Weekly Comment - July 29, 2019

Jul 29, 2019 | Nick Foglietta


Our digital lifestyles spew off massive streams of data that institutions COLLECT, COMPILE, SORT and SELL.

“The Great Hack”


The Netflix documentary entitled “The Great Hack” is worth a couple of hours of your time to understand the impact that data and “metadata” collection has had on our society; specifically on the last US election.


Last week I commented upon the global military complex shifts about how it has even become metadata dependent:

  • A swarm of AI (artificial intelligence) pilot drones can already negate the present US military advantage.
  • Metadata analysis offers more covert information than 85% of traditional intelligence.

The conclusion those two points lead us to is a situation where the amount you spend on sophisticated weapons is useless IF your opponent has the ability to (a) anticipate your attack and (b) use quick responding drones to neutralize your sophisticated weapon.


Just imagine how much that simple change has destabilized the global military balance that has existed since the completion of World War II.


Metadata is now the most valuable commodity on the face of the planet surpassing oil which has long held that position.


The algorithms analyzing data are employed in virtually every area of our lives you can imagine. Our digital lifestyles spew off massive streams of data that institutions COLLECT, COMPILE, SORT and SELL. The purchasing institutions run the purchased data with other purchased data to build accurate profiles of individuals, communities, and nations.


Most of society offers their data freely via their electronic spending habits and time spent online. The small cost of putting a little of our information “out there” seems insignificant to the advantage of using that great new App on our phone. 


And here is the reality of 2019: There is no “taking our data back.” The barn door is wide open and life is forever changed.


So why are you bringing this up in your investment blog Nick?


Because the ability to shift your behavior is based on the ability to shift the narrative. And the ability to shift the narrative is premised upon being able to control the narrative in the first place.


When those who want to shift the narrative can have a basic understanding of your online “footprint” via metadata analysis, they have the ability to influence your perception of almost anything in the world.


An example of narrative shifting in action can be seen with inflation expectations.


The narrative you are being sold is that there is not much inflation in the world and the world needs more of it. I want you to think about how freaking stupid that idea really is.


First, we all know that our lifestyle inflation is much higher than what the official government statistics tell us it is. History has shown that high inflation rates destroy real nominal wage growth and real savings.


Stable prices that increase at the rate of organic growth is the desirable condition in economics. 


But when the global debt level is 350% of global Gross Domestic Product (GDP), the powers that be need more inflation. You might even say they must “inflate or die.”


So the “sheeple” of the world are told over and over again more inflation is required for their lives to be better when inflation is one of the things that is making their lives more difficult.


Here is another narrative that must be sold to the public.


The reality is that American state and local pension funds have just under 73% of the assets they need to fund future obligations to public workers. They believe they can hold that gap by earning an average of 7.4% annually.


The public must believe that a 7.4% compounded rate of return is realistic for these pension funds.


Let me show you a chart from John Hussman’s, “They are Running Towards the Fire” note dated July 14th 2019. It uses American data for the expected “buy and hold” rate of return for a US portfolio of stocks that is made up of 60% S&P500, 30% fixed income, and 10% cash.

Without getting too bent out of shape about trying to understand exactly how this chart is created it states:

Based on the returns of US stocks, bonds and cash since 1928 the compounded, expected rate of return from this point in the financial cycle is 0.44% per year.


That is a huge distance from 7.4%


Even if Hussman is off by 2% and the compound rate of return is 2.44% rather than only 0.44%, these pension funds are nowhere near close to being able to meet their obligations.  


But the narrative must be sold to the public that it is possible to maintain pension benefits in the status quo.

I have found myself asking the question: What is really possible?


It seems history has to be turned on its head to accommodate all the debt, but isn’t that exactly what we are watching happen before our eyes?


Let me play the optimist.


There is a way, not to solve the problems caused by outrageous debts, but to kick the can down the road for a longer period of time.


What if the entire world went down to zero or negative interest rates? What would stock and real estate prices look like then?


Nobody knows for sure, but the powers that be are betting asset prices will still go higher if they keep lowering interest rates. At the very least, they are pretty sure it extends the present conditions.




We live in a quickly changing world. 


In my 32 years of experience in the financial industry, I have never been quite so humbled as I am now.


The strongest allies I have are a strong sense of history and a deep rooted passion for investment discipline. 


The stock market is now as bifurcated between “growth” and “value” as it was in 1999/2000. This means investors are paying an incredible premium to buy growth (think mainly technology) stocks vs more conservative names. 


It is worth noting that extremes in these types of correlations do NOT mark the end of BULL markets. It is the REVERSAL of these extremes that marks the end of BULL markets.


We watch carefully for such change but the road to zero percent interest rates keeps much of the growth story alive so I don’t expect the growth stocks to stop outperforming until interest rates bottom…wherever and whenever that might be.


Feel free to email or call with any questions you may have.