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

Father’s Day

I’m having a contest with a dear friend of mine to see who can read the most books across a diverse genre including: WWII history, the pandemic, biographies, politics, religion, thermodynamics, and physics. I came up with the last two, although I’m not quite sure why. When we finish a particularly interesting book, we will get together and discuss it. Our conversations sometimes turn toward our dads. His is 97, lives alone and still drives a car. Mine passed a few years ago at age 85. Both were instrumental in our lives. Perhaps a Father’s Day tribute is in order.

My dad had a quiet reassurance about him, and he was always there

I had a morning paper route as a young kid, which meant I was up and delivering papers before 6:00 AM Monday through Saturday.  At the top of the hill on Pine Avenue I delivered the last paper and headed for home.  There in the distance was the silhouette of my dad in the kitchen window cooking a hot breakfast of French toast or pancakes.  I knew I was almost home.  I knew I was safe.  Beyond anything else, my dad made me feel safe, and that’s one of the most important things a kid can feel.   

My dad had a knack for saying just the right thing at just the right time… 

I sat in the car staring out the window watching the kids who had arrived before me shoot baskets.  I was nervous.  My first basketball camp, my first time away from home and I was in the 7th grade.  My dad didn’t say much on the way to Jack Donohue’s Basketball Camp.  But I think he knew that I was nervous.  He glanced out the window and watched the kids shooting, too.  One of them missed a shot. 

“He missed,” my dad said.  For some strange reason, I wasn’t nervous anymore. 

My dad could put my mind at ease without saying a word… 

He had this reassuring wink that told me everything in the world was going to be OK, and searching the stands for his wink was a big part of my pre-game ritual during my high school basketball career. 

My dad taught me many invaluable life lessons –

  • “Under pressure, simplify”
  • “People have different priorities”
  • “Always look at things from different perspectives”

There is a humorous story that accompanies each of these life lessons.  Humor was perhaps my dad’s greatest gift. 

I think it was Groucho Marx who said, “The man I admire most was my mother.” Humor really is a special gift.  I learned many important life lessons from my mom, as well. The importance of having self-confidence, of competing with honor, and being honest, above all.

A Happy Father’s Day to all… To those who still have their father with them, give him a big hug if you can. Thank him for what he taught you and for the sacrifices he made for you. For those whose father has passed, cherish the memories. For those who might be distant or estranged from their dad, I pray for God’s grace and forgiveness.

I always wanted my dad to be proud of me and I hope he is. I hope I can pass on some of his life lessons to my children. Perhaps we can all pray for the strength to create positive life lessons with whomever crosses our path today. Might we also pray for the inspiration to be the dad or mom, or individual, God created us to be.

Michael Kayes, CFA

Narratives on my mind

Change the narrative. That thought kept running through my mind while I endured aggravation and congestion at the Charlotte airport this past weekend. Just because I dread the airport experience, doesn’t mean I have to be in an unpleasant mood. I can, in a nutshell, change the narrative. 

What is a narrative and why does it matter?…  There was a very interesting article in the Wall Street Journal recently, titled – “Can Freedom Survive the Narratives?” written by Lance Morrow.  According to Morrow, “We live in the age of supercharged story lines, most of which are demagogic nonsense.” What does that mean?

Whatever the issue, coming from either side of the political aisle, the narrative is dominated by hyperbole at best, and out right whoppers, as Morrow states, at worst. Polarization and divisiveness will not end until we stop launching and worse over, believing in whoppers. 

A narrative in today’s world is an agenda wrapped in a catchy phrase spewed forth incessantly for political gain. Often, narratives determine sentiment and sentiment impacts virtually every aspect of our economy and society.  That’s what a narrative is and why it matters. 

But who controls the narrative? Politicians, mainstream media, and social media are all jockeying to control the narrative. But is it possible for each of us to create our own narrative?  Thankfully, we can decide how we think, what issues we concentrate on, and even how we feel about them. We can analyze issues thoroughly and comprehensively from all different viewpoints. We can search for common ground, compromises and win-win solutions to any challenge. From this approach we can produce reasonable narratives in lieu of exclamatory soundbites. In the end, reasonableness can be unifying.

If we remain stuck where we are today, bombarded by whoppers, two things are likely to happen. First, people will tune out once they lose any semblance of trust in the narrative.  Second, extremists will dominate the political debate and whichever group is in control will force its agenda on everyone else. In short, we will lose our freedoms. Freedom to disagree and think independently. The narrative today is leading us ever closer to totalitarianism. We have to change the narrative. How we debate, discuss, and listen to each other needs to change. 

Inflation has been on my mind of late as well. The latest CPI number, at 4.2%, was shocking. It was the highest number in over a decade. The narrative from the Fed is that the inflation spike is transitory. Is it? Let’s look at what is driving inflation currently. The latest inflation data shows prices spiking in multiple areas, including housing, auto, food, and commodities. Shortages and logistical bottlenecks coming out of the pandemic are driving prices higher across much of the economy. Beyond that, wages are going up, as companies are struggling to find qualified workers. Meanwhile, the Fed has stated that it has tools to control inflation if necessary. A historical study will show that the Fed’s ability to control inflation, once it starts to accelerate, without causing a great deal of economic pain, has been woeful. I suspect that inflation concerns will linger for the remainder of the year and will continue to cause the yield curve to steepen.  This may help the financial sector, but it may be a head wind for the overall economy and the rest of the stock market.

The last thought worth discussing is the government policy of paying people not to work. The narrative on this includes the call for universal income and higher taxes on the rich to pay for it.  As we continue to move to a technology-centric economy, not to mention the inevitable disruption that artificial intelligence is likely to have on overall employment, the question that is being asked is – What do we do with the unemployable? Should we give people money to find meaning outside of work? As I have written about in previous editions, we also have to identify the potential unintended consequences of policies related to paying people not to work. This may be the defining challenge for our country over the next decade. Pursuing a career, coming home each day after a job well done, providing for one’s family has been at the core of our society since its birth. It has given life meaning. It has spawned dreams for generations. What could possibly replace that? 

Michael Kayes, CFA

In a word

In last month’s edition of Exencial Views, I posed this question – “What will be the lasting impact of the pandemic?”  I’d like to try to answer that question.  First, corporate earnings are showing signs of life, with positive surprises outnumbering negative surprises at several bellwethers across multiple industries and sectors.  This is a very important development, and if this trend continues, it could be a key driver of future stock price performance, at least in the near term.  Keep in mind, one of the major reasons for skepticism of a stock market that continues to set new highs is that valuation is getting stretched.  If earnings grow faster than consensus expectations, that argument becomes much weaker.  How are companies able to grow earnings faster than expected despite all the reasons not to expect that to happen, including the lingering effects of the pandemic and overall political dysfunction?  In a word – Resiliency.  Like it or not, there are few forces in the universe stronger than the desire to create profits.  Corporations, at all levels, continually make strategic adjustments to the ebbs in flows of the business cycle and the ever-changing global economic environment.    

Second, we are seeing increasing signs that Merger & Acquisition activity is heating up, particularly in the Health Care sector.  In most cases, increased M&A activity leads to higher stock prices.  With productivity improving and ongoing fiscal stimulus from the federal government, many corporations are flush with cash.  Moreover, with interest rates still historically very low, access to capital for acquisitions is readily available. 

These two factors, better earnings growth and accelerating M&A activity, should support stock prices going forward.  Beyond that, there is one other factor, although it is more difficult to quantify…

In a word – Resiliency…  Neighborhoods and communities, in towns, large and small, across our amazing country are moving forward.  We wear masks to church and the grocery store, and don’t think twice about it.  We social distance when we should but are once again hugging those we love.  We are getting our shots, planning trips previously postponed, and planting gardens.  Just finding joy in normalcy, while accepting that times have changed.  We are reaching out to others in need and worrying less about things we don’t like and can’t control.  And that is a good thing.  In essence, we have adjusted, and we are breaking free of the worst-case mentality mindset that had been pervasive and debilitating to our national psyche and sense of community.  We are reuniting and rebuilding.  Hope has been renewed. 

Perhaps the most important lasting impact of the pandemic is that our country has learned humility.  We were ill-prepared, mislead by experts and politicians, at times stubborn and selfish, and we suffered greatly.  But we learned, adapted, and persevered.  Most importantly, we are slowly putting our differences in proper perspective, and concentrating on how we can unite and work together.  This is happening in families, neighborhoods, and communities.  Eventually, even our political leaders will follow.   

You will be hard pressed to find supporting data in the mainstream media or in never-ending, one-sided political dialogue. You certainly won’t hear about it by listening to the elites, who have long ago lost touch with the heart and soul of America. Nevertheless, I am convinced it is happening. A Renaissance of the soul, perhaps. In a word – Grace.

Meanwhile, despite my unbridled optimism, there are always risks to evaluate and monitor.  For starters, we are keeping a close eye on the yield curve.  I expect it will continue to steepen, in anticipation of higher inflation resulting from profligate government spending and debt accumulation.  If interest rates rise too much too fast, the economic recovery could be at risk. 

In addition, tax rates are going up.  How much and how soon remains to be seen.  Higher taxes will reduce future economic growth potential.  Ultimately, the outcome of the interim election in November 2022 could have a significant impact on the outlook for taxes and economic growth. Finally, there is always the risk that government overreach will produce harmful unintended consequences for the economy and markets. 

Each day, our investment team debates these risks as well as future opportunities.  It’s always a balance between the two. From a macro perspective, a bullish case can always be made. Unfortunately, so can a bearish case. It’s just the nature of how the markets work. In most cases, reality lies somewhere in between. A prudent investor is guided by, in a word – Temperance.

Michael Kayes, CFA

See Other Side

St. Patrick’s Day always brings back fond memories…  The day always began for my dad and I with 7:00AM mass at St. Francis.  We knew it was a special day, at least for those of us who were Irish, when Dr. Gavagan walked down the center aisle wearing green wing-tip shoes.  After mass, my dad would lead us on a day of revelry beginning at an Irish pub called Dineen’s where we consumed a strange, awful-tasting concoction called a Tom & Jerry.  From there we traveled to a few other local taverns like Eddie Kane’s and Millie Miko’s.  On one memorable St. Patrick’s Day, we drive 60 miles to the state capital in Albany to a famous place called The Grinch.  As we walked toward the entrance, we could hear raucous singing to the tune of Irish folk music.  Above the steps, perpendicular to the door was a peculiar sign – “See Other Side.”  My dad chuckled as I followed directions.  On the other side was the same message.  The Irish sense of humor…

See Other Side…  Perhaps today, it is the right message at the right time for our country.  As vaccinations and herd immunity move in a positive direction, we can begin to see an end to the pandemic.  Will the recovery be strong or weak?  Perhaps, most importantly, will the politicization and polarization ever end?  Let me address the last question first. 

Politicization and polarization can only exist when there is a refusal to listen to, understand, and respect the opposite viewpoint.  Congress continues to demonstrate this unwillingness in its legislative process, but worse over in its communication and endless political spin.  Are they leaders or are they followers?  If they are the former, it is hard to envision our country uniting without bipartisanship being the modus operandi of Congress.

If we start from the assumption that our country cannot achieve its full potential if we remain divided, then how Congress conducts itself matters.  Legislating from the center, finding compromise on controversial issues, would go a long way toward unifying our country. Is Congress up to that task? So far, there are no signs that they are. So, our country remains polarized.

What will be the lasting impact of the pandemic? Will masks and social distancing be the new normal, even after we are all vaccinated? How will we rebuild trust and a sense of community?

The strength of the economic recovery hinges on positive progress on the first two issues. If we remain polarized politically, distrust and fearfulness will continue to suppress spending and investment, as well as overall economic growth. If we don’t work at the grass roots level to rebuild community, collaboration and entrepreneurship will not thrive. In short, we will fall far short of our economic potential.

With tax increases and increased government regulation a virtual certainty, an economy already operating below its potential will likely weaken further. As I see things today, there is a relatively high probability that this will be the most likely scenario over the next few years.

On the positive side, interest rates and inflation should remain relatively low. The pressure will be on companies to produce reasonable earnings growth in a very difficult environment. It would seem logical to see the overall equity market continue to narrow, fewer stocks driving the overall performance of the benchmarks.

Risks to this outlook include inflation gaining momentum due to endless government stimulus. The recent rise in interest rates is a warning signal, and trends in interest rates and inflation should be closely monitored going forward.

See Other Side… What risk is there, really, to be open-minded and listen to opposing viewpoints? Really listen and try to understand, before trying to be understood. When we finally decide to do this, and I am ever-hopeful we will eventually, the power of collaboration and esprit de corps will unleash an energy that our country hasn’t seen since WWII. Trust, community, confidence in the future, and teamwork, will be the major driving forces of the next great period for the most amazing country the world has ever known.

I just hope I live to see it.

Michael Kayes, CFA

Thinking About a Washing Machine That Can Fly

thinking about a washing machine that can fly

During the recent Super Bowl, instead of watching the halftime show, I switched the channel to watch part of the movie Apollo 13. I really like that movie. I really dislike Super Bowl halftime shows. I know this makes me odd.

Far away, my favorite line from Apollo 13 was uttered by Astronaut Jim Lovell’s mom Blanche, at one of the most tense and frightening moments of the story. As the world worried about the fate of the astronauts during the dangerous re-entry, Blanche tried to calm the nerves of her frightened grandchildren. And then came the best line in the movie –

“If they could get a washing machine to fly, my Jimmy could land it.”

It takes a special person to exude confidence when everyone else is fearful.

Who are those confident people today? What would give them the confidence to speak up in the face of pervasive doubt and insecurity?  And would we believe in them and follow them?  Perhaps that is the most important question.

Back to the Apollo 13 story… Blanche believed in her son. She also believed in his training and his fellow astronauts.  She had confidence in the scientists and engineers at Mission Control in Houston.  So, she believed when most others doubted. And therein lies the inspiration. Unwavering confidence in the face of widespread doubt.

You can’t fake this kind of confidence. You can’t manufacture it in a sound bite or social media tweet. It must come from deep inside and it is unshakable.  

Think Herb Brooks before the U.S. team played the Russians at Lake Placid in 1980.

Think General Patton as he led his troops toward Bastogne to liberate the surrounded 101st Airborne troops.

Think FDR as he spoke to the U.S. Senate on December 8th, 1941.

The United States is an amazing country. There are few limits as to what we can accomplish.  That has been our undeniable legacy. In our short history, we have produced our best when some noble cause is in our crosshairs. 

Think about the engineering and industrial accomplishments during WWII, from Higgins boats to atomic energy. 

Think about landing a man on the moon.

Think about how rapidly we discovered and produced a vaccine for Covid-19.

Every noble pursuit has a unifying impact on our country. If that is true, then perhaps it is also true that any pursuit that isn’t unifying isn’t noble. I suspect not everyone will agree with that statement (I’m not sure I do, actually). Nevertheless, I sense there is a lack of unshakable confidence in our country’s future, and I think it is because we lack a noble purpose. So, here are a few suggestions:

  1. Right-size government. Make it efficient, productive, fair, and incorruptible at all levels.
  2. Lead the world toward a cleaner environment AND faster and more sustainable economic growth.
  3. Rebuild a sense of community throughout our country and help the marginalized and disadvantaged accomplish goals and dreams conventional wisdom might consider impossible.

I am convinced that there are leaders out there today who can make these suggestions reality. We just have to motivate them to come forward (more on that in future editions).

In the meantime, it behooves one to keep modest expectations as we struggle with crony capitalism in the face of higher taxes and more government regulation, both of which seem likely. Low interest rates and low inflation (thus far) should support higher stock prices. Entrepreneurialism still produces amazing new companies, even as it disrupts the prospects for current leaders. Moreover, improving productivity through advanced technology continues to be a strength across much of the corporate sector.  The U.S. is still an economic superpower and likely will be for longer than many pundits predict.

Where there is fear and uncertainty, there is always hope and opportunity. There is no challenge that cannot be overcome with the right combination of boldness and unshakeable confidence toward noble pursuits. 

We have already proved that just about anything can fly, even washing machines, and we can land them, too. It is time to think much bigger, isn’t it?

Michael Kayes, CFA

A Sellers Film Festival

Every once in a while, a new movie is released, at just the right time, to help us form an accurate perception of an important event or issue.  Other times it makes more sense to watch a classic from the past to understand the current environment.  Which brings me to one of my all-time favorite movies, “Being There,” starring Peter Sellers, as Chance the Gardner, AKA Chauncey Gardiner, released in 1979.       

To summarize, the story revolves around the life of a simple-minded man who has spent his entire life as the gardener at a wealthy estate.  Chance the Gardener never leaves the estate and learns everything he knows about the world through what he watches on television.  Literally by accident, Chance is placed in the care of a well-connected business mogul and the rest of this hilarious movie is Chance the Gardener becoming misnamed and mis-interpreted as Chauncy Gardener, economic and political advisor to powerful politicians, including the President.

Reality is not static, it continues to evolve, and is constantly reshaped by perceptions.  Moreover, one person’s reality might be viewed as complete nonsense by someone else, leaving both sides confused and frustrated.  And that, in a nutshell, is the state of our country.  We are all trying to figure out the new reality.  The questions we are faced with, from an economic perspective, are almost endless.  Here are a few important ones:     

  • Will more government stimulus help the economy, or will it only worsen the debt situation leading to financial disaster?
  • Will an increase in minimum wage have a net positive impact, or will businesses dependent upon minimum wage workers be forced to reduce staff?
  • How long can the Fed keep interest rates low?
  • When will rising inflation be the party-killer some pundits expect it to be?
  • What tax increases will we face and what will be their impact on the economy?

The answer to these questions will largely drive the markets in 2021 and over the next several years.  Over time, we will discover the real economic answers.  Then, only in hindsight, will we be able to evaluate the predictive accuracy of today’s political narrative or agenda.   

I suspect 2021 will be a year for guarded optimism and valuation discipline.  Within equity portfolios, our focus will be on incremental changes, not magic moments to make extraordinary portfolio bets.  In other words, it may be a year to focus even deeper on individual company fundamentals and less on macro developments or political rhetoric.    

Which brings me to another all-time favorite movie, also starring Peter Sellers – “The Pink Panther Strikes again.  In this fifth film of The Pink Panther series, Sellers plays the bumbling Chief Inspector, Jacques Clouseau. (I highly recommend them all).  Throughout the movie we are left wondering whether Clouseau is really a brilliant crime solver or an imbecile.  There is ample evidence on both sides of the debate, so, like today, it depends on who you ask.

While it may be better for our mental health, or at least our disposition, to watch Peter Sellers movies, instead of the nightly news, we must remain engaged even if we vehemently disagree with the dialogue.  With a new administration and Congress, changes are coming.  Some may help the economy and markets, some will not.  Virtually every decision made by the President or Congress will be applauded by half the country and despised by the other half.  There is just no getting around the fact that the country remains deeply polarized.  The goal here is not to pick a side but figure out the economic impact of every change and then adapt portfolio strategy accordingly.   

So, here it is, our overall investment strategy for 2021…

  • Be incremental and disciplined, not emotional and reactive
  • Stay engaged and objective, searching for truth not spin
  • Maintain perspective, balancing risk and opportunity
  • Stay informed, be discerning, and occasionally, watch a Peter Sellers movie. 

Laughing can be good for the soul.

Michael Kayes, CFA

The Dreaded Snowplow

Every year at this time, I find myself reflecting on my favorite Christmas memories.  Christmas lights, midnight mass, eggnog, and shoveling snow.  What??  Shoveling snow??  Let me try to explain…

It was Christmas day 1978, in our Norman Rockwell town of Herkimer, NY when Old Man Winter dumped 24” of snow in one day.  Two feet of thick, wet, very heavy snow.  Early Christmas morning, with my siblings, cousins, aunts, and uncles, still sound asleep, I went outside and began shoveling the driveway.  There was no logical reason why I felt compelled to do that, it was Christmas day, everything was closed, there was nowhere to go.  Nevertheless, I picked up a shovel and went at it.  About four hours later, exhausted and drenched in sweat, our long driveway was clear and ready for use.  Then, stealing defeat from the jaws of victory, the dreaded snowplow came by creating a massive wall of snow at the end of our driveway.  I had more work to do.  The lesson that day was this – Sometimes, setbacks occur due to forces completely out of our control.  But with a little grit and determination, challenges can be overcome.  The sheer challenge of shoveling that much snow was what motivated me to do it.

Later that evening my best friend and I put on our skis and traveled around town, helping motorists who were stuck in the snow, and visiting friends along the way.  We had a blast, assisting our neighbors and spreading holiday cheer.  There is always somebody to serve or encourage. 

For the record, I miss snow at Christmas, although I have no interest in shoveling two feet of it ever again.  Covid-Christmas 2020 is going to be tough on a lot of people who are isolated from friends and family.  The challenge for all of us is to find a way to connect and share fellowship and enjoy the Christmas spirit, remotely.    

Collectively, my sense is that we all want Santa to bring us a more normal year in 2021.  As we contemplate what that might look like, perhaps a pertinent question is this – What surprises are in store for us next year?  To answer this question, we must first identify the forces currently driving the economy and markets:

  1. Historically low interest rates
  2. Quantitative easing and ongoing government stimulus
  3. Relatively benign inflation

Let’s examine the sustainability of each one.

#1- Low interest rates

The Fed has stated numerous times that it intends to keep rates low until the economy has fully recovered from the Covid shut down, and until inflation is at or above 2%.  With the potential for higher taxes and more government regulation from the new administration, it is unlikely that economic growth will accelerate enough in 2021 to lead to higher inflation.  Given this outlook, low interest rates are likely to continue in 2021.

#2 – Quantitative easing and ongoing government stimulus

At least one more stimulus bill is likely coming in early 2021, perhaps more than one.  For better or worse, we are in the mode where government is becoming more involved in managing the economy.  While this can have some benefit in the short run, the major concern is the ever-growing deficit.  It’s difficult to gauge when the deficit will finally drive inflation and interest rates higher, which is what most pundits have been predicting for quite some time.  It is definitely an area we will be monitoring closely going forward.

#3 – Relatively benign inflation

There are several powerful forces keeping inflation below the Fed’s target of 2%.  Demographics, productivity, technology, slack in the economy, and global competition, all play a role in keeping inflation under control.  My sense is inflation will remain benign in 2021, but again, it bears watching very closely.

#4 – Continued economic recovery from the shutdown

Corporate earnings are forecasted to grow next year between 5-10%.  As we have seen in recent years, companies that can achieve faster growth will be rewarded with expanding P/E multiples.  The “growth-scarcity premium” that has driven numerous stocks, particularly in the Tech Sector, will continue into next year.

In summary, it seems logical to assume that these four driving forces will continue in 2021.  At the same time, I suspect there will be a few unpredictable events and developments that upset the apple cart.   Our investment team will continue to employ valuation discipline and prudent risk management while being ever vigilant for the dreaded snowplow.

Merry Christmas and Happy Holidays to all.  

Michael Kayes, CFA


I started the first draft of this edition of Exencial Views on Veteran’s Day.  A day that we should all be thankful for and inspired by.  Thank you, Veterans, for your sacrifice and devotion to duty and country.

My plan is to send this out a few days before Thanksgiving, to share all that I am thankful for, before being consumed with football and overeating.  So here goes –    

I am thankful for my amazing friends who have supported me over the years, who have tolerated my faults, encouraged my dreams, and laughed with me during this journey toward old age.

I am thankful for my family, for the unconditional love they share so freely.

I am thankful for my spiritual warriors who pray for me and with me, and for the hope they give to even the darkest moments we face.

I am thankful for the words of John F. Kennedy, “that one man can make a difference, and every man should try.”

And for the words from John Wooden, “It is amazing what a team can accomplish when no one cares who gets the credit.”

And from Abraham Lincoln, “I like to see a man proud of the place in which he lives.  I like to see a man live so that his place will be proud of him.”

It is good for the soul to reflect upon that which we are thankful.  It is also good for the soul to be inspired and to offer inspiration to others.

It is good for the soul to serve somebody, to offer a word of encouragement at just the right time.  To believe in people when they doubt themselves. 

Of all this, I am thankful.

With the election virtually over, and vaccines seemingly on the way, it seems appropriate at this time, to look ahead and perhaps make a list of things I hope we can all be thankful for one year from today.  So here goes –

On Thanksgiving Day, 2021, I hope we are all thankful that we have put our masks away.  That we can once again shake hands and hug each other.  I don’t know about you, but there are days I really need a hug.

I hope we can be thankful that with new leadership, our political process has become more effective and less polarized.

From a market perspective, hope really isn’t part of the equation.  Let me try to explain.  As most investors know, the stock market is a discounting mechanism.  It looks ahead, driven by future expectations for earnings, cash flow, and valuation drivers like interest rates and inflation.  As reality exceeds or falls short of these expectations, stock prices move accordingly.  The never-ending comparison of expectations to eventual reality is what drives stock prices.  While hope might be a good thing, as Andy Dufresne explained in The Shawshank Redemption, it can be dangerous when it comes to predicting future stock prices.  Essentially, analysts and portfolio managers must separate what they hope will happen from what they think will happen.  In short, removing emotion from the process is critical to long-term investment success.  No small task, especially in today’s environment.

Here are three positive developments that should unfold as we move into the New Year –

  1. At least one effective vaccine will arrive sometime in the first half of 2021.  By the end of 2021, Covid-19 will still be around, but we will be well on our way toward defeating it.
  2. Corporate earnings will accelerate in 2021 as the economy continues to recover.    
  3. Political vitriol will reside as divided government and legislative gridlock settles in.

As in most years, unpredictable events will occur.  Some will be positive, some not so.  As an investment team, we will remain vigilant in our disciplined, analytical process.  Searching for opportunities, adapting to changes, avoiding emotional extremes as best we can.  All while remaining thankful for the many blessings we receive each day.     

Michael Kayes, CFA

Wisdom of the Elders

I’ve always been a remote kind of guy. Ever since I read the book “My side of the mountain” when I was a kid, I’ve longed for the wilderness. Many years ago. I penned this poem about solitude…

What is calling way out there?

Beyond the desk we sit and stare.
What is calling way out there?

A freedom search, quite possibly.
In wilderness we long to be.

Where all around the boundaries gone.
In solitude from dusk ‘til dawn.

In quiet search for self-reliance.
To continue on – no small defiance.

Our choice to make, should we turn back?
Not from fear nor courage lack.

But search we must, inside the lines.
For freedom lies within our minds.

What is calling way out there?
An echo from a calling near.

Today, I can’t help but be concerned about the undeniable trend toward a permanent remote workforce. Many companies, particularly in the tech industry, are moving in this direction, taking advantage of this trend to reduce salaries for employees who move from high-cost areas like Silicon Valley to lower cost cities and towns. Corporations also see great opportunity to reduce expenses for office space. What’s not to like?

When I started in the business, in the dark ages of the early 1980s, I went to lunch every day with my colleagues. Since I was the rookie, I took advantage of this time to ask as many questions as I could without being annoying. Over time, these and many other face-to-face, informal conversations, provided valuable insight into how these seasoned portfolio managers and analysts approached their profession. This hanging-around-apprenticeship taught me the nuances of stock picking. If the chatter around the coffee pot centered around a stock that had been doing particularly well, I learned that most of the news was already discounted in the stock price. Conversely, if the buzz around the office was decidedly negative, that might be a name to dig into as a potential buying opportunity. I also learned to read the body language of my peers which gave me instant feedback as to the persuasiveness of my arguments during our daily debates on the economy, markets, and individual stocks.

In a nutshell, there is no effective substitute for face-to-face communication, especially when it comes to transferring the wisdom of the elders to the next generation. While reduced overall expenses for payroll and office space may enhance the bottom line in the short run, the loss of this informal training and mentoring will be an issue companies will have to deal with well into the future. Companies that can right-size cost structures, while preserving all-important, face-to-face mentoring, will have a leg up on their competition.

With only a couple weeks to go before the election, the stock market is very close to an all-time high, baffling pundits and market strategists of both political persuasions. As I have previously written, both sides fear disaster for the markets and for our country if the other side wins. I suspect reality will land somewhere in the middle. What does this mean from an investment perspective? It means the election is likely to create winners and losers across our economy and markets. Some will be short term, driven by fear and over-reactions, and some will be more substantive and long term. It will be important to distinguish the latter from the former. Maintaining valuation discipline will be critically important to take advantage of opportunities that may result from political or legislative change. As has become our motto, internally – we will do our best to control what we can control.

While many of us would like to control the election outcome on the state and national level, none of us can. We can all vote and should. We can all support whoever wins, and that perhaps is our civic duty. And when science solves the pandemic, which it will, we should hang around with our neighbors and loved ones, and marvel at the wisdom of the elders among us.

Michael Kayes, CFA