Will Summer End Before the Iran War?

Summer's End:

First, no, you did not miss a July newsletter - that newsletter evaporated into the ether, due in part to the World Cup sucking up a lot of the author's focus at the beginning of the summer.  And only a few readers complained, which is better than the expected none.  Luckily, those readers (and probably you as well) had already assumed that watching the World Cup kept me from getting another newsletter out.  Partly true, but I was also waiting for SpaceX to finally break below its IPO price. Not because I would officiously say “I told you so”, but because I was pretty confident that (wherever SPCX price ends up when I hit publish) the stock price gyrations would have buttressed my underlying advice, which was simply: IPOs should NOT be bought by (i.e. sold to) the individual investor!

But before we get to SPCX, we should get back to the Iran War, which wasn't (isn't) a “war”, but did lead to a peace deal (which wasn’t a deal)?  But did lead to peace, except for the continued hostilities? But we are still about to get a great deal? And the oil is flowing again, I think? Wow, I guess when the networks don't release new TV shows in the summer, the President feels the need to create drama. We are certainly approaching life imitating art with the latest gyrations – although unfortunately, the art appears to be a poor approximation of theater of the absurd.  Can life imitate art if Trump has never read Beckett? While we wait for Godot and his peace deal, however, we can take solace that the overall stock market appears to have moved on from the concerns of stagflation and a 1970’s oil shock that were so prevalent earlier in the war.  Part of the explanation is that although the oil markets continue their gyrations in response to each different declaration from the President (and response from the Iranians) the price of oil has never actually departed significantly upwards to $200 (as was predicted).   But most importantly, everyone in the market sees that Trump has absolutely no appetite for higher gas prices. And the market is responding to that!

Now the focus has shifted back to AI and whether we are starting to see a ROI (Return on Investment) from the massive capex over the last couple of years.   Recently, MSFT and AMZN showed investors some potential for that (and were richly rewarded, with both going up ~15% after good earnings, leading to some sort of pointless MSFT record).  (Late update:  Nvidia too).  This is good for the market generally; even if AI has the hallmarks of a speculative bubble, the market’s focus seems to be narrowing in on whether these AI investments are paying off –  and that is exactly what we should want as index investors who follow the market.  As index investors we want the overall economy to grow and be productive! Or if we dabble in individual company stocks, or were lucky enough to accrue significant holdings in certain stocks, we should be happy that those companies are seeing the message that they need to invest efficiently (or give us our money back to invest elsewhere!). 

SpaceX to the Moon?

Mentioning the world’s first trillionaire (for a fleeting moment above) seemed like a good enough segue to revisit the biggest IPO in years (as discussed in the last newsletter).  Now, I wasn’t the only one deeply skeptical of the valuation of SPCX, but I must admit I was a little surprised at just how quickly that inflated valuation became unsustainable in the market.  After a few days of euphoria (or market manipulation, as we discussed last time), SPCX hit an intraday high of $225 per share in mid-June but as we entered August, it was hovering around above $110 (and now has rebounded to bounce around near its IPO price of $135).  Which is to say that anyone who gave into the hype and purchased SpaceX a day or two after the IPO is likely sitting on short term losses of around 30% (unless they panicked at the end of July and locked in a 50% loss - brutal).  But there are few lessons I like to draw from this (ignoring the IPO discussion from last time). First, it does appear that a lot of the chatter about keeping SPCX out of passive investors portfolios was being taken seriously - even if the overall conclusion is that passive investing is a myth (that cat is out of the bag, unfortunately). Second, while there were countless analysts recommending SPCX (and still doing it, although I presume they are all associated with Investment Banks who were involved with the IPO) it was the bond market (vigilantes?) who again showed itself to be the better judge of risk (that is a callback to the sidebar above, and also foreshadowing the bond market discussion below. Wow!) Third, apparently one of the significant drivers (and, I repeat, apparently) for the stock price collapse was a scrubbed/failed Starship launch.  The scrubbed launch definitely happened, but Elon insists the subsequent launch/recovery was not a failure (even though 5 of its rockets failed to ignite as it touched down); his proof being that the rocket was still floating in the Indian Ocean, rather than having exploded or immediately sank.   (Update: it is finally out - is that why the stock price has recovered? Only the underwriters know!).  By the way, I actually do think their rocket business is pretty fucking impressive – but the concept of their insane IPO price was predicated mainly on AI and orbital data centers…not just the rocket business. And we still don't have any data centers in space! Although SpaceX did manage to crash one of their rockets into the moon (not a joke!), which is not exactly what investors were hoping for, but I guess will have to do!

Of course, if I am talking Elon and SPCX, I probably have to mention Tesla too, if for no reason than the multiple rumors that Elon is going to try and merge SPCX and TSLA (much like he did to rescue SolarCity in 2016).  I presume these rumors were driven in part by the fact that TSLA had a not-so-great quarter, but maybe moreso by the fact that it is becoming increasingly clear that TSLA is losing (has already lost?) its status as the premier EV manufacturer.   It may well be that TSLA is considering selling its China business because that will make it easier to combine with SPCX and also because it’s about to lose any market share it had in China.  For example, multiple Chinese EV makers are advertising charging times significantly lower than Tesla – necessitating the inclusion of seconds (not just minutes) in their descriptions.   As a Tesla buyer who purchased my Model Y because of their fantastic charging network and charging speeds, the ability to charge 10% to 70% in under 5 minutes would be pretty appealing! Finally, as another flashback to the SolarCity merger in 2016, I note that news just came out that Tesla’s SolarRoof has now been entirely discontinued (a flop surpassed only by the Cybertruck - which is officially the biggest car launch flop ever!), and serves as a reminder (as if you need one) that many of Elon’s announcements are not really about business plans (unless you mean his personal balance sheet), since the SolarRoof was announced just a few weeks before he asked Tesla shareholders to approve the SolarCity bailout (this is true!). Now, of course, Tesla shareholders who held through that merger aren’t actually complaining (they benefited tremendously after Tesla’s amazing run-up in the early 2020s).  But I wouldn’t be surprised if a proposed SpaceX merger with Tesla doesn’t follow (and/or precede) at least a few wildly exciting and groundbreaking announcements from the former trillionaire.

(Official) Musical Interlude:

Questionable mergers and Tesla PowerRoofs had me thinking about electricity (apparently) - so here are two very different, but fun, electricity songs.

Bond Yields and Kevin Warsh

This newsletter is going to take a small break from pointing out ridiculous corruption stories (truthfully, the whole July newsletter could have been a special FIFA corruption review, but the author was distracted cheering for Argentina. [What’s that? cognitive dissonance…not familiar with the concept, but will try and look it up.])  And there would have been plenty of ridiculous corruption stories to share, but it might be more useful to tie it to a broader point about bonds.  After all, the bond market is supposedly always right (see SPCX above). And the financial press has certainly been highlighting the bond yields increasing.  So why are bond yields increasing, and should we be worried?  My answer to the second part at least: we don’t need to be worried about the fact that bond yields increasing, but we should be worried about at least one of the underlying causes for bond yields increasing – perceived loss of Fed independence under Kevin Warsh. And, it's not exactly political corruption or market manipulation, but it's certainly adjacent.  Perhaps a reader can suggest a country with high levels of political corruption, and nonetheless possessing a central bank renowned for independence and a cautious technocractic approach.  I, at least, am coming up dry.

Now unfortunately, my pointing out (like many others have done) the risk of decreased central bank independence doesn’t really help anyone looking for a short term action item about positioning stocks vs. bonds.  But then again, I don’t really subscribe to the idea that readers should be engaged in substantial short term reallocations in response to the financial news.   For example, I hope none of you saw and then tried to follow this article in Bloomberg, about how to invest in response to the Super El Nino we are getting/going to get…I mean, seriously, sell stocks that are overly exposed to Potash and buy stocks with more nitrogen exposure?  Sell Peruvian Banks and buy US insurers?  I barely know what Potash is, much less how much of my portfolio is “exposed to Potash”.  I have been to Peru and definitely cannot name a Peruvian bank [FYI - I tried to guess Itaú BBVA, which is actually Brazilian, so pretty bad guess].  Probably the biggest bet I would make would be buying (for readers in California) or not buying (for readers in the PNW) an Epic/Ikon Pass 😊.

But the broader point is whether the bond market is actually forecasting a general decline in our political and economic institutions (political corruption being only one symptom)?  And what does that mean for you as an investor?  It’s a big topic, obviously, and there is way more to say than could be legitimately addressed in a newsletter published (at best) monthly!  But I do think it is important to keep that risk in mind when determining your high-level allocations; not between stocks and bonds but between the US and Int'l equities.  US equities have outperformed Int'l equities recently for a good long time (only very recently reversed in the short term, see MSCI chart).   And frequently explanations about the reason for such out-performance focus on a stronger US dollar, better investing climate and regulatory framework (as well as things like more tech and better earnings growth).   But a stronger US dollar, good investing climate, and strong regulatory framework are inextricably tied to our governance structures.  Investors generally require higher premiums to invest in countries where regulators (and regulations) can change on a whim. Not suggesting our president is capricious (because this is an apolitical newsletter, as you all know).  But importantly, the lack of perceived Fed independence will hurt the strength of the dollar (particularly if Warsh won’t deliver economic pain to control inflation). I suspect this longer-term concern is what we are starting to see get priced into the bond market.

It doesn’t mean you need to do anything (especially not rashly); after all various US stocks are exposed to foreign currencies and international economic growth.  But it might be reminder to make sure that you’ve rebalanced any accounts which have benefited by the previous US out-performance.  Or, depending on taxable treatment of those accounts, perhaps merely change future contributions (my typical approach).  Remember you can change/rebalance in all retirement (tax-deferred/tax-free) accounts without any taxable event, but in any taxable accounts you probably want to simply change where your contributions go. I am a big fan of automated contributions/investments (i.e. I don’t like having to log on and make decisions all the time, because of recency bias for one); but that doesn’t mean I won’t change the allocation of future contributions from time to time to always be aiming at my preferred US vs. Int’l allocation.   So, the TL;DR is that I am paying more attention to US vs. Int’l equities than stocks vs. bonds in response to this concern.  The corollary is that [perhaps obviously], I generally prefer using bonds (for individual investors) for smoothing returns (and sleeping well at night!), and that allocation does sometimes require rebalancing as mentioned a few months ago (where you can also see a Dolly Parton video, RIP); but I definitely don't recommend trying to trade bonds in response to global macroeconomic changes (or forecasts from the Fed).  Anyway, all this talk about bonds reminds me of old people (not me, I am still young and vibrant of course, and will be for another 40 years I anticipate), which is a good segue to the last little segment. 

Inheritances and Heirlooms:

I met with a client who was considering moving in her boyfriend, but one of her concerns was that his house was jammed full of furniture he had inherited and wasn’t able to get rid of (despite not liking/using those items).  And the issue of inherited “things” is not uncommon (particularly considering the size of Baby Boomers’ houses and their penchant for “family heirlooms”).    Bloomberg wrote [gift link] extensively on inherited art (often undesired), which ends up with no real place to go.  And the examples in that article are only, perhaps, the most surprising examples since we tend to think of “art” as very movable, sellable, and desirable.   The issue is broader than art, obviously; and serves as a good example of a broader lesson of not waiting to pass things down (money, art, furniture) until the very end via an inheritance.   Because, much like heirloom tomatoes, you shouldn’t wait too long to share the wealth and heirlooms you have enjoyed with your family and friends.

There are lots of good reasons to not wait (one big one, personally important, is that it helps you downsize; a process my dad is undertaking right now in part so he will be forced to divest all sorts of furniture/art/things).  Unfortunately for me, our house was not filled with an extensive collection of old master oil paintings.  And in fact, the issue is worse when the items are grand pianos, heirloom pieces of furniture, unique collectibles, vintage cars/vehicles, etc. (though obviously jewelry/watches are different).   My house is not small, but extra space for a grand piano is not something that was planned for (partly because I don’t play the piano anymore, if I ever really did 😊). Luckily my uncle, a music professor who does play the piano, has my grandmothers’ grand piano!   Beyond downsizing, the other benefit of being proactive is that if you want one of the kids (or grandkids) to enjoy an heirloom, you can talk about with them before they buy a house in which definitely won’t fit it (or, worse, buy their own piano!).   I mean, unless you are actively playing, giving them a grand piano now when the grandkids are learning piano seems sensible?  The same applies to heirloom furniture (useful furniture, of course, not the China cabinet or entertainment center, because no one wants those anymore!). Those bequests will be more useful now when your kids have, for example, moved into a new house than they will be 15 years from now, when their family memories have been made around a different table they purchased 15 years ago.  Finally, remember that depending on your family situation, it is not uncommon that multiple “heirloom dining room tables” are intended for the same couple!    So, if you want to make sure your heirloom dining room table is used and appreciated, better to get in the door first (if someone were competitive about that, not you obviously!) 

Finally, again subject to family dynamics, one of the biggest benefits about being upfront with children about these heirlooms arises when there are multiple kids, with various levels of emotional connection to such items (and the parents gifting the items may not fully understand).   If a family conversation (even in separate parts) can broach the topic of (i) who wants heirloom furniture, (ii) who is able to take them/use them, and (ii) who doesn’t want them at all (perhaps because their partner is also going to get a dining room table), parents can likely make the most harmonious decisions for their kids.   On the other hand, if you have a Calder hanging in your living room, I suspect any of the kids would make some design choices to make it fit 😊.  Or a Balloon Dog by Koons...although those potential recipients are (probably) not reading this newsletter!  So definitely consider gifting heirlooms sooner rather than later. That goes for the only heirlooms that I think are undeniably amazing to receive – heirloom tomatoes - because you should give those away when they can be still be used for BLTs (and not just tomato sauce 😉).   And with that, we can wrap up with some songs about inheritances!

Musical Grand Finale

Tom Petty’s "Down South": One of my favorite Tom Petty songs from the tail end of his epic career, starts with an absolutely killer set of lines which kind of sums everything in the song.  Headed back down South / Gonna see my daddy's mistress / Gonna buy back her forgiveness / Pay off every witness.

Corb Lund's "S Lazy H" - A wonderfully sad song, which he explains (in this video) was more of an amalgamation of various stories he knew about from Alberta, not one specific story.   But the underlying tension about family farms is real – and the (spoiler alert) heart-breaking resolution of the song has been played out for generations.   Unfortunately, when an inheritance is in the form of one significant ranch/farm, splitting the estate between multiple children is never going to be easy.