Last week I was out of town traveling for work. I did a lot of travel in my old job but with Novem I’m not on the road much. One of the nights I was gone I received a video message from my youngest daughter. I’m not exactly sure what I was expecting but most of the video was her telling me about all the pickles she ate that day. When you’re three years old I guess that’s the big news of the day.

Also, I picked up my car from the mechanic on Monday and the check-engine light already came on. I checked the engine. It’s still there.

A Lesson In Investing: The One That Got Away

Sea Ltd. Sponsored ADR Class A

  1. I first printed out the SE 10-K and started reading into this company. It was very interesting but the valuation seemed high and management had a lot of growth avenues they were pursuing. There was lots of execution risk. Personally, I was also busy looking for a new job and so it was easy for this to fall by the wayside. SE traded in the low teens.
  2. Sea Ltd. reported a great quarter, beating previous guidance and also guiding above street estimates. The stock closed up 75% that day. I thought, “well I missed that one… maybe I’ll buy it on a pull-back.” SE was in the low $20s.
  3. I like to keep a “shopping list” of super high-quality fast growing companies trading at high valuations. The idea is that while these stocks are usually too expensive for my taste, during periods of market disruption I can refer to this list and hopefully take advantage of irrational pricing to build positions in great companies. Heading into COVID-19, SE was on my radar. On March 14th 2020, as the pandemic unfolded, my daughter had what would be her final swim lesson before the pandemic shut down the YMCA. While she splashed around, I read a report on SE and I concluded that shelter-in-place type policies would likely not impact SE’s core business. The stock was under $45.

SE bottomed on March 20 at about $37. To date I have purchased exactly zero shares.*

Perhaps the lesson here is to not fret over finding a perfect entry point- you’ll never find it. If you see an attractive investment opportunity that meets your criteria, start buying. It doesn’t have to be a full-position.

*Full disclosure, there is no way I would have been able to hold onto these shares for a 8x return in just 18 months!

It's a Demand Shock, Not a Supply Shock

It’s Mostly a Demand Shock, Not a Supply Shock, and It’s Everywhere

Inflation is often categorized as either “Supply Push” or “Demand Pull”.

  • In Supply Push, input scarcity and rising costs are the key driver of inflation.
    • A good example is the 1970’s oil embargo and energy shortage.
  • In Demand Pull, inflation is driven simply by demand simply outstripping supply. Bridgewater believes that the inflation we are currently seeing (transitory or not) is Demand-Pull inflation.
  • In both cases, there is a vicious feedback loop between rising costs, rising prices, rising wages and so on and so forth.

Current levels of stimulus are much higher than after the Global Financial Crisis (GFC)

  • Monetary Stimulus – Both monetary stimulus programs were enormous. In both cases, the Federal Reserve cut interest rates and engaged in quantitative easing.
  • Fiscal Stimulus – In the GFC, monetary stimulus was paired with a relatively small amount of fiscal stimulus. In the response to COVID, the fiscal stimulus was enormous. This isn’t just limited to the stimulus checks and PPP loans but also the infrastructure bill and additional government spending that is working its way through the government now.
  • Credit Expansion – In the wake of the GFC, credit contracted dramatically as banks reigned in funding. This stifled some of the monetary stimulus and helped prevent inflation.

Supply has recovered and is now above where it was premarket. Demand is even higher thanks to the generous stimulus mentioned above.

  • BW doesn’t cite where they get aggregate “supply” data but they do show some examples.
    • “for copper, aluminum and nickel, supply is much higher than in recent years, but prices are still rising, and inventories are being drawn down”
    • “Chinese production is 20% higher and exports a full 40% higher than at the start of 2020.

Based on BW’s assessment, it sounds like the companies poised to benefit most will be those who can help supply catch-up to demand. Companies positively exposed to rising capex like Caterpillar (CAT), Honeywell (HON), Johnson Control (JCI) come to mind.

One thing that isn’t well explained by BW is the supply/demand difference for goods versus services. US consumers spend much more on services than they do goods. Supply of services is still trailing from where it was pre-COVID. BW doesn’t address this nuance or how it feeds through the economy. Perhaps this is a question that even a $150 billion hedge fund can’t even answer.

Maybe Inflation Does Have An Upside…

Higher Prices May Force Americans To Eat Reasonable Portions On Thanksgiving

Rifle season opens up around here on Saturday. Good luck to anyone going out. If you’re not planning on hunting, be mindful where you hike this time of year!
Enjoy the weekend everyone, Go Bills

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