The Sunday Drive - 08/13/2023 Edition [#71]
The Sunday Drive - 08/13/2023 Edition [#71]
Musings and Meanderings of a Financial Provocateur
👋🏼 Hello friends,
Greetings from Saratoga Springs, NY! It’s another gorgeous summer weekend here in upstate New York. Let's take it easy and enjoy a leisurely Sunday Drive around the internet.
The Sunday Drive is also published at NewLanternCapital.com.
🎶 Vibin'
As we meander into the second half of August, typically one of the quieter periods of the year, I thought something a bit on the mellow side might fit the mood.
This week, I’m vibin’ to the theme song from the 1988 movie Homeboy starring Mickey Rourke and Christopher Walken and featuring music by Eric Clapton. Best enjoyed with a beer or glass of white wine, preferably next to a body of water. 😊
💭 Quote of the Week
"Mystery creates wonder and wonder is the basis of man's desire to understand."
– Neil Armstrong
📈 Chart of the Week
The Chart of the Week shows U.S. corporate profits (black line) and the performance of the S&P 500 (blue line) in the post-war period. Both time series are adjusted for inflation. I found this chart interesting because it shows the corrective nature of recessions which serve to re-align the equity market with the economy.
As you can see, the market largely tracked (at least directionally) corporate profits from the 1950s through the mid-1970s. When inflation picked up in earnest in the 1970s, the performance of stocks expressed in real terms, i.e. adjusted for inflation, lagged the real economy very significantly for a decade.
However, once inflation came down in the early 1980s, the real performance of stocks was dramatic and lasted until around 2000 when the dot-com bubble burst. The chart shows just how far ahead of the real economy the market had gotten by the late 1990s.
What I find most interesting in this chart, and perhaps most relevant to today, is how quickly corporate profits recovered in the early 2000s, and how after a few years, the performance of stocks began to track the real economy again.
For the last decade or so, inflation-adjusted corporate profits have been roughly flat, and yes, the stock market has once again gotten ahead of the real economy.
The real question we have to ask ourselves is how that gap will resolve itself? Will we have a typical recession which will bring the market back in line with (or below) the real economy? This seems to be the consensus opinion amongst the mainstream financial media.
Or…
Might the opposite occur? What if we have a resurgence in real corporate profits over the next several years, led by lower inflation and increasing productivity (see last week’s Chart of the Week), leading the real economy to catch up to the market?
For what it’s worth, this is the scenario I’m inclined to believe in, at least for the time being.
🚙 Interesting Drive-By's
This week we have articles on remote work, capital management, inefficient markets, and usefulness:
🤔 An Office is not The Office - from Dror Poleg
The office crisis is over. Didn't you hear? A new report from Business Insider proclaims, "Remote Work is Dead: Zoom Tells Employees to Return to the Office." Phew. Finally, we can stop worrying about all those lazy people who can't be bothered to show up. The office won! Yay!
Oh, wait.
That's not what the story says. So what is actually going on? And what can we learn from it about the real future of work?
Zoom announced that "employees that live near an office need to be on-site two days a week to interact with their teams." Specifically, it mentioned "50 miles" as the relevant distance from an office.
This is not the death of remote work. This is formal confirmation that the office is dead — not an office, but the office. [link]
📈 Dell Inc. - A Masterclass in Capital Management - from Cedric Chin
Leaders who are great at capital management don’t get much fanfare in tech. Their skills are subtle: they understand the capital cycle in their industries and know the optimal time to fuel expansion with fundraising. They have a deep, felt sense of cash flow, unit economics, and risk when evaluating mergers and acquisitions or using debt.
They’re not as flashy as product revolutionaries or scrappy entrepreneurs leading the charge against Goliaths. But make no mistake—capital management is a superpower that can make all the difference in a company’s long-term prospects.
Dell Inc. is one of my favorite exemplars of this skill. The company is often dismissed as an old PC stalwart, and as a result, it doesn’t make headlines as often as Apple, Google, and Microsoft do. But over the years, Dell has managed to reinvent itself time and time again, navigating turbulent changes in the tech world thanks to deft capital wizardry.
There’s a lot Silicon Valley can learn from the high-stakes moments that defined Dell’s business. [link]
💯 The Inefficient Market Hypothesis - from Jack Raines
How Hertz Became the First Meme Stock…
I […] wonder when this pattern of YOLOing one’s money into bankrupt and/or flailing stocks began. I understand the allure of lottery tickets and roulette wheels, but public bankruptcy announcements hardly seem like the right place to risk it all.
Seriously, why would you ever, ever, throw your life savings at a bankrupt stock?
And then it all made sense: the reason that so many “investors” have been willing to go full-send on these bankrupt meme stocks is because three years ago, Hertz went bankrupt, and the investors who weathered that storm got PAID.
Should this have worked? Nope.
Was it ill-advised to invest in a 🗣️ BANKRUPT RENTAL CAR COMPANY DURING A PANDEMIC??🗣️ Absolutely.
Did it work anyway? 100%.
Buckle up for the story of the grandfather of all meme stocks: Hertz. [link]
💡 The Difference Between Useful and Valuable - from Chip Conley
A corkscrew is useful, a hug from your mother is valuable. A door is useful, watching a sunset is valuable. A car is useful, a good friendship is valuable. Having hobbies is useful, having faith and praying is valuable.
The useful is almost always more expensive than the valuable. In fact, what is valuable rarely costs money. This occurs because money is useful but not valuable. The valuable generates much more happiness in the long term than the useful, yet we often value the useful more than the valuable. [link]
👋🏼 Parting Thought
This week, my mother celebrated her 88th birthday. After having lost 3 parents in 27 months, the latest this March, my wife and I and our children cherish each day, week, month, and year that we still have her.
Happy Birthday, Mom! Keep dancin’!!! 🎉🎊💃
If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em at me.
Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed.
I hope you have a relaxing weekend and a great week ahead. See you next Sunday...
Your faithful financial provocateur,
-Mike
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