Month: October 2024

October 28, 2024

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Introducing the Einstein of economics

Dear Reader,

You’ve probably heard of John Maynard Keynes and Adam Smith, right?

Towering figures in economic theory.

But how about Ludwig von Mises?

I didn’t hear the name until I went to work for an independent financial research firm renowned for publishing work well outside the investing mainstream.

This overlooked Austrian economist might just be the most important thinker you’ve never heard in terms of understanding capitalist society.

Given that we believe that investing in knowledge is one of the most intelligent things you can do as an investor, I think it’s time I introduced you.

The free market radical

Ludwig von Mises

Ludwig von Mises was an economist, logician, sociologist and philosopher of economics.

Born in 1881 in what is now Ukraine, Mises was the last torchbearer of the original Austrian School of Economics. I’ll dig into the Austrian school in a future email.

Despite his brilliance, Mises spent much of his career as an outsider in academia, often without a paid university position.

He wrote and lectured on classical liberalism and the power of the consumer.

In other words, he was interested in free market economics and civil liberties. He advocated limited government, political and economic freedom, and freedom of speech, with a particular focus on individual autonomy.

He was not a fan of social policies, taxation and state involvement in the individual’s life.

He defended these views as illiberalism and authoritarianism rose in Europe during the 20th century.

While Keynesian economics — which included the idea that government spending could increase economic output — dominated the 20th century, Mises steadfastly defended free markets and criticized government intervention.

The Nazis burned down his library and forced him to flee to the United States in 1940.

Lemberg, Mises’ birthplace, in modern-day Ukraine

Mises made groundbreaking contributions to economic thought, including:

Calling out socialism: In 1920, Mises argued that socialist economies would inevitably fail due to the impossibility of economic calculation without a price system. This insight remains a cornerstone of free-market economics. He also believed a stock market was a guard against socialism.

Austrian business cycle theory: Mises proposed that business cycles are caused by the expansion of bank credit, leading to malinvestment and eventual recession. This theory offers an alternative explanation to Keynesian models.

Praxeology: Mises developed this approach to economics, based on the idea that economic laws can be derived from the self-evident axiom that humans act purposefully to achieve desired ends.

Capitalist society: Mises’ perspective

For Mises, capitalism wasn’t just an economic system — it was the only viable way to organize a complex society.

Here’s why:

The sovereign consumer: In a free market, consumers ultimately direct production through their buying decisions. This “democracy of the dollar” ensures resources are allocated efficiently to meet actual demand.

The entrepreneur as engine: Mises saw entrepreneurs as the driving force of progress. By taking risks and innovating, they constantly improve products and production methods.

The price signal: Prices in a free market convey crucial information about scarcity and demand, allowing for rational economic calculation. This is impossible in a centrally planned economy.

AI rendering of ‘capitalism’

The stock market: Capitalism’s unsung hero

While many people see the stock market as a casino for the wealthy, Mises viewed it as a vital institution in a capitalist society.

He argued that the stock market efficiently directs capital to its most productive uses, as investors seek the best returns.

By allowing ownership to be divided and traded, the stock market enables risk to be spread across many individuals.

Stock prices provide crucial information about the relative value and performance of companies, guiding further investment decisions.

In his own words:
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‘There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist.’

What would Ludwig say about today’s situation?

If you hadn’t noticed, we’re living in an era in which the market practically hangs off government decision-making.

What central banks decide to do with interest rates has a massive impact on what investors decide to do with their money.

While we might feel this is normal, Mises warned against government manipulation of the money supply. He said that such meddling created boom-and-bust cycles.

With central banks around the world engaging in unprecedented monetary expansion, his theories are more relevant than ever.

As governments attempt to direct economic activity, Mises’ critique of central planning provides a powerful reminder of the importance of decentralized decision-making in markets.

Mises’ emphasized entrepreneurial innovation as a driver of progress — not central bank money printing.

Mises’ ideal investor avatar

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Ludwig von Mises would have defined a good investor as someone who is:

• Wary of government intervention in the economy, which can distort prices and lead to malinvestment.
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• Understands that stock prices reflect not just current conditions, but expectations about the future.
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• Recognizes their role as a capital allocator in the broader economy.
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• Appreciates the stock market as a crucial institution for economic freedom and prosperity.

All pretty sound, right? So…

Why does history overlook this man?

Mises’ relative anonymity in popular economics can be attributed to several factors:

His uncompromising stance against government intervention put him at odds with the prevailing Keynesian orthodoxy.

His works are often considered dense and challenging for the general reader.

He lacked the institutional backing that many of his contemporaries enjoyed.

Despite this, Mises’ ideas have had a profound influence on libertarian thought and continue to shape debates about economic freedom and the role of government in the economy.

In Mises’ view, every stock purchase is not just a bid for personal profit, but a vote cast in the economic democracy of the free market.

Quote of the Week

‘The stock market is the heart of the capitalist system. It is its most characteristic feature. It reflects all the economic conditions of the country and all the circumstances affecting it.’

— Ludwig von Mises

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy it.

If one of our dear readers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

October 21, 2024

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S&P 15,000 by 2030?

Dear Reader,

As we drift deeper into the final quarter of 2024, three financial phenomena are colliding.

We’re nearly two years into a bull market that’s charged higher despite prolonged inflation and interest rate rises.

Now, interest rates are falling.

Corporate earnings are up.

And yet, recession fears linger.

The market is pricing in a recession at 35% probability.
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Thom Benny
@The_Benchmark_
Not out of the woods. Bears remain close. https://twitter.com/KobeissiLetter/status/1846553207239000329

The Kobeissi Letter
@KobeissiLetter
BREAKING: The market is now pricing in a 35% chance of a recession in the US within the next 12 months.
This is down from ~50% seen several months ago but still above the historical average.
Among different indicators, next 12-month Fed interest rate policy expectations imply… https://x.com/i/web/status/1846553207239000329

4:8 PM • Oct 16, 2024
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Plenty of fear. Plenty of greed.

Which will prevail, and for how long?

Right now, there are three distinct visions are emerging for how the stock market might perform for the next 10 years.

As ever, the bull, the bear and the middle ground.

Here they are.

The bull case: Riding the
AI and demographics wave

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Fundstrat’s Tom Lee presents an optimistic outlook, projecting the S&P 500 to surge beyond 15,000 by 2030.

That’s more than double its current level.

What’s got this bull so charged up?

Three main things:

Millennial spending wave: Historically, stock market upswings have coincided with growth in the 30-50 age group. Lee sees the rising economic influence of millennials entering their prime spending years driving stocks higher.

Tech filling labour shortages: He expects U.S. tech spending to skyrocket, potentially pushing the tech sector’s weight in the S&P 500 from 30% to 50%. Lee anticipates a surge in technology investment, particularly in AI, to address global labour shortages.

Flood of money into the U.S.: As companies worldwide invest heavily in technology, Lee predicts increased capital flows into the U.S. — strengthening its dominant position as a hub for leading tech firms.

Were these projections to materialize, the market’s annual returns could compound in the high teens. Bullish indeed.

But that’s just one view. What about the other side of the coin?

The bear case: Stagnation
and geopolitical risk

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On the other end of the spectrum, some analysts, including those at JPMorgan, paint a more cautious picture, at least for the rest of this decade.

Their concerns include:

Can’t go much higher: Many think current equity valuations are stretched, and that there’s little room left to run higher.

War worries: Prolonged, high-stakes global conflict makes analysts nervous about whether the stock market can continue climbing.

Recession Fears: The Fed has just lowered interest rates, but recession fears remain alive and well. Bears don’t see the economy as out of the woods yet.

Under this scenario, the market might struggle to make gains, potentially remaining range-bound or even declining over the next few years.

Grim. But, like all these viewpoints, far from a sure thing.

The middle ground: Emerging
markets take the lead

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Goldman Sachs presents a more nuanced view of what lies ahead for stocks.

They see a shift in global market dynamics, and don’t focus only on U.S. markets.

Key points from their forecast:

A bigger share for emerging markets: They project emerging markets’ share of global equity market capitalization to increase from 27% currently to 35% by 2030. That would be a significantly larger slice of the global market cap, which currently sits around $109 trillion.

U.S. market share decline: While emerging markets could increase their share, the U.S.’s could fall from 42.5% today to 35% by 2030.

India’s leading the charge: Goldman Sachs predict India will have the largest increase in global market cap share, potentially reaching 8% by 2050.

This view suggests that while U.S. markets may not see explosive growth, the global investment landscape could offer significant opportunities, particularly in emerging markets.

​This gives you an idea of how far these markets potentially have to run.

In other words, while backing U.S. tech stocks today seems like the smartest play, perhaps that won’t be the case 10 years from now.

Basically, this view is ‘things could change’ — which, to be honest, isn’t much of a view at all.

Give me a strong for or against any day.

Another record high, but for how much longer…

While we’re fans of taking the long view here at The Benchmark, we don’t advocate taking your eye off the ball in the short term, either.

Phil Rosen over at The Opening Bell Daily pointed out last week that, having just hit its 46th record high of the year, the S&P 500 could have the best part of a year left to run to its bull market high.

According to the Wall Street Journal, the market historically takes 709 trading days to hit its bull market high.

This current bull run — which started on October 12, 2022 — is just over 500 trading days old.

That would imply there’s just over six months left of rising stock prices.

If only the past were a reliable guide to future events.
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(It’s not — do your own research and understand the risks, always.)

Quote of the week

‘The individual investor should act consistently as an investor and not as a speculator.’

— Benjamin Graham

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy it.

If one of our valued subscribers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
​​
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

October 14, 2024

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Newton’s law of speculative bubbles

Dear Reader,

If I told you there was a company whose objective was to wipe out national debt, and that I’d secured a trade monopoly with a vast, rich nation to make it happen…

Would you be interested in investing?

This very proposition drew some of the 18th century’s highest profile players — including pioneering physicist, mathematician and philosopher Sir Isaac Newton — to invest their money into one of the most insane bubble-and-bust stories you’ve ever heard.

This is a tale of greed, speculation, and financial ruin that makes today’s market swings and scandals seem mere ripples on a pond.

The business of saving national economies

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The South Sea Company was founded in 1711 by an Act of Parliament.

In 1713, the company was granted a trading monopoly in the South Seas region. This referred to South America and surrounding waters at that time.

This monopoly was granted as part of the Treaty of Utrecht, which ended the War of the Spanish Succession.

Specifically, Britain had been awarded the right to the Asiento (‘Contract’) by the Spanish Crown, giving them monopoly rights to import African slaves into Spanish-held America.

The British government then granted this right to the South Sea Company.

In exchange for this monopoly, the South Sea Company agreed to buy up £9.5 million (some sources say £11 million) of Britain’s outstanding official debt.

In other words, the business was going to free Britain from debt with the enormous profits of its zero-competition business activities.

This one company, with this enormous competitive advantage (secured by the government), quickly became the hottest investment narrative in Britain.

The company’s stock price ran higher on speculation and misleading claims.

At its peak in 1720, South Sea Company stock had risen by over 800%.

​South Sea House, interior​

Investors, from the working class to the nobility, rushed to get a piece of the action.

Isaac Newton, pioneering physicist and father of classical mechanics, was among them.

Newton reportedly lost as much as £40 million (adjusted for inflation) in the scheme.

Other luminaries joined Newton as shareholders.

Jonathan Swift (author of Gulliver’s Travels).

King George. Parliament. The Church.

This bubble ran to the very top.

Optimism morphs into delusion

The South Seas Company looked like it couldn’t lose.

The company could make money on trade and interest on the loan it had made to the government (to buy it’s national debt).

Speculation surged.

By summer 1720, the share price was rising fast.

King George I had became governor of the company in 1718, giving it the ultimate seal of approval.

The company launched an aggressive propaganda campaign, promising astronomical returns and framing investment as a patriotic duty.

They offered loans to investors to buy its shares, creating a self-perpetuating cycle of demand and price increases.

As share prices rose, FOMO kicked in, hard.

More people rushed to invest, fearing they’d miss out on easy riches.

Share prices charged from £128 in January 1720 to more than £1,000 by August — an increase of nearly 700% in just seven months.

What goes up…

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In September 1720, the bubble burst spectacularly.

Stock prices plummeted from £950 a share in July to £185 by December.

Down 80% in just five months.

The fallout was catastrophic.

Investors were ruined, suicides spiked, and the national economy took a massive hit.

Here’s an account containing the Amount of the Sales of the Real and Personal Estates of the late South Sea Directors:

Back before we had modern portfolio trackers like Navexa​

Jonathan Swift, who lost a considerable sum himself, captured the chaos in a satirical ballad:

Thus, the deluded Bankrupt raves;
Puts all upon a desp’rate Bet
Then plunges in the Southern Waves
Dipt over Head and Ears – in Debt.

Aftermath: South Seas Company’s sunken dream

The public outrage was, of course, strong.

Parliament — despite having created, promoted and invested in the whole thing — launched an inquiry.

It uncovered a web of insider trading and bribery that would make even the shadiest of modern-day corporate raiders blush.

Several company directors were punished, including prominent Cabinet members.

The Chancellor of the Exchequer was removed from power and imprisoned in the Tower of London.

It was financial and political carnage on a scale we can’t really imagine, today.

Sir Isaac Newton: Abandoned reason to ride the South Seas wave

Too good to be true, too bad to be false

The South Seas Company saga played out about 300 years ago.

But its lessons still burn bright.

If it sounds too good to be true, it probably is.

Speculation can create a dangerous disconnect between stock prices and underlying value.

Even the smartest people (Isaac Newton — seriously) can get caught up in market mania.

Government involvement doesn’t guarantee safety — it might even amplify risks.

As we navigate today’s markets, from crypto booms and busts to AI stock mania (the jury is still out on this), the South Sea Bubble serves as a stark reminder of the dangers of unchecked speculation.

And a reminder, not only of the importance of due diligence — but of weighing the facts independently of public opinion about those facts.

Quote of the week

‘I can calculate the motion of heavenly bodies, but not the madness of people.’

— Sir Isaac Newton

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy it.

If one of our dear readers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
​​
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

October 7, 2024

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Ignorance as an investment

Dear Reader,

Seth Andrew Klarman is a billionaire. The private investment partnership he founded in 1982 has realized a 20% compounded return for 40 years.

Let that sink in for a moment.

Twenty percent a year. For 40 years.

An annualized return that strong turns $100,000 into $147 million.

Klarman’s Baupost Group hedge fund started with around $270 million in funds under management.

Today, it’s worth around $25 billion.

Since 1982 the stock market has — according to Wikipedia — crashed 10 times.

The 1987 Black Monday crash alone was enough to inflict serious, lasting financial damage to someone close to me.

The rest of their life they lived with the consequences, and regret, of having sold in panic as investors all over the world rushed to get out.

That fear and anxiety investors feel when markets are bad and everybody is racing to the exit, you could characterize as impatience.

And as Warren Buffet says, the stock market is essentially a machine that transfers wealth from the impatient to the patient.

Seth Klarman is one such patient investor. He’s even known as the ‘Oracle of Boston’, placing him alongside Buffet’s ‘Oracle of Omaha’ moniker.
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Seth Klarman — one of the world’s most patient investors

Over Klarman’s 40+ years running managing his investment fund, none of the 10 crashes have, in the long term, impeded him from racking up what most of us would agree is a highly impressive return.

According to him:
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‘The daily blips of the market are, in fact, noise — noise that is very difficult for most investors to tune out.’

‘Klar’, by the way, is German for ‘clear’.

Whether or not Klarman’s name had any bearing on the way he views the markets, it’s certainly clear that ignoring the so-called ‘noise’ in favour of a long term strategy has been immensely profitable for him and his investors.

Ignoring noise = essential for long-term returns

When we talk about market noise, we’re talking about a lot of things.

Daily price movements, economic changes that impact the markets, interest rate chatter, and current events are all standard examples.

Here’s a quick example of just how useless most noise is — and why smart investors like Seth Klarman ignore it, preferring instead to focus on their strategy.
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The chart shows you the S&P500 index between 2009 and mid 2017. As you can see, annotated along the line is every time the financial media claimed ‘the easy money has been made’.

In other words, nine times they claimed the good times were over for the S&P500…

That things were about to get tough for investors…

That you should perhaps be scared about what was about to happen to the stock market.

And yet, while in the short term the S&P500 did indeed fluctuate — sometimes severely and abruptly — over the seven-and-a-half years this chart shows, it still doubled in value.

We can’t know how many people were scared into selling their stocks each time they read a ‘the easy money…’ headline.

But, you can bet there were quite a few, because for every buyer there must be a seller.

The impatient and the patient.

I know people who won’t even get into the stock market — on account of the fact values can fall — let alone stay in stocks they own through volatile or uncertain times.

Such is their meagre appetite for investment risk — or perhaps their inability to ignore the noise.

(Lots of) time in the market

​Amsterdam Stock Exchange, circa 1670​

‘Get rich quick’ has become virtually synonymous with ‘scam’. You read those words and you know there has to be a catch.

While it’s true that some investors do bag huge gains from speculative investments like penny stocks, it’s very rare that they’re able to repeat those successes by applying any sort of discipline or formula.

Getting rich quick, you could say, depends on luck.

You have to buy the right investment at precisely the right time and you sell it at the right time. The odds of doing both of these things, consistently, are very low.

Getting rich slowly, on the other hand — building financial freedom and exponential wealth by investing like the Seth Klarmans and Warren Buffets of this world — depends on something else.

It demands investors maintain discipline, patience and a healthy amount of ignorance to allow the daily and weekly ‘noise’ to pass as exactly that — short-term blips on a much longer journey.

CGT options you didn’t know you had?

Tax is a fact of (legal) life.

Capital gains tax on investments, too.

But, you’d be amazed how many investors don’t understand the (very much legal) options available to them in calculating and reporting their capital gains for tax purposes.

Navarre’s latest walks you through the four main CGT strategies in his latest vid.

Click to watch.

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That’s it for The Benchmark this week.

Forward this to someone who’d enjoy it.

If one of our dear readers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
​​
​Unsubscribe · Preferences​

All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.