Clients & Friends,
It’s been a busy month with the delta variant running rampant in parts of the U.S. and world, and renewed concerns over reimplemented lockdowns taking the center stage. The hospitalizations appear overwhelmingly concentrated by those who are unvaccinated. While the amount of people still not vaccinated is concerning, the vaccines are now battle-tested against delta with strong results. Hopefully those who are not vaccinated will take notice.
In economic data, Q2 GDP was released and came in at 6.5% which was materially lower than the 8.4% estimate. A large reason for the miss was related to inventories and supply chain issues. Meaning, inventories were drawn down but not replenished as supply chain issues prevented restocking. Automobile inventory was a big factor for the drawdown which also translated into a rising CPI. We found out that in June, CPI jumped +.90% from May and +5.4% from June 2020, driven by a large increase in used car prices. The big debate is whether this increase is transitory. Another perspective is that the increase will be more modest going forward but that these new price levels are here to stay. So perhaps we should get used to the cost of goods and services at today’s levels.
It was also a month of firsts where we saw Bezos and Branson launch into space, which was incredibly exciting to watch. While I might not be the first one aboard Virgin Galactic, it’s something I’m very interested in doing as the entry price becomes more reasonable. $250-500K seems a bit high but perhaps I’ll consider a GoFundMe. There’s definitely a battle ensuing in the stars as a new space race is well underway.
Agriculture and Climate Change
If you know me well, you are likely to know that I believe our food system is completely backwards and is a major factor in the degrading levels of our health and that of our planet. Up to this point, references to externalities and the total cost of this system have been educated guesses at best, but now the Rockefeller Foundation has put a number on it. According to the study, the U.S. spends $1.1 trillion on food, with a total cost of 3x that amount when factoring in rising health care costs, climate change and biodiversity loss.
With carbon dioxide levels at these levels, we should be going all in on regenerative farming and agriculture practices that do less harm (and even are carbon negative) than our current industrial ag practices.
A report was just released by The Intergovernmental Panel on Climate Change (IPCC) stating the planet will warm by 1.5° Celsius in the next two decades without drastic moves to eliminate greenhouse gas pollution. The latest scientific assessment from the IPCC for the first time speaks with certainty about the total responsibility of human activity for rising temperatures. The scientists forecast no end to warming trends until emissions cease.
The time to act is now and we all play a role in this one way or another.
Our agriculture practices are having a severe negative impact on the environment and is a contributing factor to climate change. When farmers till or we chop down parts of the Amazon for cattle grazing, we release carbon into the atmosphere contributing to the greenhouse effect. As a result of this and other factors, climate change is having a major impact on our ability to grow food to feed the world’s expanding population, and I expect food inflation due to declining supply to be a potential destabilizing factor. Recently, Brazil’s worst frost in two decades brought a deadly blow to young coffee trees in the world’s biggest grower. Flooding in China’s key pork region inundated farms and raised the threat of animal disease. Scorching heat and drought has crushed crops on both sides of the U.S.-Canada border. And in Europe, torrential rains sparked the risk of fungal diseases for grains and stalled tractors in soaked fields.
In Argentina, the Parana River is the main thoroughfare for Argentine commerce, where ~80% of the country’s crop exports flow through its muddy waters en route to the Atlantic Ocean. Currently, the river’s levels fell to the lowest since the 1940’s which is the result of years of scorching drought that scientists attribute to climate change. Not surprisingly, the cost of soybeans has increased substantially as well.
The Parana River doesn’t just affect Argentina, as it runs through Brazil and is making it more challenging and costly to get grains and iron ore out to global markets. Here in the U.S., we have problems of our own (as already highlighted above). Oat production is at its lowest level going back 155 years.
Thus the price of oats is through the roof this year. All those people drinking oat milk (i.e. vegetable oil laden oat water) in their lattes are going to see those prices rise. Just be prepared for a $10 latte between the price rise in oats and coffee.
All of these events are interconnected and are a result of climate change impacting nature.
The Food Price Index from the UN’s Food and Agriculture Organization rose for 12 consecutive months through May before easing in June, still up 34% from a year earlier. The index measures international prices of a basket of food commodities. I have read countless times that food inflation has major potential to destabilize countries, especially in emerging markets. When people cannot afford to eat basic staples, riots begin.
Now onto some market charts.
The amount of money that flowed into stock market in Q1 and Q2 2021 was astonishing. The annualized equity inflows were more than the previous 20 years combined according to Bank of America.
Where else did capital flow? Venture capital volume shattered records through the first half of the year as more than $288B was invested worldwide. That’s an increase of around $110B from the second half of 2020.
So far in Q2 2021, Tiger Global has the top spot of $’s invested with a16z and Sequoia and Accel in a tight race for second.
Returns, however, have been very uneven. I don’t think many would have guessed on 1/1/21 that China would be negative and gold only up 4%.
Did you hear the S&P valuation is incredibly high? Price to sales ratio continues to make all time highs.
But that’s just one metric so let’s look at the forward PE ratio, which is well above the 5 and 10 year averages. If we zoomed out further, it would show we continue to trade at elevated levels relative to historical levels.
This is a very informative chart indicating that most stocks individually are more volatile than the index, and that a lot of stocks ending up going bankrupt or losing value permanently. The takeaway from this (imo) is that diversification is still important. If you’re going to be 100% allocated to stocks (which I don’t necessarily recommend), do so in a way that you are not exposed to a single stock performing poorly. Diversification is always prudent.
GMO’s seven-year asset class returns are outright depressing. The chart below shows real returns for various asset classes which means after inflation. They forecast U.S. large cap stocks to return -8% per year! In fact, the only place that has a positive forecasted return is emerging value.
It’s no surprise that a lot of investors are looking to private markets and alternative investments. The trailing 10-year annualized returns for private credit, real estate, buyout PE and VC are very attractive.
High yield muni bonds yield to worst is now below 3%. I’m dumbfounded at the person who buys junk bonds at these prices.
So what are the takeaways from all of this? Most importantly: get vaccinated. Next: do your best to eat organic, local, and ideally regenerative. There are so many farms around TX (and nationwide) from which you can buy regenerative meats and vegetable products and know that you are supporting carbon negative farming. Lastly, be careful investing in markets that have seen an incredible surge in price and valuations (on most metrics) after unprecedented fiscal and Fed stimulus (and subsequent rise in M2). The valuation at which you purchase an asset has a correlation historically to future returns.
Just as working out without a spotter can be dangerous, investing without an “investment spotter” can be equally detrimental. I’m available if you need the spot.
I hope you found this month’s update helpful and informative.
CEO & Founder
Most Often Sources: Edges & Odds, WSJ Daily Shot, 361 Capital, Steve Blumenthal’s On My Radar