Circle of Competence Issue #38

Quote of the week: "After all, you only find out who is swimming naked when the tide goes out." - Warren Buffett, 2001 Shareholder's Letter

FOOD FOR THOUGHT

Back in week 33, I discussed the current market cycle and general thoughts on where we are in the cycle after reading Howard Marks' latest memo. This week, I wanted to update the points from Marks' letters with a few more gleanings that I took note of this week.

- In the Real Vision interview with Kiril Sokoloff, Stanley Druckenmiller makes some very compelling points around deteriorating fundamentals in the corporate debt markets and has positions on currently that are effectively a directional bet against certain sectors of the markets. In fact, he has been trying to find a way to be short various sectors of the market since this July. Druckenmiller is one of the greatest investors of all time and in fact has never had a down year in 30 years of money management. When someone of his stature speaks, I listen. Great quote around 59:45:

"Could this Tesla thing have been able to take place in any other environment in history (without this cheap abundant debt)? I don't think so. It is just ridiculous... But I don't look at it so much as Tesla, it's just the environment."

- Bruce Berkowitz has virtually half his fund in cash at Fairholme Funds. This speaks volumes.

- Buffett just bought back almost $1B in stock and has $100B on his balance sheet - are there no good investment opportunities out there?

- The yield curve is 25 bps above inverting and tightening. Historically, a yield curve inversion (when the slope becomes negative) has been an excellent leading indicator of an impending economic recession.

- Marathon Asset Management's (distressed debt hedge fund) Richards is calling for recession in 2020 stemming from over-leveraged corporations.

- There is a growing sense of a bubble in the venture capital space. Many startup companies have been bestowed the almighty 'Unicorn' status - but are they unicorns in reality or just on paper? The beauty about raising money in the private markets is that it is not marked to market on an accounting basis - many of these esoteric accounting techniques can simply be reduced to whatever the companies agree upon at their funding with their investors... and they do not have to undergo brutal public market scrutiny and daily re-rating of their stock price if they are money losing entities (which most are!).

With zero interest rate policy for several years and the Federal Reserve's balance sheet expanding by $4+ trillion after the Great Financial Recession, effectively pumping this money into the economy, is it any wonder that this money would eventually pile into riskier and riskier assets when rates are so low for so long? As the old adage goes, there is no free lunch in economics, and the bill may be coming due soon. After all, you only find out who is swimming naked when the tide goes out. Is the tide showing signs of turning?

Have a great week!

- Benton

DEPARTMENT OF GENERAL FINANCE

- Kiril Sokoloff interviews legendary investor Stanley Druckenmiller on Real Vision

- Bruce Richards' interview on the risk of over-leveraged companies going forward (Bloomberg)

- Carl Icahn published his latest deck on the DVMT buyout but then subsequently ended his proxy contest against Dell Technologies

after they offered more money to DVMT shareholders to sweeten buyout deal (Pitchbook)

- Greenhaven Road Capital Q3 letter (Scott Miller)

- Bruce Berkowitz's Fairholme Funds Q3 letter

- Chris Leithner on climate change and the insurance business

- Fred Wilson on the beauty of economic development in the wake of Amazon's HQ2 announcement for NYC (AVC.com)

- $2B in incentives for Amazon HQ2 - did NY and VA overpay? (New York Times)