Observations, thoughts, concepts from the top table.
Globally, we are experiencing an exceptional period. Our U.K. sisters and brothers have surprised the world and voted to leave the European Union, erasing in two days a record $3 trillion of market wealth and perhaps forcing ultra-low and negative interest rates to continue for an even longer foreseeable time horizon. We’ve snapped back a good chunk of this lost valuation, but uncertainty and volatility still permeate. In an ironic twist that illustrates that circumstances are rarely black and white or win-lose, the leadership on both sides of the referendum have either resigned or been given a vote of “no-confidence” and a demand to resign. The rest of the EU, which could hardly be called a “well-oiled” machine, may have finally found the first cause it can truly unite against: punishing the U.K. for her disloyalty! Unfortunately, the EU was much stronger with the U.K. in the fold and London as a regional financial capital, so, if all goes as voted, there may be no victors on any side and the likely outcome is a higher likelihood of an intermediate-term British and possibly pan-European recession, neither of which would help any of us, including the U.S.
On top of this (and perhaps intertwined), we have the painful intersection of mass populism, and the common enemies being every bank and any other “elite” in the neighborhood. We are sadly experiencing large numbers of people wanting to undo or at least limit or slow globalization (i.e., bring on the trade warriors and immigration barriers). If this wasn’t enough, one can throw into this distasteful cocktail a painful mixture of the sad mass migrations from troubled lands, unparalleled government debt, stagnant growth and despicable terrorism, sectarianism and prejudice. It is easy to become quickly overloaded with negativity or even paralyzed from depression and sadness at the current state of the world. This environment has massive ramifications for how we manage money for others, run our companies and live our lives. Sadly, it will also dictate the reality of the future and the legacy we leave to our children. With all of these cross-currents, we thought we would try to cut through some of this “painful noise” and highlight some basic observations that might help us all navigate our evolving world and steer ourselves to a better future.
Ten Thoughts on Navigating A Painful and Confusing Period:
History is littered with examples of what happens when the gap between the haves and the have nots expands too far. We firmly believe that capitalism, while not perfect, is the best economic model that exists and results in the highest quality of life, as well as the greatest personal satisfaction and sense of freedom. That said, it may not be accepted by many who are privileged, but it is clear that the fortunate ones who have figured out how to create and accumulate wealth must allow for a fair sharing and a safety net for those who need and deserve one. At the same time, few will ever feel good about redistribution unless it is done in an efficient and intelligent manner by an effective and balanced government. Additionally, it goes without saying that philanthropy and kindness not only make the world a better and safer place, but it makes the giver a happier and more complete person.
We are not going to advocate a political choice or statement, but will speak philosophically. What every society truly needs and deserves are political leaders who do just one thing right: PUT THE CITIZENS’ INTERESTS AHEAD OF THEIR OWN PERSONAL AMBITIONS. We don’t care why the other candidate is horrible. We don’t care about form over substance. We care about constructive logical ideas that are actionable and will maintain and hopefully improve the quality of life for as many people as possible. Efficiency, common sense, fairness, balance and long term vision. If only it were so simple.
It Is All About People
Whether you are managing money, building a company or watching your son or daughter pick his or her life partner, it comes down to surrounding yourself with people of high character, integrity, compassion, intelligence, empathy, perseverance and loyalty. When the environment is such that the wind is at your back, this priority might not be as obvious as it should be. In times of pain, stress or uncertainty, this is all that matters and will dictate success or failure.
Low interest rates
There can always be a surprise shock to the system, but the likely outcome of all the current strife is that historically low interest rates are highly likely to be with us for quite some time. Growth is just too slow, the economy is fraught with too much uncertainty and fragility, and inflation is in check. This means that unless you have a stomach for huge risk, you should expect and be prepared for moderate to low rates of return. Unfortunately, this reality will not discriminate whether you are investing money or trying to drive ROE for your shareholders. There will obviously be exceptions to this rule, but for most companies and investors, this will be a fact of life that needs to be incorporated in your future planning.
Technology Persists As A Game Changer
Just when you think there is no growth or potential rates of return, one has no choice but to marvel at the technological innovation and resulting improvements to quality of life that have occurred (and will continue to proliferate) in everything from shopping, investing, communicating, entertaining, learning, driving, and living healthier and longer (and better) lives. One of us even has his own Instagram account (although his kids won’t let him be on Snapchat -- not cool enough!). The point is that while there are always some downsides with technological progress, this is one of the best weapons the world has to combat the painful cross currents that exist today, as well as the challenges we have to sustain growth and promote freedom.
Volatility Is Here To Stay
Of this point, we are certain. The winds are too strong and change on a moment’s notice. The only way to stay secure for the long term is to have ample liquidity. This too will dampen ROE for companies who cannot employ too much leverage, no matter how cheap it may appear. Even the most astute of money managers will need to keep a meaningful cash cushion to prepare for untimely redemptions (is there ever a timely one?) and the ability to average down when attractive value gets even more attractive. Capital structure matters, and those who are built on a strong foundation will take advantage of those who are not, and it will happen suddenly, ruthlessly and without warning. By the way, it is also possible to get badly hurt when the markets instantaneously bounce back the moment after you de-risked, downsized, or -- god forbid -- hedged and went short. Perhaps we have our rose colored glasses on when we hope Europe will find a common path, but the unlikely announcement of a “re-vote” by the British may cost some people more than Brexit. Nothing is simple, straightforward, or easy.
Fundamentals Are Not Dead
It has been a very long time since quality research and value oriented investing have been rewarded. In history, almost everyone who has finally capitulated on this philosophy has done so at the exact wrong time and they paid the price. Low interest rates cause many asset classes to correlate, and the speed of communication and waves of volatility and panic make it feel like nobody will ever care about concepts like tangible book value or hard assets ever again. At the end of the day, we believe the hard work of bottom up analysis, serious due diligence and the focus on true value will be a winning combination, especially during periods of turmoil. It just might not feel very smart at times like these.
Do Your Own Work
Information travels at an incredible speed. The volume of media outlets and sources has proliferated to the point of them becoming more of the story than the actual news itself. The reality of the new media business model is that clicks are what matters and negative/controversial/bombastic stories sell better and faster today than the direct facts. When it comes to investing, politics or just life decisions, nothing is more important in this current new world than actually doing your own work. Visit the facilities of the companies you invest in. Meet with the management teams personally versus relying on all the social media mob reactions. Know your clients and customers, and get direct and honest feedback. Cut out layers of bureaucracy that only serve to make it harder to get to the truth. This way, you won’t have to overly rely on the mass media to understand reality.
Costs Must Stay Rational
One of the undeniable conclusions from our low growth and uncertain environment is that efficiency will dictate the winners and losers of the future. Again, it doesn’t matter if you are managing money for investors, running a company or overseeing your personal household...diligence on the cost side of the ledger is one of the few things you can directly affect today. Unfortunately, it is not a once a year or even a quarterly endeavor. The new world and the current environment dictates this is an everyday and constant way of life. This is not the responsibility of just senior leadership or mid-level managers. This is the responsibility of every single person in your organization. Without everyone being vigilant and bought in to help, it is impossible to go far enough to be truly competitive in the current world. If you find yourself not bought in (or if you are not raising your hand to actively help) to be part of the solution, you may soon sadly realize you are part of the problem.
Health, Family, Friends and Life Balance
Just when you think the world is a mess with Brexit, volatility, redemptions, earnings misses and all the other headaches that we each suffer daily, ALL IT TAKES IS ONE PHONE CALL FOR THINGS TO INSTANTLY BE PUT INTO PERSPECTIVE. You know what we are saying. Despite all the turmoil, every one of us needs to appreciate what we have every single day and realize that life is (hopefully) a very long race with many ups and downs and while littered with pain and craziness, it is our ultimate gift. Regardless of the cross currents we have all faced and will continue to deal with, our family, friends, and health are a precious blessing and need to be treasured every single day.
These are not rules or an instruction manual for dealing with the craziness of our current times. They are merely observations, thoughts, concepts, and beliefs from two people who have lived through many markets and experienced countless professional (and personal) ups and downs. If a single of these thoughts resonate with even one of you and helps you have better clarity or perspective on something you are dealing with while investing your client’s wealth, managing your business or living your life, the time spent writing these thoughts will have been well spent.
RICHARD B. HANDLER, Chairman of the Board and CEO, Jefferies Group
BRIAN P. FRIEDMAN, Chairman, Executive Committee, Jefferies Group
P.S. Happy Independence Day Weekend to everyone.
P.P.S. Handlerrich on Instagram!