What’s in your inbox?

I think you can tell a lot about a person, as well as what is going on in the world, by the topics that show up in one’s daily email inbox.  Here is a percentage breakdown of mine over the past several days:

ESG Investing = 55%

Big Tech Anti-Trust = 20%

Resurgent Inflation = 15%

Daily Devotionals = 3%

Coupons for Johnny Brusco’s Pizza = 2%

I’m thinking I’ll skip the last one, but the first three are definitely worth discussing.

ESG Investing – What is it and why does it matter?

To begin with, ESG stands for Environment, Social, and Governance.  It is far and away the most talked about issue in the investment industry today.  Corporations, governments, and political activists are all driving it, some are even obsessed with it.  Corporate executives are being measured not as much by historical measures like earnings growth or shareholder returns, but on how progressive they are in terms of developing sustainable and environmentally-friendly business practices and promoting an inclusive, politically-correct work place.  Importantly, major corporations and universities, have joined hands with progressives to incorporate ESG Dogma into all places and levels of our economy and markets.  

The ethics and morality of ESG Investing would make for an interesting conversation, but I’ll leave that for another day.  What I would like to discuss in this edition is the economic impact it is likely to have on the U.S. and world economy.  I anticipate the following:

  1. Continued market share and political power concentrated at mega-cap firms, like Black Rock, Apple, and Google.  Broadly speaking, this will have a detrimental impact on market competition.
  2. Increased regulatory and compliance costs, which disproportionately harms small and mid-size businesses.  Moreover, since the vast majority of job growth is driven by small businesses, this does not bode well for job growth or consumer spending.
  3. Slower overall economic growth and higher inflation. 

Big Tech Anti-Trust – 

Big Tech including, Apple, Microsoft, Face Book, Google, and Amazon, are linked arm and arm with political progressives.  These corporations want to preserve their economic power while progressives want to preserve their political power.  Anti-trust rhetoric is nothing more than a way for politicians to pressure Big Tech into supporting their agenda and their re-election campaigns.  It is crony capitalism, plain and simple.

Resurgent Inflation – 

There was a very interesting op ed in the Wall Street Journal written by a well-respected economist, Joe Carson.  In it he remarked that the Fed has recently substituted a measure of non-market rent for the historical increase in housing prices.  By doing this, inflation numbers according to Carson, are being dramatically understated.    I suspect that going forward over the next 1-2 years, inflation is going to be a bigger problem than politicians expect.  If that prediction is accurate, interest rates are likely to rise, and stock price valuations will be under increasing pressure.  We intend to monitor inflation very closely going forward.  

The net of all these three trends, ESG Investing, Big Tech Anti-Trust, and Resurgent Inflation, are generally not positive for the economy and the stock market.  Just how negative they will ultimately be remains relatively unknown, but in my mind the trend is clear – the more government pushes its progressive agenda, the greater the risk for slower growth and less innovation, while at the same time, higher inflation and soaring deficits.  Low interests rates and endless monetary stimulus continues to support the economy and stock prices, and may continue to do so in the near term.  The Fed seems determined to continue to support the markets as long as they can.  How long can they do this and what happens when they stop?  Our investment team debates these questions all the time, while utilizing disciplined valuation methodologies across all of our investment strategies to take advantage of undervalued opportunities while avoiding overvalued or lower quality securities. 

Can crony capitalism engineer ever-rising stock prices?  There are pundits who think so, and I don’t think it is too much of an exaggeration to say that some investors expect it.  I’m not so sure.  Ethics, morality, political corruption, cronyism, polarization, and wokeness.  It’s certainly a long list of issues that continue to divide our country.  America, still relatively young, remains the great experiment of self-government, as described by President Garfield in his inaugural address in 1881.  Are we off course today or just on a different course?  Does it even matter?  I think it does, but time will tell.

On that note, it’s time to clip my pizza coupons and put them to good use.  And then perhaps I’ll read my daily devotionals,  which I find quite useful as I try to make sense of a complicated world and it’s unsettling developments.

Michael Kayes, CFA