Thoughts from the Frontline

You won’t be surprised to know I disagree with recent Federal Reserve policy choices. The Fed’s future choices are more important, though. Debating what they should do is one thing. Anticipating what they will do is critical.

Why do we invest? Everyone has their reasons, but funding retirement may be the most common one. Whenever the time comes, we want to relax in comfort and security.

Happy Thanksgiving! I hope everyone had a good holiday. I’m writing this issue early in the week while enroute to join family in Dallas. Today will be different and I hope you like it.

In some simplistic economic theories, shortages never happen. Supply and demand for any particular good are always perfectly balanced in a given time and place. If you can’t get what you demand at that moment, you pay a higher price or you demand something else.

I am writing in the middle of a whirlwind week in New York. We are going to discuss what I’m learning, some takeaways from the conversations I’ve had, changes in my personal portfolio, and thoughts around the topic of the day: inflation. As well as a few random things that I have read this week. All delivered to you within my 3,000-word limit. Let’s jump in…

If I had to describe my last 500 letters in one word, it would be “complexity.” The older I get, the more I realize problems I once thought had reasonably straightforward solutions are, in fact, hideously complicated. That doesn’t make them unsolvable but it reduces the odds they will be. Often we start with good intentions and end up with unintended consequences, not all of which are good.

To Jerome Powell and the Fed:

Because I believe in the division of labor, I rarely use hand tools today. In the ‘80s and ‘90s, I had two 4 x 8 pegboards on my garage wall full of tools along with my large Craftsman toolbox. I had the right tool for every job around the car, house, and yard. I worked on the plumbing, electricity, built rooms, and flooring. My current friends might not believe it, but I was quite handy back then. It was almost a bit of a fetish.

At the risk of overusing a favorite metaphor, today we’ll talk about sandpiles. My past sandpile stories focused on financial crises. The same principle holds in any complex system, though. Everything works until suddenly it doesn’t. As Minsky said, stability breeds instability. Then one additional grain of sand triggers a collapse.

Historical comparisons are always risky. This is particularly so when comparing different eras in vastly different countries like the US and China. Similarities can actually obscure more important differences.

Six months ago, few Americans had heard of Evergrande. Now many worry this Chinese property developer’s downfall will start an economically devastating chain reaction.

I have written several letters on the theme that the best investment posture is cautious optimism. Pessimism and bearishness never get you in the game, while untamed optimism means that at some point, you’ll have a serious setback. The cautiously optimistic investor asks both, “What could go wrong?” and “What could go right?”