from governments all over the world. Of course, these policies were enacted in the interest of fighting what was considered a serious virus. However, the impact of these actions is now far more serious than the virus itself. We did warn of this potential back in March of 2020 in our blog post, “Time For A Pushback.” We urge readers to review that post.
Regardless, this scenario is what we must deal with at present. Supply chains are in shambles as the powers-that-be are learning that you cannot turn the economy off and on like a light switch. Whatever the masters at the Fed say, this situation is not just “transitory.” These massive actions have served to disrupt supply chains for years. And the inflation that everyone is experiencing is likely here to stay, at least for a while. As for the damage this has done on a societal level, and how that affects economic behavior going forward, we can only guess. We expect it will be long-lasting if not permanent.
Nonetheless, it will be the entrepreneurial drive of the people who run businesses that will lead us out of the morass that has been created. And good news on that front is at hand. The long, dark slog of the “8000 to 4000” problem (the drop in the number of public companies on U.S. exchanges), of which we have written about endlessly in recent years, has reversed. Thanks to the little understood special purpose acquisition company (SPAC), we are now back up to over 5800 companies on U.S. exchanges. This is amazing news. These are the generally smaller companies that in the previous 15-20 years were unable to gain access to the capital in public markets, allowing the oligarchic rise of the “FANGS” to dominate the past decade and, in our view, stultify innovation and competition in ways that have become detrimental to economic progress.
It is from these ranks, and from other companies yet to become public, that we will see the unleashing of the innovation necessary to drive the economy of the 21st century. While some pundits have argued that the technology boom of the past few decades has run its course and is running out of steam, they could not be more mistaken. We are actually on the verge of revolutionary new developments in many areas, among them two important related developments: blockchain technology and distributed computing. This economy will be transformed by the rise of distributed computing tied to blockchain technology and, as our friend George Gilder wrote about in Life After Google, those transformations will power the next generation of computing and technology, not to mention almost every other sector in the economy. The “central control” of everything from computing to finance will be upended.
We are reminded of the experience of the 1970s, during which we saw tremendous economic and political mistakes, leading to all kinds of negative consequences (including the rise of enormous conglomerated business behemoths and all kinds of obstacles for smaller companies), but during which we also saw the rise of new and innovative companies (including Apple, Microsoft, Intel, and many others) who would go on to change the world in completely unforeseen ways. We are convinced that the lesson for investors is that we must always be searching for innovative, growing companies and new transformative paradigms (which are at the heart of our narrative-based investment philosophy), no matter how negative the general climate seems to be at any given moment. Yes, indeed, we are living in interesting times! Stay tuned.
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