Dear Fellow Shareholders:
Fed Chair Jay Powell recently noted that the economy is experiencing “extraordinary times.” There are several events to which he could have been referring. He could have been alluding to the trade war with China, which has dominated headlines for much of the year. He could have been referring to oil prices which have risen from $40 to over $70 and then collapsed towards $50. Another item to which he could have been referring is the yield curve, portions of which have already inverted. Risky leveraged loans are at record levels. And there is a whole array of geopolitical issues which may have been on Chairman Powell’s mind including Brexit, Italian budget issues, Paris riots, and the election of a left wing president in Mexico.
Yes, we are living in extraordinary times. But other times can also claim to be extraordinary. Certainly the global meltdown in ‘08 merits that claim. 2010 gave us the Greek debt default crisis, which threatened the existence of the Euro. In 2011 a Japanese tsunami destroyed the Fukushima nuclear power plant. That year also marked the deaths of both Osama Bin Laden and Muammar Gaddafi. Additionally 2011 had the first ever reduction of the United States’ credit rating. This budget crisis led to a shutdown of the U. S. government in 2013. That same year also marked the start of North Korean missile testing.
2014 brought the beginning of a collapse in oil prices from over $100 to their ultimate low of $30. In 2015 the oil patch crisis culminated in bankruptcies for several indebted oil producers. The effects of the slowdown in drilling created a recession in the industrial sector. 2016 featured the astonishing election of Donald Trump as President of the United States, which brought sizeable tax cuts into law in 2017.
So our extraordinary times may be rather ordinary in their extraordinariness. Headline writers thrive on turning the ordinary into the extraordinary. They love dramatic headlines. Sensational headlines are what sell newspapers and draw digital clicks.
Reports of war and natural disasters are tragic for those directly involved. But for most of us these newsworthy events have little direct impact. Despite the extraordinary headlines our lives go on as normal.
There is one truly extraordinary event to which Powell might have been referring. Currently we enjoy both full employment and no inflation. Usually full employment and inflation are companions. Economists have named the normal trade-off between employment and inflation as the Phillips curve. A nation can have either full employment or no inflation. It can’t have both. Tight labor markets almost always induce inflation. In turn, inflation leads the Fed to tighten rates. Inflation slows but so does the economy and employment. Will our current Goldilocks full employment and low inflation condition last?
Two concerns threaten. One is the length of our expansion, one of the longest on record. Some believe that sooner or later our growth must end simply because it has been going on for such a long time. Yet the oil patch woes of 2015 hint that our boom isn’t as over ripe as feared. The drop in the oil price caused producers to halt investments which led to a year long decline in industrial production. Typically this meant recession. But this did not count as an official recession due to the reduced size of our industrial base. GDP, the official expansion indicator, continued moving upward. Still the industrial slump brought dampened the optimism that leads to boom ending excess.
Another concern is inversion of the yield curve which has been a reliable recession indicator. Currently the yield curve is close to inverting but hasn’t yet inverted. So no official recession prediction yet. Even if the curve should invert, the inversion tends to lead a recession by a long time. So we have more time to enjoy our robust economy.
I believe that excesses are what drive recessions. Some excesses are visible, especially those related to debt. But by and large our economy is healthy. I further believe that the stock market is driven by the economy. A healthy economy should produce a healthy market. This does not mean that I expect stock prices to go straight up, but I’m not expecting a correction any greater than the four 10% drawdowns we’ve had this year.
SEVEN CANYONS UPDATE
We are settling into our new offices in downtown Salt Lake City. This is quite a change for me. At Wasatch I looked out at the mountains through a wall of windows. Our campus location meant that as the seasons changed my “wallpaper” changed. The outdoors often called to me. I went on a daily walk to enjoy our setting.
Seven Canyons offices are in a lovely old building downtown with smaller traditional windows. My less alluring view is of office buildings. But I can see the buildings which used to house both Wasatch’s second and third offices. I enjoyed the tranquility of Wasatch’s current setting. Now I appreciate returning to the bustle of SCA’s urban setting.
Josh and I recently visited Morningstar’s Chicago headquarters to tell the Seven Canyons story. We were accompanied by Josh’s seven year old daughter. Willa sat in on our meeting, spending the time coloring. Josh and I thought our meeting went well. But, at the conclusion, when I asked Willa if the meeting was good, she unhesitatingly responded “Nope.” Hopefully our Morningstar hosts were more impressed.
Spence has been our most prolific traveler. From his late summer trip to India: “I got my long awaited metro ride in Mumbai. My vision of crammed bodies smelling of sweat and spice was nowhere to be found. It was clean tidy and spacious. Quite a contrast to my NYC subway days. But also somewhat discouraging as our culture is becoming more globalized and less diverse.”
He just returned from a trip to London and Prague: “Traveling so far for a conference isn’t the norm, but worthwhile when I can get a bottom-up view on Turkey, Poland, Russia and the many smaller CEE countries. It’s certainly not the same as being on the ground but there are other benefits… I met a Ukrainian company along with other analysts. With no intention of stoking any flames I mentioned the recent Russian seizure of Ukrainian ships and crew. It was like I lobbed a grenade from a safe bunker. The ensuing debate intense but cordial. The passion of the Ukrainian woman was moving. The leaden view of the Russian analyst presented quite a contrast. This lone interaction made the trip worthwhile.”
I would also like to clarify that the December 20 drop in price shown on most websites for Seven Canyons World Innovators (WAGTX) did not represent the actual decline in the value of your investment. On that date all investors received their annual dividend payment, which was either paid in cash or by the issuance of additional shares. Inclusive of the dividend paid on that date, WAGTX declined only 0.5%.
In closing, I want to tell you how much I appreciate your willingness to invest alongside us in our Seven Canyons World Innovators (WAGTX) and Seven Canyons Strategic Income (WASIX) funds. I look forward to a profitable future together.
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually or quarterly.
Phillips Curve is a supposed inverse relationship between the level of unemployment and the rate of inflation.