Always look forward

Hey Dhruv,

I know daddy has been remiss in writing these notes regularly. Daddy took a new gig at a startup and things are hectic. Daddy’s loving it though, its a fun ride!

Daddy wants to talk today about a movie by Woody Allen called “Midnight in Paris”. The central character in this movie (played by Owen Wilson) is obsessed with 1920’s Paris. He’s a writer and thinks the best work came out of that era. As it happens in movies, very unscientifically, he is transported to 1920 and gets to meet all his heroes. He loves it. As luck would have it (it is the movies after all) he meets his muse in the 1920’s. She likes art and literature just like him but surprisingly is obsessed about the 1890’s. She believes that the best work came out of that time period. So, double transport, they both go to the 1890’s to meet their idols and guess what, the folks in the 1890’s believe the best work came out of the renaissance!

So what am I getting at? (other than totally spoiling the movie for you). Humans like to look at the past fondly and are very nostalgic. Just like in the movie, every generation always thinks that the past was the best. For example, music was so great in the 60’s, there was no information overload, we all read and were more intellectual in the “old” days.

This is bullshit. Always look forward.

If you look at the facts, it is pretty obvious that things have gotten better through time. Your daddy is writing this note on a train headed back home on a really small computer that is 10 times more powerful than the one just a decade ago, WITH wireless internet, TODAY! Things have gotten better and logically the odds are, that the future will be better as well!

So stop focussing on the past. Always look ahead. Don’t yearn for the days of yore, create the future you want to be in.

Unless we are talking about markets :).  This might sound cognitively dissonant, but hold on there is a lesson in here somewhere.

Lets get back to macro. Inflation in the US remains weak, inflation in the EU dipped and there are now fears of deflation. In response, uncle Draghi at the ECB cut rates this week.  A rate cut was not expected. You might be thinking that deflation is good, prices are falling, better for me, I get to pay less! But if everybody starts thinking like that, everybody waits and nobody buys any stuff. What is the first thing a business going to do in this situation? drop prices off course to clear inventory! Prices drop further and as a consumer you wait even more (hey it will be cheaper tomorrow, why buy now). Now you have a spiral of collapsing prices. Collapsing prices mean collapsing demand which leads to more layoffs (increased unemployment). Prolonged deflation is bad, bad, bad.

However in spite of this seemingly looming threat of deflation, Equity markets are at all time highs. This is very confusing to daddy. If we are deflating,  future growth is going to be lower (remember demand is collapsing in deflation). Equity markets are supposed to be forward looking, so they should be heading lower in expectation of lower growth! Not happening.

Daddy thinks something needs to give.

Fundamentally aggregate demand hasn’t come roaring back and credit growth is still constrained. People are still de-leveraging. Profits are all time highs but investment spending is at all time lows. How are companies going to keep up profits if they don’t make capex investments? There is anemic growth everywhere. India reported 4.4% growth, China reported 7.8% growth and the US reported 2.8% growth. Dismal, Dismal, Dismal. However as with all things Mr Market, prediction is a foolish game. Daddy’s is going to stay out of it and just keep building that margin of safety.

So why did I ramble on like this? Is there a point?  Yes, I promise there is :).

Be optimistic about the future and always look forward in everything that you do,  with one huge exception.  Don’t carry that bias too far with your investment philosophies. Markets are irrational and the future may always not be bright in the short run. In life worry about the long run, but with investments, pay attention to short run. The short run may bankrupt you and thats no fun.

Till next time,



On Today November 8 2013

Important Numbers

Attribute Value
S&P 500 1770.61
10 Yr T-note yield 2.77%
30 Yr T-note yield 3.84%
Yield Curve Upward Sloping
TIPS inflation expectations (5Yr) 1.77%
Cleavland Fed Inflation Expectations 1.73%
Unemployment Rate 7.3%
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