The Sunday Drive - 08/25/2024 Edition [#125]
Musings and Meanderings of a Financial Provocateur
👋🏼 Hello friends,
Greetings from Saratoga Springs, NY. Let’s enjoy a leisurely Sunday Drive around the Internet.
🎶 Vibin'
As the summer winds down and we look to the change of seasons, sometimes I wax a little nostalgic for my younger years and call back to simpler days.
This week’s vibe has always been one of my favorite Journey songs. The vocal combination of Steve Perry and Greg Rolie makes it quite special. The Budweiser can on the piano in the studio is a reminder of #rock-n-roll days long ago.
I hope you enjoy Journey’s 1978 hit, Feeling That Way.
💭 Quote of the Week
“Those who bring sunshine into the lives of others cannot keep it from themselves.“
— James Matthew Barrie
📈 Chart of the Week
I found this week’s Chart quite fascinating and frankly, eye-opening.
Very few people currently working in the investment management business began their careers prior to the early 1980s. In fact, the bulk of the growth of the professional money management business occurred during the 1980s and ‘90s. This growth coincided with a secular decline interest rates beginning in the early 1980s which followed a multi-decade period of inflation in the post WWII years, particularly in the 1970s.
For the last forty years or so, a portfolio consisting of a blend of stocks and bonds - typically weighted 60/40, has served investors well overall.
As we sit here today with yields on fixed income barely above the rate of inflation, if at all, the math just doesn't work out to offer attractive returns on bonds going forward.
I believe that the combination of long-term under-investment in physical assets, i.e. commodities, and demographically driven labor force declines will lead us to experience a long-term inflation rate of 3% at best, higher than the Federal Reserve’s target of 2%.
That one percent difference might not seem like a lot, but over a long period of time, the value of financial assets discounted using a 3% rather than a 2% inflation rate will be lower and the long-term value of physical assets will be higher.
If you take an even longer view than that of most currently working investment professionals and go back another four decades to the end of World War II, a very different 60/40 portfolio construction would've done better for investors over the full course of time.
A portfolio consisting of a blend of 60% stocks and 40% commodities actually outperformed the typical 60/40 stock and bond portfolio.
Perhaps we might rethink how we view commodities. Might they be poised to perform well over the next several years, perhaps many years, and serve investors well by being a part of their portfolios?
Another part of my argument for a higher long-term inflation rate than 2% is the aforementioned demographically driven labor force declines.
A couple of years ago, I wrote a piece called The Mother of All Asset Shifts which discusses the interplay between financial assets and human capital.
I believe that as population growth slows and ultimately declines, and societies around the developed world continue to age due to lower fertility rates, we will see a revaluation of human capital higher. Some would call that inflationary, but I just call it reality.
So if I am correct in my belief that long-term inflation - regardless of central bank policies - will be at best 3%, a very different portfolio emerges.
Portfolios consisting of stocks, commodities, and perhaps an elongated period of monetizing our human capital by delaying retirement and continuing to work could very well serve investors much better than the classic, or perhaps not so classic if you look far enough back, 60/40 stock and bond portfolios.
Food for thought anyway…
🚙 Interesting Drive-By's
🤔 A Data-Driven Case for Productivity Optimism - from Brian Albrecht
📉 The Upside to Population Decline - from James Pethokoukis [Link]
📈 Home Insurance is a Really Big Problem - from Kyla Scanlon [Link]
💡 AI Predicting Markets, Deepfakes, and the Race to Superintelligence : Tech’s Triple Threat - from Peter Diamandis [Link]
💰 Everything is Worse Because of Private Equity - from Jared Dillian [Link]
👋🏼 Parting Thought
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 (X ‘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. The views expressed in The Sunday Drive are mine alone, and are not necessarily the views of Investment Research Partners or Cache Financials.
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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A 60/40 stock/commodity portfolio seems crazy. But it's making me question the 60/40 orthodoxy and that's valuable. Thanks Mike.