James Agee and Walker Evans were being facetious, of course, in the title of their shattering depiction of the poor in 1930s Appalachia. How do we as a narrative-driven society understand the actual living conditions of actual people in our actual world? We don’t. We don’t see them at all. There are no Missionaries to tell the tale of a tenant farmer. But there are hundreds just aching to tell the stories of Famous Men.
Back in the day of Agee and Evans, the stories of Famous Men were almost always puff pieces, heroic narratives of Titans of Industry and Politics. Today, though, these stories are more often than not cautionary tales, steeped as we are in the other-observing Sheep Logic of the modern age, where it’s all schadenfreude all the time.
I thought of this when I was reading various year-end articles about the Famous Men whose stories dominate our financial press, men like Elon Musk and David Einhorn and the like. There are lots of others to choose from, and they’re almost all cautionary tales of Masters of the Universe getting their comeuppance. These are very popular stories. You may think that you’re above a comeuppance story, but you’d be wrong. You’re both biologically hardwired and socially trained to LOVE these stories.
To be clear, though, I’m not writing this note as an exercise in civic-mindedness or to call attention to the plight of some modern day tenant farmers.
No, I’m writing this note to help you make money in 2019.
When you focus on the behaviors of Famous Men, you cannot see clearly the behaviors of the mass of people who actually determine real-world market and economic outcomes.
We’ll leave Einhorn’s cohort of professional money managers for another day, as it’s an evergreen Epsilon Theory topic. Today I want to talk about the behaviors of Elon Musk’s cohort, corporate CEOs and senior management. And I’ve got a very simple observation about those mass behaviors.
The effectiveness of corporate management in surviving the Great Recession and thriving in the decade since is nothing short of astonishing.
In every sector, from tech to financials to healthcare to retail to energy to whatever, management teams have proven to be remarkably competent at implementing process technologies and calculating a strategic path that minimizes the maximum regret of business failure.
I’m not making this observation as a rah-rah booster. On the contrary, my forte as an investor is short-selling. Nine years ago, I was shocked by how FEW management teams failed. Today, I am shocked by how FEW management teams have blown out their balance sheets or their inventories. I am shocked by how FEW management teams have put their companies in a position of existential risk at the tail end of unprecedented monetary policy stimulus and excess.
Are there exceptions to this rule? Sure. And you’re aware of them all, because the cautionary tales sell like hotcakes. But this IS the rule.
Did management get a lifeline from the Fed and its extraordinary monetary policy actions? Yes. And you’ve heard about this ad nauseam from me and others. But what’s truly extraordinary is how few companies failed before these policies kicked in, how careful companies have been in the years since these policies kicked in, and how prepared companies are now that these policies are rolling back.
I think it’s the biggest and most important economic story that no one has written, invisible because it’s diffused across thousands of management teams and has none of the story elements that make for a compelling narrative arc.
We are living in a Golden Age of corporate management competence, driven by the adoption of process technologies and minimax regret strategies.
That’s not going to stop in 2019.
Here are two implications for your investment strategy:
1) Minimax regret strategy is NOT an earnings maximization strategy. It is a survival maximization strategy. Put another way … the Golden Age of management competence is not a Golden Age of EPS growth, and I have no idea if consensus 2019 earnings estimates for the S&P 500 or your particular sector of interest are too high or too low. In fact, that’s the point, because competent corporate management doesn’t know, either, so they’re not going to lead the company on the assumption of a particular state of the world that always beats and raises. On the other hand, though, that’s why the Golden Age of management competence IS a Golden Age of low default rates. It’s also why my spidey-sense is not tingling about some imminent systemic crack-up even if financial asset prices and earnings estimates continue to take it on the chin.
2) Super-low interest rates do not spur corporate risk-taking. On the contrary, ZIRP diminishes investment in real-world growth opportunities like building a new factory or developing a new product in favor of market-world growth opportunities like stock buy-backs and dividends. This was the fatal flaw in central banks’ decade-long effort to spur productivity growth and “good” inflation by cutting interest rates to zero and beyond. It’s not just pushing on a string … it’s providing infinite liquidity for a competent management team to satisfy its earnings growth goals in a risk-free manner! But by the same token, as the cost of money increases, competent management teams will need to take MORE risk in the real-world, and THAT is what generates wage inflation and productivity growth and all the rest. Just as cutting interest rates to zero failed to spur inflation, so will raising interest rates from zero fail to contain inflation. Sorry, Mr. Friedman, but inflation is not a monetary phenomenon in anything but a tautological sense. Inflation is always and everywhere a risk-taking phenomenon.
For more on minimax regret strategies and their role in markets, see:
For more on inflation risks, productivity, and the fatal flaw in the past decade of monetary policy, see:
- Things Fall Apart, Part 3 – Markets
- The Narrative Giveth and the Narrative Taketh Away
- Gradually and Then Suddenly