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November 2020 – Twenties is as Twenties Does
In this issue:
- The Twenties- the old one and now
- The Fed- what could go wrong ?
- This more than rhymes
- The next decade
- Beware of dogs?
- Health is Wealth
November managed to keep on truckin’ and was one of the best months for stocks this year. There was no whimper, as in the prior two months, except for a little selloff on the last trading day of the month. Each of the four global indexes we actively manage was up. MSCI EAFE now has a gain on the year and the only index that has not made all-time-highs is the S&P/TSX 60.
So far in December the trends have persisted with Emerging Markets taking the lead and MSCI EAFE a close second. We started November below our maximum allocation to equities. Our signals shifted the active strategies into maximum effort mode early in the month and we remain fully invested in all four markets. At this point, the risk-reward, as quantified by our systems, can be defined as: compelling.
If you would like to stay current on our measures of trend and momentum in the markets we follow, please click here.
THE TWENTIES – THE OLD ONE AND NOW
One of the more interesting ideas Elon Musk has is that we are living in a simulation. Regardless of your opinion of him, you have to admit he’s done some remarkable things with his knowledge, wealth and imagination. His most recent achievement in the financial realm is Tesla being added to the S&P 500. As a side note: the stock trades at 1200 times earnings and has a valuation 10 times that of GM.
Ok, back to imaginary things… if this is a simulation, how much memory and processing power does it have and who or what is running it? Maybe it is a system in which actions and events can only deviate from any narrative by a certain amount. Humans make history, and even over thousands of years our basic behaviours haven’t changed much.
With that in mind, the hundred-year-old twenties seem to be worth a look at relative to our baby twenties – which have kicked off in a truly strange fashion. There could be some clues in history as to how things unfold over the next decade – or not, but it is worth having a look.
The first commercial radio broadcast is often documented as occurring November 2, 1920 by Westinghouse’s KDKA out of Pittsburgh PA. That was election night in the United States. The idea exploded in popularity shortly after, due to the novel experience of hearing election results before anyone read them in the morning paper. This may be irony.
It’s also not completely true, an old version of ‘fake news’ – because like many things innovative, Canadians did it first, we just didn’t make a big deal about it. In Montreal, May 1920 the Canadian Marconi station XWA broadcast a radio show. XWA was an acronym for Experimental Wireless Apparatus. Notice how it isn’t an ‘E’ but an ‘X’. That is old branding we think is new. Think Toronto Stock Exchange that was known as the TSE and is now branded as the TSX.
Westinghouse was working on this for quite some time. Radio was usually considered a point-to-point communication tool. Westinghouse was a major supplier to the military during the Great War. Marconi himself first broadcast a radio signal across the Atlantic in 1901 in the form of dots and dashes – Morse code. A radio signal with sound, broadcast to multiple receivers was a breakthrough.
The idea was motivated by the need to transition from a wartime supplier to a consumer goods company. In other words, they wanted to sell radios. So did RCA, the Radio Corporation of America that evolved out of American Marconi with GE as a main shareholder. These companies quickly realized that in order to drive sales of hardware they needed to create content – radio shows, with news, music and other forms of entertainment. If this doesn’t all sound familiar, check out RCA’s logo, created in 1921. It might give you a clue.
Note the globe with World Wide Wireless as the slogan. Of course none of this is related to the World Wide Web, because until the evolution of high-speed wireless networks the most recent WWW was strictly a wired network.
Out of this innovation and competition many things we now consider normal in everyday life, evolved. To finance the content the radio networks required to sell hardware, they introduced advertising. A radio advertisement was first broadcast in New York in 1922. NBC and ABC were products of the radio boom funded originally by AT&T, and then GE, RCA and Westinghouse took those networks off their hands in 1926 – more on that below regarding anti-trust actions.
This was a very rapid expansion of all business related to radio, in an era where people were just discovering how to use new technology to create networks and sell products, whether it was hardware or content. The 1920s were amazing in many ways. You could hear the news, listen to new music or tune in live to the biggest fights in the boxing world. Plus, the stock market was breaking out of a range going back to the early 1900s.
These things were all occurring at once. And this, after a devastating world war that forever changed the course of international political relationships and killed tens of millions of people while the deadliest pandemic in recorded history was simultaneously occurring. Thank the stars the 2020s simulation algorithm skipped the global war part and only sourced the pandemic code.
THE FEDERAL RESERVE- WHAT COULD GO WRONG?
Like many government projects, the Federal Reserve Bank had its origin in crisis. To read the official version, the Panic of 1907 was an unacceptable disruption to the development of the emerging economic powerhouse that was America. The stock market collapsed by 50% and bank runs spread across the country. Yet, not much happened until 1910 when a few Wall Street bankers and some politicians had a secret meeting at a private club on Jekyll Island. They were determined to act on the problem with the banking system in America. This system was described by Paul Warburg, writing in the New York Times back in 1907 as: at about the same point that had been reached by Europe at the time of the Medicis, and by Asia, in all likelihood, at the time of Hammurabi. Warburg, a proponent of banking reform was a partner of one of the most powerful investment banks in New York and perhaps the world.
Let’s note for the record: the Medici’s created the method of double-entry accounting to improve the general ledger in order to run the most successful bank in the history of the planet at the time. Hammurabi developed a code of conduct that essentially required those in contracts to have what we now refer to as ‘skin in the game.’ That was about 3,700 years prior to Warburg coming up with the American version of socializing losses. But this central banking idea was designed to improve the lives of the citizens of this booming country, right?
Anyhoo, something surprising happened to the monetary system of the United States after the Panic of 1907 and the secret meeting. Senator Nelson Aldrich formed a commission (funny) to explore ideas of some kind of central bank in America. His was not the first – the others prior all fell apart. So far, the current one is still going. He went on a trip to Europe with an economist (you can not make this stuff up) to investigate how central banking worked there. He was particularly enamoured by the Reichsbank in Germany along with the Bank of England. He went a skeptic and came back a national central bank enthusiast. Unfortunately, he died before the Reichsbank engaged in some of its finest work, after the Great War. At least wheelbarrows were in demand.
This background matters because the supporters of a central bank of the United States were working on the mechanics and the political acceptance of this idea. And probably what they could manipulate on the side. There was no real understanding of monetary policy, because that was not something that existed as we (mis)understand it today – they simply thought the current system didn’t work properly. It wasn’t until 1924 when the Fed began actively engaging in open market operations. That is – buying and selling assets in order to manipulate interest rates and the supply of money. This was supposed to smooth the cycles of the economy for the betterment of all.
In an era when humans thought they could control nature and bend anything to their will, this seemed like a perfectly good idea. What could go wrong?
The answer is, apparently, quite a bit. The devastation the Reichsbank unleashed upon the German economy was at least one of the origins of the next big conflagration. On a more positive note, at least until 1929, the Fed enabled rampant speculation in the stock of companies that were using technology like no one had before. In 1928 the geniuses at the Fed figured out this might be a problem. So in early 1929 they increased discount rates and pulled the loan margin on stock collateral. We know what happened next.
Back to the technology boom: RCA was one of the leading stock market performers during this speculative frenzy. That stock was promoted and managed by the ‘Radio Pool’. Pools were legal back in the day but are frowned upon now and 1934 legislation made this kind of organization of individual actors illegal. Pools were essentially coordinated ‘pump and dump’ operations. If you are interested in one of the classic first-hand accounts of how things worked in the market back then, please read Reminiscences of a Stock Operator. This was first published in 1923 and is the history, rumoured to have been autobiographical, of Jesse Livermore, the Boy Plunger. It’s fascinating stuff and if you are at all involved in markets it is a continuous re-read.
The aftermath of the market crash and the ensuing Great Depression – arguably the direct result of the actions of the Federal Reserve – may inform us as to what may be in store for our twenties.
THIS MORE THAN RHYMES
There are broad similarities in the general conditions of our baby twenties and the hundred-year-old one:
- A financial panic is the origin story of monetary policy innovations.
- The Federal Reserve itself was created in 1914 and began operations in 1915.
- The dot com bust in 2000 encouraged zero rate policy and later, after the Great Financial Crisis, ‘quantitative easing’ was introduced.
- Massive developments in the use of technology for business and consumers. Fun fact: your smartphone is considered a radio device.
- A few very dominant companies in the technology industry with layers of connections and relationships gather the attention of regulators with respect to anti-trust or anti-monopoly considerations.
- After the first monetary innovation another few develop in response to either, things not working-as- expected or hubris.
- In the mid-1920s the Federal Reserve discovers open market operations.
- In mid-2020 the Federal Reserve is actually violating the act which created it, by buying corporate securities directly.
- The stock market rallies to all-time-highs.
THE NEXT DECADE
The government’s reaction to all of these events was to break up the RCA, GE and Westinghouse organization via several means. This was nothing new. In the prior decade, the government had engaged to break up the oil and steel industry monopolies. In the 1920s AT&T, as mentioned above, exited from radio and related businesses to avoid further intrusions from the government in order to focus on dominating the landline business. Smart move – they weren’t broken up into the Baby Bells until the mid-1970s.
We have already seen various governments go after the big tech giants for practices perceived as monopolistic. The absolute economic dominance of Amazon, Apple and Google in the realm of content, hardware and advertising is not going unnoticed by the market or the regulators.
Once the Federal Reserve figured out it could manipulate asset prices and interest rates back in 1924, the Dow rallied more than 300%. It crashed in 1929 and didn’t get back to the old highs until the 1950s. This year the Federal Reserve has broken its own act of incorporation. That was in April – Dow 90,000 anyone?
BEWARE OF DOGS?
Inukshuk Capital Management (ICM) uses quantitative methods to make investment decisions because it’s our thinking that a structure of defined risk creates discipline in investment management. But it’s not as though we engage in the markets without paying attention to what is going on with respect to social mood or trends. The branding and logo of RCA of WWW in the 1920s evolved along with their business lines. In 1929 they acquired Victor Talking Machine Company that produced and sold records along with the machines that played them. They also adopted an iconic brand that almost everyone still knows: the image of Nipper in what was titled “His Master’s Voice”.
We love dogs here at ICM. Dogs are our friends. They have been domesticated from wolves for at least 20,000 years. They can still be wolf-like. The market top might be when the dog barks or bites. If any of Amazon, Apple or Google rebrand and represent their business in analog doggie or other animal form, beware.
Beware of that dog.
To be continued…
HEALTH IS WEALTH
At Inukshuk Capital Management, we are firm believers in the connection between Health (physical, mental, spiritual) and Wealth.
As we celebrate the holidays in a year like no other, we wish you and your family peace, happiness and good health.
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