Trump: A Fail for Agriculture

Without doubt, Trump's policies have been a disaster for agriculture.  His diplomacy through tweets and his thoughtless implementation of tariffs have resulted in a flood of unintended consequences - all to the detriment of the American economy, especially to long suffering farmers.

Here is the prelude to this post - a quote from a recent Gartman letter:

ON THE POLITICAL FRONT,  we attended a  board  meeting  at  one  of  the  universities  in  whose endowment/investment  committees  we  are  Board members and we were  really  quite  astonished at the antipathy  of  those  we  spoke  to  regarding  President Trump.  Previously,  those  we  had  spoken  to  were staunch  supporters  of  the  President,  welcoming  his attacks upon the massive numbers of regulations that  the previous Obama Administration had imposed upon the economy and openly supporting the tax cuts and judges  appointed;  but  the  depth  of  anger  over  the President’s  tweeting  and  “un-Presidential”  demeanor was really quite stunning.  However, what truly caught our attention was the anger at the President over his most  recent  verbal  attacks upon  the  Federal  Reserve Bank. To several “That was the  last  straw.”  When  the President  losses  men  and women of this sort who had supported him openly before he is in very real trouble. We are  simply  reporting  what we’d heard.
The Gartman Letter LC, November 29, 2018

Impact on the Farm Economy and Why it is not an Opportune Time to Invest in Farm Equipment Manufacturers and Distributors 

I follow statistics on farm income closely.  Why?

There is a direct relationship between income and expenditures.  When times are tough, farmers rein in their spending by economizing on farm inputs and equipment.  Farm incomes are good indicators of future spending on farm equipment and services.

The Farm Equipment Market

The following article provides a comprehensive overview of the farm equipment market from the perspective of equipment dealers.  It is well worth reading in its entirety. 

2019 Dealer Business Outlook & Trends for Farm Equipment Improved 2018 Sales Sets the Tone for 2019 Outlook

A few things to consider when reading the article:

• optimistic forecasts are seldom proved out in reality ... in recent years outcomes have been worse
• the sustained nature of sales of lawn and garden equipment ... so far (it all depends on the economic well-being of non-farm households)
• trends in sales by major equipment manufacturers  - an indicator of stocks that one might want to buy when things eventually recover? 
• the general gloomy outlook for sales 

At present, farmers are suffering.  Crop prices are low due to global oversupply - the result of increased capacity in South America and China and efforts on the part of importing counties to reduce their consumption by substituting imports for lower cost alternatives derived via technological innovation and/or direct substitution for lower (often not as satisfactory) food stuffs.  The high American dollar has also been a factor. 

This suffering is compounded by Trump-imposed tariffs which have had the following impacts:

• The increase in tariffs on steel and aluminum have increased input costs on the part of manufacturers - costs which will be passed on to the customers of farm equipment manufacturers or which will constrain bottom lines if manufacturers decide to absorb some of them.  US steel manufacturers took the tariffs as an opportunity to increase their prices, thereby negating Trump's protectionist measure - an unforeseen consequence ... or an obvious consequence which was either unanticipated or ignored by Trump (if indeed, it was even within his capacity to imagine).
• The impact of cost on new equipment sales and innovative technologies cannot be underestimated.  In response to a recent survey by AgPulse, and the question,  "What’s your biggest barrier to implementing new AgTech on your operation?", 55 percent of farmers indicated that cost is the greatest barrier; 25 percent were concerned about ROI ... all other reasons were far less important:Ag Pulse Survey
• US tariffs have prompted retaliatory measures on the part of countries such as China which have been very selective e.g. increased duties on soy beans have had a major impact on export markets in the Midwest and driven down prices.  The contagion has spread to Canada: Canadian farmers are finding it more difficult to find export markets due to competition and high shipping costs.  
• The long-term impact of tariffs has yet to be expressed.  There is a palpable dislike of Americans in much of the world - an attitude which has worsened since Trump took office.  How this will influence patterns of trade and consumption has yet to be determined.  
• It has implications for the farming community. The following article provides a good synopsis of the concern over tariffs which prevails in the agricultural community: https://www.farmforum.net/farm_forum/market-analyst-tariffs-trade-and-more-talk/article_6ec6f8cf-f8e6-5bb8-993b-86bb10c78310.html.  It makes for some sobering reading and does not bode well for the short term. 
• See this take on Trump's trade war tactics by the CEO of Deere - wonder if he is now a Trump supporter? Deere CEO Worried About Lasting Impact of Commodity Tariffs.   

As noted above, future projections on the part of the equipment industry are usually optimistic ... and unreliable.  The following article from 2016 shows just how far off the mark forecasts can be:

Are Falling Farm Incomes Impacting Agtech Adoption for the Long Term?

A few highlights:

• This year will likely be the worst year of the commodity price downturn for US row crop farmers as many enter their third year of negative net incomes, according to Kenneth S. Zuckerberg, senior research analyst at Rabobank Food & Agriculture.
• Zuckerberg also believes that along with a stabilization in crop prices, farm incomes will stabilize around long-term break-even levels for five years. This means the situation will not improve as quickly as in other commodity cycles. “This is based on Rabobank’s view that commodity prices will not improve much over the intermediate term,”

Farm Incomes by the Number

This post is already overly long but it is worth looking at the rate of farm failures, the ultimate measure of the state of the farming economy. 

The incidence of farm bankruptcies is increasing:

And that nagging economic strain of low commodity prices on farmers and ranchers—compounded for some by recent tariffs—is starting to show up not just in bottom-line profitability, but in simple viability. Over the 12 months ending in June 2018, 84 farm operations in Ninth District states had filed for chapter 12 bankruptcy protection—more than twice the level seen in June 2014 (Chart 1).

https://www.minneapolisfed.org/publications/fedgazette/chapter-12-bankruptcies-on-the-rise-in-the-ninth-district

Commentary on Farm Incomes

Statistics tell one aspect of the story.  Just as compelling are the narratives of those in the farming business.  The narratives are indicative of community mindsets - one of the main drivers in decision-making on the part of those involved in agriculture and other pursuits. 

Here is a selection of comments made by bankers in the most recent edition of the AgCredit Survey of the Kansas City Fed

Higher interest rates, along with increasing fuel and repair costs are key concerns for producers. – Southwest Kansas

Much of our area was hit with significant drought, which paired with the currently low commodity prices has reduced capital for most producers. – Northeast Kansas

Devaluation of land, cattle and equipment are causing adjusted analysis of borrowing capacity and cash flow. – Central Kansas

Current grain prices make it very hard for borrowers to cash flow. Trade agreements need to be worked out with other countries to hopefully help prices rebound. – Southwest Kansas

We are on the border line between drought and severe drought. Most farm customers will produce 60 to 80% of normal and will have income deficiencies. – Western Missouri

Deteriorating working capital and overall equity erosion of ag customers is starting to have a significant impact on producers and lenders. – Western Nebraska 

A Few Conclusions

1. Forecasts by farmers and those involved in the farming economy are usually too optimistic.  
2. The Trump-initiated trade war has had a double negative impact on the farming economy: increased input costs and reduced commodity prices.
3. Farmers are not in a mood or position to willingly purchase new equipment.  They are doing everything they can do to stay above water.  
4. I figure that it is not an opportune time to invest in the agricultural sector.

However

1. Things change.  
2. Equipment manufacturers and dealers have learned to manage throughout the agricultural cycle. If anything, they have reduced overheads and introduced efficiencies which should benefit them when the economy recovers. 
3. In comparison with recent declines in commodity prices, today's farmers have kept a reasonable handle on managing debt.  When commodity prices improve, they will be able to allocate more funds for new purchases than in years previous when debt loads were much higher. 
4. I have assembled a "buy list" of companies in anticipation of the turnaround.  A few things the companies share in common:

• low debt
• profitability
• great management which has been at the helm during tough times in years previous
• excellent, competitive products and services and a scale that should enable internal efficiencies
• a good reputation in the farming community
• the potential to capture more market share

FRED Adds Silver to its daily series

Any significance to this development?  I wonder why this was done.


FRED Adds Some Precious Metal
Posted on October 16, 2018

FRED has added 17 daily series on the price of silver. These series depict the value of silver for major currencies through London bullion market auctions.

Investing in India - some positive deep trends

In recent years, my interest in investing in India has increased.  My reasons are outlined briefly later on  in this post.

However, I had not appreciated yet another reason for investing in the country - a growing sense of pride and confidence that home-grown businesses can thrive and compete on the international stage.  This is quite different from businesses which operate primarily on the basis of India's low cost wage structure (... and even now some of them are "graduating" to higher value-added products and services).

This post from the Managing Direct of JHS Svendgaard says it all:

Until not too long ago, there was a tendency to look down on everything Indian.

Consumers who went out to buy products generally gravitated towards the international at best and anything that even sounded remotely international at worst.

The general conclusion was that if it is international, then it must be superior; if it was Indian, then it must be mediocre.

The biggest transformation of the last half-decade is a new-found pride in a number of things Indian. ...

Besides, there area number of other developments at play: a growing scale achieved by these Indian companies, the manufacture of products that reconcile world-class standards with relevant customisation ,the growing penetration of these products into rural India, the engagement of home-grown role models to endorse these products and increasing competitiveness. The result is that most of these companies are not merely content to play for incremental market share; through the introduction of innovative products, they are keen to create markets that never existed.

The result of this transformation in national identity and pride is captured in the response of friends to our decision to emerge from the outsourcing shadow of a global multinational. When we announced this decision a few years ago, the first response was ‘How will you survive?’ When I explain our business model today, the reaction has largely changed to ‘Wow! It’s so nice of an Indian company to take on international brands.

The bottom line is that it is increasingly inconceivable that the second most populous consumption market in the world would need to depend on global brands for its everyday needs. On the contrary, the time has come for home-grown brands to capture a large slice of then Indian market, leverage the prevailing economies of scale and emerge as successful global brands in their own right.

This represents a transformation in a way of thinking.  In part, it is based on national pride - something which propelled India to its independence in 1947.  Most important, it reflects a real sense of confidence and strength based on ability.  To date, international brands have done well in India.  However, the advent of this trend will open very promising possibilities for astute investors.

In previous posts, I have described my interest in investing in India.

Some of the strategic reasons:

• a growing population
• a rising middle class and improvements in standards of living
• a democratic country government which adheres (more or less) by the rule of law and a respect for property
• the emergence of a more business friendly climate in government
• a country that has the rare ability to accommodate variety (culture/language/religion) and yet function despite a rather chaotic environment ... this resiliency is an under-appreciated strength which should be considered by thoughtful investors 
• a sense among Indians that India presents opportunities for advancement, hence the repatriation of entrepreneurs back to India from places such as the Silicon Valley
• educational institutions which can draw upon the "best of the best" into a high quality academic experience
• the gradual emergence of things required to nurture entrepreneurship: social networks (both national and international), sources of financing, unexploited domestic markets.

I am far more interested in investing in India than China for a variety of reasons:

• It is a democracy.
• The rule of law prevails - this in contrast to China where unaccountable officials can dictate and manipulate policy (Mao's Great Leap Forward was a disaster ... and the outcome of other top down efforts such as the state support of uneconomic ventures by state-owned companies remains to be seen.)
• India's population structure is more evenly distributed - this in contrast to China's skewed structure which will strain the country: fewer workers to support retirees who have little in the way of social safety nets, etc. 
• It would appear that corruption is less of an issue that in years previous: The perception among U.K. businesses that corruption is a major barrier in doing business in India has halved, according to the latest edition of the U.K. India Business Council’s Ease of Doing Business report compared with what it was in 2015. https://www.thehindu.com/business/Economy/corruption-no-longer-among-top-3-hurdles-to-doing-business-in-india/article25541379.ece?homepage=true

This said, there are real barriers for retail investors:

•  It is very difficult for "foreign" investors to understand that intricacies of how business is done in India.  For example, there are assumptions in financial reports that may not be apparent .... ditto for assessments of market potential and the operating challenges faced by Indian companies.  
• There are restrictions on stock ownership by foreign nationals. (Google the topic to learn more.)
• Unless one is prepared to spend a tremendous amount of time reading and travelling throughout the country, it is very difficult to get a "sense" of the place and its investment opportunities.

To overcome these difficulties one can invest in: 

• mutual funds based on India (a non-starter for me due to excessive fees and often substandard performance)
• companies such as Fairfax India which invest, Buffet like, in Indian companies.  This company represents a substantial parts of my holdings and was the topic of previous posts. 
• ETFs (here's a list of 'em https://etfdb.com/etfs/country/india/
• ADRs https://www.https://topforeignstocks.com/foreign-adrs-list/the-full-list-of-indian-adrs/.com/equities/india-adrs
• direct investment in stocks listed on Indian exchanges  https://stepupmoney.com/how-to-invest-in-shares-in-india-beginners-guide-to-stock-market-investment-in-india/

I enjoy reading Indian newspapers on line.  They reflect the country: a wild mix of articles where authors do not hesitate to advance their views.  Here are two of my go-to rags:

The Hindu

The Economic Times

Sometimes, readers express a lovely sense of humour:

Modi's Fitness Video

Howard Marks - Stock Market Cycles

There is a substantial body of investment literature which advocates the dictum that one should ignore market cycles - that in the long run, wisely chosen investments will survive the up's and down's of the market and out perform investments made by "twitchier" individuals.  Further, the authors contend that markets are impossible to "time" ... that attention to changes in the intrinsic value of investments dictate performance over time.

This is fine ... but:

• Some individuals such as retirees don't often have the luxury of waiting for market cycles to correct, especially if they retire when the market heads south.
• Holding on through thick and thin is contrary to the human experience.  By nature, we are adapted to living in cycles: from our daily routines, to the yearly cycle of farming, to the longer-term responsibilities of raising children ... and so on.  
• Investors are a fickle lot.  They are driven by fear and greed and are not rational economic automatons.  

Over time, I have come to believe that it is possible to take market/business cycles into account when managing my portfolios.  Market cycles offer the potential to minimize losses and make significant gains.  For example, I study the agricultural and mining sectors.  These sectors routinely go through rather distinct cycles.  I've learned to approximate where one is in the cycle and to position one's investments appropriately: times where it is advantageous to buy or sell ... or sit tight.  I've also learned that it means going against the crowd and trusting the strength of one's research.

In order to refine my approach I've done a lot of research on cycles.  Of the lot, Howard Marks' writing is THE BEST: based on a wealth of practical experience, a sound academic background, years of thinking and interaction with many successful investment professionals.  Moreover, he writes well.

Howard Marks - Letters

Howard Marks has been in the investment business for more than 40 years.  He is the Co-Chair Oaktree Capital Investments, an organization which manages about $124 billion in assets for pension funds, sovereign wealth funds and corporations.

His Letters from the Chair have been issued since 1990.  The memos provide deep insights into the world of investing and are well worth reading.  You can subscribe by going to this link (which also provides access to other material):

Memos from Howard Marks

His most recent book, Mastering the Market Cycle - Getting the Odds on Your Side (2018) contains a synthesis of observations.  He draws on more than two decades of his memos.

One of the striking things about the book is the consistency of his thinking.  He is not shy about noting the sometimes repetitive refrains which reverberate in his memos over time.  To my mind, this is a real plus.

In their search for variety many writers on things financial venture forth into areas where they are inexperienced or lack the depth to get beneath surficial matters.  This is the lot of most financial writers in the media.  They respond to editors' blandishments for variety and articles to encourage advertisers to continue with their support to publications.  For this reason, I ignore the financial press for the most part.

In contrast, Marks is the real deal.  He is rich.  Why?  Because he and his crew were successful in meeting the expectations of clients.  Good enough for me ... and I figure that I can gain insights from his experience.

The Three Foundations of Sound Investment Management

In the introductory remarks, Marks notes that sound investments are based on two major elements (in addition to heeding market cycles):

• a superior knowledge of "knowables" e.g. the fundamentals of industries, companies and securities
• paying an appropriate price on the basis of the fundamentals.

For the most part, the rest of his book is based on the third foundation -  "understanding the investment environment we're in and deciding how to strategically position our portfolios for it. 

A Few Highlights for Me

I've read Mastering a few times.  Here are a few of my major take-aways:

About Cycles

One of the key words required if one is to understand the reasons for studying cycles is "tendencies."

If the factors that influence investing were regular and predictable - for example, if macro forecasting worked - we would be able to talk about what "will Happen."  Yet the fact that that's not the case doesn't mean we're helpless in contemplating the future.  Rather, we can talk about the things that might happen or should happen, and how likely they are to happen.  That is what I call "tendencies." [p.12]

The Superior Investor's Perspective

The superior investor is attentive to market cycles.  ... he gains a sense of where we stand in the various cycles that matter [my emphasis], and knows those things have implications for his actions.  This allow him to make helpful judgments about cycles ... specifically:

• Are we close to the beginning of an upswing, or the later stages?
• If a particular cycle has been rising for a while, has it gone so far that we're now in dangerous territory?
• Does investors' behaviourd suggest they're being driven by greed or by fear?
• Do they seem appropriately risk-averse or foolishly risk-tolerant? 
• Is the market overheated (and overpriced), or is it frigid (and thus cheap) because of what's been going on cyclically?
• Taken together, doe sour current position in the cycle imply that we should emphasize defensiveness or aggressiveness? 

All It Takes

All it takes for the perpetual market machine to grind to a halt is the failure of one or two assumptions and the operation of some general rules:

• Interest rates can go up as well as down.
• Platitudes can fail to hold.
• Improper incentives can lead to destructive behaviour. 
• Attempts to quantify risk in advance - particularly as to novel financial products for which there is no history - will often be unavailing.
• The "worst case" can indeed be exceeded on the downside. 

The error in all these things is always clear in hindsight.  [p. 230]

The Agricultural Sector - A Low Part of the Cycle

Things are bleak.

Dropping commodity prices have caused net farm income to plunge about 40 percent since its 2013 high and credit conditions to tighten.
U.S. farmers also face headwinds of record harvests and trade disputes.
Despite tough market conditions, the farm sector has remained relatively well insulated from potential solvency impacts.
A Tale of Two Economies



There is a positive dimension to this for patient investors.  Drawn from the above-noted article, the graph shows that farmers have learned through hard experience to manage debt. There is the prospect that, when commodity prices increase (and they will), farmers will be positioned to spend significant amounts on equipment, provided interest rates remain "reasonable".  In recent years, most farmers have economized on equipment expenditures but there is a point where the supply of reliable used equipment may not be sufficient to meet demand, hence the need to purchase new.  I continue to monitor this situation closely.  Fortunately, there is a wealth of data to use in this regard.

Potential Post Crash Investments

The mining and agricultural sectors are cyclical.  As mentioned in earlier posts, I have a significant stash of cash as a result of dismissing most crew members in
The Financial Log Book (which will be updated soon).

Why have I done this?

• A view that the markets are in for a major correction.  This has emerged over the past two years.  I realize that I may be "out" by a year or two, but I'm prepared to accept that.  Herr Buffet's admonition about not losing $$$ as the first and second rules for investing rests top of mind.   
• The hope that I can make nice profits by investing when "market spirits" are low.  Market cycles are there to be seen in hindsight.  There is every expectation that they will be repeated.  

While there are complex counter currents in the mining and agricultural sectors, I think that the general trend indicates a downward trajectory in both sectors.  

Why?

• low commodity prices
• growing fears of economic dislocation as a result of geopolitical strife/uncertainty, the prospect of increased trade wars, the threat of increased interest rates, the burden of government indebtedness,  etc. 
• a sense in the markets that a correction is to be expected ... things have been "too good for too long" and the party is about to end

Preparation for Investments in the Future

I am compiling a list of potential companies.  Here are some of the general criteria I am using:

• strong balance sheets with little debt and access to financing 
• great management that has experienced operating during the depths of at least one market cycle
• competitive products and services and a strong reputation with client markets
• companies which are innovative and developing products/services to meet the future demands of clients - not too far ahead of the curve: pioneers take the arrows while settlers take the land
• the ability to quickly ramp up operations when good times return
• majority of company business is located in stable jurisdictions where the rule of law prevails

I am also looking for companies which occupy specific niches in the aforementioned sectors and which should be especially profitable in the early stages of recoveries.  In this respect, I am revising my systems models as part of this analysis.  For example, during the early stages of recovery in the mining sector, I figure that it is more profitable to invest in existing producers whose operations can be ramped up fairly quickly.  Generally speaking, it is only later in the cycle that explorers become more attractive.  

Some Potential Crew Members

I am exploring a few themes:

1. Agricultural equipment distributors
2. Agriculture equipment manufacturers, especially those who are making inroads into traditional markets 
3. Mining equipment manufacturers
4. Mining engineering companies
5. Senior/intermediate mining companies with operations that can be ramped up quickly and where the "operational kinks" have been worked out

Here are a few companies which may be added to the crew at some point:

Outotec 

Rocky Mountain Equipment

Deere

Kubota

While researching Outotec, I came across an interesting site, Corporate Knights - The Magazine for Clean Capitalism .  I'm going to investigate some of the Global 100 companies for two reasons:

• to get a sense of the "opportunity space" occupied by the companies in order to open new avenues for research
• to identify potential crew members for The Financial Log Book

It is a work in progress that will unfold over the next two years.  It brings to mind a dictum which applies (pardon the pun) to painting and varnishing:

A good paint job is 90 percent prep work and 10 percent painting.  

So too, it is with investing.  

Investment Ideas

I often visit sites maintained by outstanding money managers.  Why?

Insights into Decision-Making

The most important reason for doing so is to learn about their decision-making processes and their attitudes.

When I read their quarterly/annual reports, I am particularly interested in learning how the portfolios change through time.  The dynamic view shows how thinking processes work in practice.  In this respect, most portfolio managers are quite candid.  They comment on:

• their reasons for adding to or reducing positions in various holdings
• the weighting of holdings in their portfolios
• their attitude during periods of outstanding or substandard performance
• their perceptions of the macro environment and their reactions thereto

For me, this is pure gold ... better than investment texts.  You get to see how things work in practice.  For example, there are any number of books which have been written by one-off wonders - investors who have gotten lucky and who have capitalized on this by writing books to boast, to sucker people into attending their talks on the investment speakers' circuit or to trust their cash to them.  Sadly, when you peak at their portfolios later on (if indeed, they maintain investment funds) you will often see a record of substandard performance.  

This said, there are some truly outstanding investors with enviable long-term track records.  You can see a representative slate of these people here:

gurufocus

Investment Leads

Fund portfolios are wonderful sources of ideas for investment.  Consider that the managers have the combination of skill, deep experience and access to information that, sometimes, is not readily available to the average investor.  Further, they have the capacity to spend a lot of time in their search.  

All said, it makes sense to take advantage of their work and to incorporate some of their holdings into your investment portfolios.  There is no shame in emulating people who are successful.  This is done all the time in other fields of endeavour: golf, music ...

Here is a wonderful treatise on cloning investments:

Cloning Investments

It is posted in a blog entitled:

Canadian Value Investors

The blog has been added to the "favourite sites" sidebar on this blog.

Inventions

Warning: If you click on the following link, you will be captured for a looong time.

I Googled "inventions" in a random search for investment ideas and came across this fascinating site.  There is no end to human ingenuity.

https://www.youtube.com/channel/UC4Tklxku1yPcRIH0VVCKoeA/videos

The link provides access to YouTube videos depicting inventions related to a variety of subject acres e.g. tools, furniture, camping etc.

Donut Economics - 7 ways to think like a 21st century economist

Introduction 

It's always useful to read widely and to include viewpoints which differ from those in the mainstream - ideas perpetrated by thoughtful individuals with a deep and varied experience with life.

Along these lines, I always make it a point to read George Monbiot, a writer with The Guardian.   For those who wish to learn more, here is his web site: George Monbiot

a few words from about George:

Here are some of the things I try to fight: environmental destruction, undemocratic power, corruption, deception of the public, injustice, inequality and the misallocation of resources, waste, denial, the libertarianism which grants freedom to the powerful at the expense of the powerless, undisclosed interests, complacency.

Here is what I fear: other people’s cowardice.

I still see my life as a slightly unhinged adventure whose perpetuation is something of a mystery. I have no idea where it will take me, and no ambitions other than to keep doing what I do. So far it’s been gripping.

Donut Economics - 7 ways to think like a 21st economist

An Insight about an Historical Ecological Assault - The Advent of Agriculture

I spent many years studying landscape change, especially the evolution of forest cover in the Great Lakes - St. Lawrence Forest.  This, coupled with extensive reading led me to conclude that the greatest human-caused global ecological disaster ever was the advent of agriculture.  

My wife and I will visit Britain this year.  I used to love the highlands and the Borders between England and Scotland.  They are beautiful but those lands barely hide the ugliness of a declining agricultural economy propped up by artificial subsidies and a system of land management which suppresses ecological diversity and stability.  Read more here: All the Hills are Dead. 

Monbiot makes a compelling argument for the "rewilding" of the British uplands, taking into account a variety of perspectives.  He concludes:

Rewilding could be a lifeline to those who live and work in the uplands. How many people, post-Brexit, will be prepared to keep paying £3bn, roughly same as the NHS deficit, in farm subsidies whose current benefits are hard to discern? Taxpayers may be more inclined to part with this money when it produces such obvious public goods as functioning ecosystems and magnificent wildlife.

Geography - Essential to Understanding Geopolitics and Useful for Investing

Preface

This post is a "think piece".  It reflects some initial thoughts on the applicability of geography to assessing the potential of a prospective investment. I'm offering it with the thought that others might get insights into an alternative approach.

Definition of Geography

Defined simply, geography is the study of the distribution of things over the surface of the earth.  

This definition was drilled into me by my thesis advisor who had a sign over his door which warned: I'm the meanest son-of-a-bitch in the valley.  I am indebted to that magnificent man: he was the proverbial pot of gold at the end of the rainbow - the man who opened intellectual doors and made my university experience worthwhile.  Some of his aphorisms still echo in my mind:  The only excuse for an late assignment is death.  A dirty mind is a perpetual feast.  

A Ridiculously Short Introduction to the Three Main Schools of Geography

1.  Environmental Determinism

The thesis is that the physical environment predisposes human development to certain trajectories i.e. that humans respond directly to the opportunities and limitations imposed by their physical environments.  For example, you cannot grow rice in Antartica. Many industrial sites were situated to exploit hydro power - everything from pioneer mills to huge lumber and pulp and paper complexes along the Ottawa River (which also served to transport logs to the mills from vast upstream catchments).

• this school of thought has a long tradition and flourished in the late 1800's and late 1900's
• it has considerable explanatory power in matters such as patterns of agricultural activity, patterns of overland and maritime trade (e.g. it is possible to model with considerable accuracy, the distribution of things ranging from transportation corridors to retail outlets) 
• the approach has been attacked by academics and others in recent decades as "politically incorrect" i.e. one application of the approach has been to "explain" why some societies are more advanced than others.  For example, northern Europeans developed more robust societies than those who live in more salubrious climes because they had to strive to survive and in so doing, evolved to have a competitive advantage over less developed societies
• it has also been used to try and explain why certain societies are more insular and conservative than others e.g. mountain dwellers (Swiss excepted) are generally poorer and more conservative than their lowland cousins 
• opponents reject it as a relict of colonialism, imperialism, sexism ...  you name it ... 

2.  Cultural Determinism

Followers of this approach believe that human ingenuity is the main determinant of human development e.g. that it trumps physical limitations such as water scarcity.

• this approach predominates in academic institutions 
• practitioners feel that it constitutes a more nuanced approach in that factors other than the physical environment can play a more significant role in determining human outcomes e.g. the role of technological innovation in opening vast areas to agriculture, aviation and electronic communication has overcome limitations posed by distance 

3.  Possibilism

This is a compromise which recognizes that human activity can be explained by elements of environmental and cultural determinism.

• it is not in favour within academic institutions which are constrained by the dictates of political correctness - even to countenance thinking outside the reigning orthodoxy is a non-starter
• when used judiciously, it has tremendous explanatory power as it levers the power of both approaches
• no better is this illustrated than when it comes to developing strategies to solve practical problems e.g. military strategy must account for human and technological factors as well as physical considerations related to characteristics of the theatre of operation; ditto for efforts to determine the best location for retail outlets.  

Application of The Geographical Approach in Assessing Investments

1.   Geopolitical Applications

There is a huge body of literature on geopolitical theory.  Perhaps the best recent addition to the literature is The Revenge of Geography: What the Map Tells Us About Coming Conflicts and the Battle Against Fate by Robert D. Kaplan.  He is a "possibilist".

Here are a few reviews which provide various takes on this impressive work:

http://www.nytimes.com/2012/10/07/books/review/the-revenge-of-geography-by-robert-d-kaplan.html

http://thesummaryreport.com/the-revenge-of-geography-by-robert-kaplan-tsr/

In contrast with the current academic approach to reduce the study of human activity to efforts to know more about less, Kaplan has taken a broader, more synthetic approach which is more reflective of the "real world" - something which the movers and shakers have to address on a daily basis.  It involves taking a considerable risk on his part, especially as it involves personal judgement.

I would also urge readers to take up a copy of The Influence of Sea Power Upon History: 1660–1783 by Alfred Thayer Mahan. Published in the 1890, it is perhaps the most influential book on the geopolitics of naval warfare ever written.  It is every bit as relevant now as then.  I wrote about it in an earlier post:

Sea Lanes and Maritime Security, Globalization, and A Great Source of Information About Think Tanks

The important take-away for these works is that they address high order, low moving processes which "control" or "dictate" the expression of shorter-term events such as battles, or strategies adopted by various nation states as they rise and fall.  Read these books to get beyond theheadlines.  It is no accident that wars tend to be repeated on the same pieces of geography and unfold in generally the same ways.

A Few Potential Applications for Investment Analysis

• An appreciation of the extent, importance and nature of geopolitical trends (e.g. military pressure points/strategies) can point the way to potential investments.  I will be writing about one of them in a future post. 
• Risk analysis is an important part of any investment.  It is important to get beyond the headlines and ascertain if potential threats are short-term in nature or the consequence of long-term high order geopolitical drivers.  
• The consequences of upheaval in one part of the world can, in a sense, be modelled.  For example, have you ever thought of potential consequences associated with the closure of various choke points on maritime routes for the transport of oil ... and how you could prepare for it?  (All of my oil-related investments have been made with this in mind.)  

2.  Hierarchy Theory 

Trade War Hurts Agricultural Equipment Manufacturers

I am not investing in the agricultural sector at the present time.  Why?

The American agriculture sector has taken a real hit as a result of Trump's decision to start a trade war with China and other countries.  This is yet another reason why I will sit on the sidelines and not invest in American farm companies.  The cycle will eventually change.  In the meantime, I am compiling a list of potential investments in the sector in anticipation of an eventual return to sunnier days.

US Farm Equipment Companies Pay More for Steel

Listen to this interview with an executive from Sukup Manufacturing (he is a Republican).  In response to Trump's tariffs on steel, US steel mills raised their prices by 30 percent!  You have to wonder how this has affected the competitive position of American farm companies.  They are already suffering from a depressed farm economy where farmers are struggling with depressed commodity prices and rising costs.

Former Legislator Steven Sukup on Manufacturing

Here is the Sukup Manufacturing web site:

https://www.sukup.com/

Here is another take which portends a more serious state of affairs in the American farm equipment sector:

The US import tariffs on steel and aluminium – of 25% and 10%, respectively – are a serious threat to this recovery. According to the Association of Equipment Manufacturers (AEM), steel makes up about 10% of equipment manufacturers’ direct costs. Now that most countries are exempted from the steel and aluminium import tariffs, the threat of rising steel prices for US manufacturers seems to be lower for the short term. These exemptions, however, are only temporary, and they depend on the outcome of further trade negotiations. Therefore, US agricultural machinery companies still potentially face a 2.5% increase in direct costs. In that case, prices of agricultural machinery will need to go up, putting pressure on sales growth, as US crop farmers face another year of depressed margins....

An even bigger threat for the market recovery of agricultural machinery are the retaliatory measures from the US’s trading partners. The import tariffs on US agricultural products lower prices of US agricultural commodities destined for export, which will negatively impact sales of agricultural machinery.  ...

It gets worse:

After several years of decline in the global market, the US agricultural machinery industry, in particular, runs the risk of receiving another blow. The US becomes a less attractive place for manufacturing agricultural machinery, due to the risk of a further depressed domestic market and the risk of a higher cost of steel. And the competitiveness of American agricultural machinery companies on the domestic and world market is also at risk. As a result, we can expect manufacturing assets in the US to decline in value, creating opportunities for companies that take a long-term approach to building or strengthening their position in the US.

https://research.rabobank.com/far/en/sectors/farm-inputs/Opportunities-Arising-From-Turbulence-in-US-Agricultural-Machinery-Industry.html

My Take-Away

The analyst at Rabobank may underestimate the resilience of American manufacturers, but his observation has led me to extend my research further afield - to include companies based outside the US.  In this regard, I am paying close attention to offshore companies which are setting up distribution and/or manufacturing centres in North America and South America.

Investing - public opinion surveys are useful tools

About once a month, I check opinion surveys on a wide variety of topics.  Why?

• I sometimes get investment leads.
• The background information about public sentiment is sometimes useful in setting a context for the strategic operating theatre of businesses.
• It's fun. 

Here are a few sources that I consult:

YouGov

From the very beginning, we have been driven by a simple idea: The more people are able to participate in the decisions made by the institutions that serve them, the better those decisions will be. ...

At the heart of our company is a global online community, where millions of people and thousands of political, cultural and commercial organizations engage in a continuous conversation about their beliefs, behaviors and brands.

We combine this continuous stream of data with our deep research expertise and broad industry experience, to develop the technologies and methodologies that will enable more collaborative decision making.

And provide a more accurate, more actionable portrait of what the world thinks.

You can search the site for a variety of topics, including snack foods, persons in the news, etc.  Did you know, for example, that M&Ms and Reese's Peanut Butter Cup are the two most popular candies in the US?  

I have always been fascinated by language.  Here is a very interesting take on the nuances of using adjectives such as "very bad" to "perfect".  It compares the perceptions of Americans and Britts.  

How Good is "Good"?

Pew Research Centre

Pew Research Center is a nonpartisan fact tank that informs the public about the issues, attitudes and trends shaping the world. It conducts public opinion polling, demographic research, media content analysis and other empirical social science research. Pew Research Center does not take policy positions.

It takes the pulse on many aspects of American society, including politics, religion, social trends, media and news, science, etc.

Here is an interesting take on Trump's image in the mind of the international community.  Americans may be unaware of the collateral damage which is being wrecked by Trump's attitude, words and actions.

Trump’s International Ratings Remain Low, Especially Among Key Allies

Pew Research is my "go to" site.  

I tend to avoid sites operated by organizations which have an axe to grind, except when I'm interested in learning more about a particular mindset.  Increasingly, tribalism is expressing itself in a way whereby various "groups" are not interested in making contacts with "the others" ... and most discouragingly, disparage their viewpoints as not having any credence.  Hillary Clinton's dismissive remarks about the "deplorables" was a factor which led to her defeat.  If anything, her campaign was deplorable ... or as per the survey noted above in YouGov, was "very bad".

Bear Markets Investment Strategies

The decline in global equities markets was accentuated in October.

An Unrewarded Earnings Season by BlackRock provides a comprehensive view of the current situation.

Key points

1. Uncertainty over the sustainability of earnings growth is fueling equity weakness, reinforcing our call for boosting resilience in equity portfolios.
2. Global equities fell amid elevated market volatility. Government bonds and the U.S. dollar rallied, while oil prices declined.
3. This week’s U.S. employment and inflation data may provide clues about the future path of Federal Reserve rate increases.

Here's another view:

Warning: 14 of 19 bear market signals triggered, Bank of America says

Another interesting take on causes for the declines is presented here.  It's all about yield curves.

Why Another Market Volatility Surge in Likely Ahead

Predicting market performance is difficult at best.  I have found that it is wise to heed the pedigrees of prognosticators and their motives.  Most act in the interest of themselves and their organizations.  For example, inmates from the professional investment industry are loathe to broadcast doubts about the state of the market for understandable reasons: better to advocate the continuation of good times or the doctrine of holding fast for better times during market  corrections.  

It makes better sense to read widely and think in a considered way and to arrive at your own conclusions.  As a result of doing so, I started to lighten up my position in equities in August 2018 for a variety of reasons:

• concern about the possibility of a major correction in the markets (I have written about this in previous posts.)
• the absence of compelling ideas for new investments and the sense that some investments had run their course for the short to intermediate term
• a desire to have a stash of cash to invest once the market correction had run its course
• a conviction that tax considerations are often over emphasized to the exclusion of other matters when it comes to managing one's portfolios over the longer term
• the luxury of having an income stream which allows me to sit on the sidelines if I decide to trim some expenses

Some portfolios are now more than 70 percent in cash.  

My thinking in this matter has been influenced most by the writings of Howard Marks.  

His most recent book, Mastering the Market Cycle, is masterful - a collection of his accumulated wisdom.  I have written about this book in an earlier post.  It is one of top 5 "must reads" on thing financial.

It is difficult to know "where" we are in economic cycles as Howard Marks has taken great pains to note.  However, it is possible to detect general trends and take action.

Here is a great article penned in July 2017 by David Rosenberg:

David Rosenberg: Here are 10 tips for investing late (very late) in the business cycle

I am going to quote his tips directly:

So how to invest?

Answer: Be aware of where we are in the cycle and act appropriately by having an optimal portfolio for this part of the business cycle:

1. Raise some cash — sometimes a 1 per cent yield on a three-month T-bill will have to suffice.

2. Reduce domestic cyclical exposure.

3. Focus on companies with strong balance sheets; low refinancing risks.

4. Cut the overall beta of the equity portfolio.

5. Screen more heavily on earnings quality and predictability.

6. Protect the equity portfolio by writing call options or buying puts.

7. Diversify geographically into markets that are in an earlier part of the cycle (many parts of Europe, Asia).

8. Step up investments in dividend growth/yield and in less economically sensitive parts of the market.

9. Credit hedge funds with attention paid to better quality should help preserve capital and provide a recurring cash flow.

10. Long-term bond yields (even zero coupon) never rise during a recession so no matter how low they are, then can indeed go even lower unless this game goes to extra innings.

I wrote to the man, stating that it was one of the best articles I had read that year on things financial.

Here is another take.

Could the “Barbell Strategy” Whip Your Portfolio Into Shape?

We all know what happened in 2007 and 2008, after debt levels became unsustainable. During the interview, Taleb stopped short of predicting another such crash, but he stressed the importance of paying attention to the risks.

As for his current allocations, he’s invested in real estate, short-term Treasuries and gold, “just in case.” If you own stocks, he said, make sure you have some kind of put protection. Readers of his books might recognize this approach as the “barbell strategy.” Here he is in The Black Swan:

If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed… then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments… you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasuries—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios. That way you do not depend on errors of risk management.
https://www.marketslant.com/article/black-swan-author-just-issued-powerful-warning-about-global-debt

My Take

1. You never get poor by taking profits or by failing to remember Herr Buffet's first and second rules of investing - not to lose money and not to forget the first rule.
2. It's always difficult to predict market cycles or even know where you are in a cycle.  It's akin to the "boiling frog" syndrome (Google it if you don't know the term) but with the difference that a point is reached sometimes where a sudden event disrupts the gradual process e.g. the frog is extracted from the pot and eaten. This said, there are clues which can point to where we are in the cycle.  Howard Marks provides guidance. 
3. I have trimmed the portfolios considerably, leaving what I consider are resilient stocks and holdings which might might do well in market uncertainty and potential inflation scenarios. 
4. I will explore the potential to adopt some of the strategies noted above with a view to protecting my stash.  
5. I will busy myself in the search for compelling investments with the thought that the market cycle will eventually present investors with some compelling investment possibilities.  The process may take a few years but I feel that patience will be rewarded.  This is not to say that I won't hesitate to invest at any time if attractive opportunities arise.

Dividend Stocks - Start with Lists

My search for potential investments includes looking at dividend paying companies.  Why?

• The theme has the potential to open new possibilities that, otherwise, I might not have considered.
• Dividend paying stocks offer the potential for steady income which is taxed in Canada at lower rates than interest bearing vehicles.  
• Dividend income can be regarded as being paid for waiting until such time as a stock may increase in value.  For the most part, I am a value investor and am patient and tolerant of short-term fluctuations in price. 
• The combination of dividend income and capital appreciation is potent, especially if one is fortunate to find a company with long-term economic prospects. 
• Many companies offer dividend reinvestment plans whereby dividends can be employed to add to one's position.  There are several benefits to this (Google "DRIPs")
• High dividend rates may indicate the economic fragility of an enterprise and constitute one signal for taking a position which anticipates a future decline in the stock's price. 

To appreciate the power of investing in dividend stocks, look at this account of an individual who has done well in achieving a position of economic well-being:

My Own Advisor

In my search, I  am consulting a variety of sources which focus on dividend paying stocks.  In addition to providing lists, the sites offer a variety of perspectives which may tweak your thinking. 

Sure Dividend

The downloadable Dividend Kings Spreadsheet List below contains the following for each stock in the index:

Dividend yield

Price-to-earnings ratio

Consecutive years of dividend increase

Along with other important investing metrics.

Dividend Kings

Offers commentary on selected companies, also a variety of perspectives such as fastest growing, worst performing companies.

Dividends Ranking

Offers a comprehensive listings which can be searched by country, sector, industry and listing.  There is also a useful commentary on investing in dividend stocks.


If you want to peak under the hood, you can always consult the portfolios of money managers.  Here are a few:

Richard Bernstein Global Advisors Global Dividend Kings

A unit investment trust that seeks total return through a combination of dividend income and capital appreciation. The stocks are selected for the trust by Richard Bernstein Advisors (RBA) using a comprehensive process.

The 10 Best Dividend Funds

Focus is on low cost funds offered by Vanguard and Fidelity.


A variety of screeners can be used to winnow down potential candidates for investment.  Here is one of them:

GlobeInvestor

A Few Observations

• There is no substitute for grunt work.  It provides you with a sense of the market space and over time, you develop a "view" which fits your investment style.  
• Ensure that the companies would make sound investments (whatever criteria you may use).   
• Consider the tax implications for dividend income e.g. dividend income can be sheltered in some investment vehicles.  (Wealth Daily Advice for a Canadian perspective.)