Tag Archives: digital

Infosys' Healthcare Analytics to Use Microsoft's Technology

India based IT company Infosys Ltd.INFY recently announced a partnership with technology behemoth Microsoft Corp. MSFT to aid the digital transformation of health institutions through the deployment of smart analytics solutions. Infosys’ collaboration with Microsoft reflects its underlying strategy

The Perfect Storm Is Here: Managing Your Wealth Will Be The Hardest Thing You’ve Never Done

Summary Today’s wealthy investors and Wall Street have always had it so good. With credit expansionary schemes near exhaustion, what is the next bubble to bust? The next great financial crisis has already begun and the global currency war is your first clue. A traditional portfolio asset allocation won’t necessarily help your wealth survive what’s ahead. “What we learn from history is that people don’t learn from history.” Warren Buffett said it best. We are now late in 2015 and approaching the 8-year marker since the onset of the Great Recession of 2008. In a cyclical world of boom-to-bust economic and market history, we find the global financial markets of the developed world economies (ex-China) are all still trading near record highs. Private equity and pre-public venture capital valuations are fully valued across most historical metrics, and both commercial and residential real estate are also priced near the higher end of their historical valuation and price range. The Great Recession of 2008-9 is long forgotten by most investors and the Internet Bust of 2001-2 is now ancient history. Further back, the Bond Market Bust of 1994, the Stock Market Crash of 1987, and the Great Stagflationary Recession of early 1980s are buried within the digital archives of Wikipedia. Although our 7-year boom-to bust cycles are quickly dismissed from our collective investor memory banks, they have been quietly building in their financial intensity and devastating effects on our wealth. Thanks To A Lifetime Of Credit Expansionary Policies And ‘Easier Money’, The Wealthy And Wall Street Have Always Had It So Good For nearly 35 years, US monetary and fiscal policies have been the greatest ally to investors looking to build significant wealth and stay ‘long risk’ through the years. The buy & hold mentality is still deeply ingrained into both institutional and individual investor DNA. Through financial crises, bear markets and economic recessions, investors have been rewarded by not panicking and simply holding on. After all, the Federal Reserve and central banks had your back. Since 1980, through most investors’ professional lifetimes, the secular decline in interest rates tells the story of how this relatively complacent behavior of today’s investor psyche was born. (click to enlarge) To be sure, this has not only been a US interest rate phenomenon, but a global story among the world’s developed economies too. In fact, for the first time in history, short term government bond yield curves are now negative in both Germany and France, and near negative in the U.S. and Japan as well. (click to enlarge) The bad news for the global economy, however, is that record low interest rates have been excruciatingly painful for retirees, income investors, and the ‘savers’ class in general. Millions of people have watched their annual retirement income stream cut by nearly 2/3rds in just the last few years. Worse yet, there is also a huge problem looming for global public sector and private sector pensions that are growing increasingly underfunded with perpetual low rates destroying their ability to meet longer-term liabilities. Sovereign nations, cities, states, and municipalities will be unable to meet their unfunded liability obligations putting even more pressure on an aging world population and government safety-net programs. That said, long-term interest rates won’t stay low forever, particularly given how late we are in the current global economic cycle. If only human nature would let our minds look out just a bit further than our noses. (click to enlarge) Beyond decades of accommodating monetary policies, global fiscal policies have also been exceedingly generous to the wealthy. Endless government deficit spending and bailout programs have reached unprecedented and unsustainable levels. Skyrocketing debt-to-GDP ratios with no political consensus in Washington and around the world has fiscal credit limits near exhaustion. We will soon approach an inconceivable $10 Trillion of additional government debt load in the US alone since the onset of the Great Recession of 2008. (click to enlarge) To put this recent $10 Trillion government deficit spending binge into perspective, it took the United States 231 years to accumulate the first $9 Trillion of government debt and only 9 years to more than double it. With Credit Expansionary Schemes Near Exhaustion, What Is The Next Great Bubble To Bust? When the risk-free lending rate is near 0% (free money), one could argue that everything and every asset is being mispriced in one way or another. That’s right, everything. According to the Austrian Economic business cycle theory, free money also creates an investment environment that encourages dangerous ‘malinvestment’. Malinvestment can best easily be understood as essentially ‘bad money chasing good money’ into mispriced and often overpriced assets based on misleading price signals and a low lending rate. We now know the Dotcom Bubble of the 1990s and Housing Bubble of the 2000s were classic periods of ‘private sector’ malinvestment – whereby the laws for Supply & Demand clearly defied any logic. Until they went bust. History is cluttered with ‘public sector’ malinvestment periods too, whereby government bonds and risk-free assets themselves became the overpriced asset bubble. What transpired during those historic economic periods was a combination of government bond defaults and restructurings – with rising interest rates and high inflation across the globe. High inflation attributable to significant credit quality deterioration in the underlying sovereign debt issuer (bad inflation) as opposed to the higher inflation of a growing and prosperous global economic environment (good inflation). Today’s investors have long forgotten the long history of government bond default crises both here and abroad. (click to enlarge) Fast forward to the Global Government Bond Bubble here in the 2010s – whereby in just the last 7 years, the massive bond market ‘supply’ has grown at an exponential rate over the slowing global economy’s financial ability to service and support it. Global bonds, by any historical measurement, are screaming ‘global recession’ at best, or ‘global depression’ at worse. On the other hand, global stocks, ex-China, are screaming that growth prospects looking ahead are strong, asset inflation is rising and market ‘risks’ are minimal. Which market is now telling us the truth about the global economy – is it the world’s bond markets ( record deflation ) or the world’s stock markets ( record asset inflation )? The answer is that neither market is telling us the truth – as the world’s central banks have now suspended the free market’s price discovery mechanism of both markets through the monetization of the world’s debt markets (also known as quantitative easing, money printing, or ‘Ponzi’ economics). The big buyers of last resort are the global central banks with their perpetual backstopping of bond markets and free money policies. As a result, the world’s stock markets have gotten a free pass too. (click to enlarge) By extending zero interest rate policies (ZIRP) for 7 years and running, the world’s central banks have attempted to orchestrate an ‘indirect’ stimulus program of their own, forcing savers and fixed income investors out of cash and/or cash equivalents and into the riskier dividend stocks and equity markets. Creating a ‘wealth effect’ among businesses and consumers can be beneficial in the short run, as it was in the Internet Bust of 2001-2 and the Great Recession of 2008-9. At the same time, central banks have conveniently, and quietly, kept the cost of funds for many of the overextended, nearly insolvent developed nations at artificially ‘low-to-no’ interest rate borrowing levels. Many nations on the brink of sovereign default now require a perpetual ultra low cost of borrowing in order to maintain solvency. In the end, financial markets trade on perception as much as reality, and market perception that a perpetual central banking ‘put’ (a bid) on financial assets has greatly contributed to our multi-year bull market in stocks, bonds, real estate and risk assets in general. The Next Great Financial Crisis Has Already Begun And The Global Currency War Is Your First Clue “There is no means of avoiding the final collapse of a boom brought about by credit expansion . The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as the final and total collapse of the currency itself .” Ludwig von Mises Founder of Austrian School of Economics (click to enlarge) For 35 years and counting, our global policymakers have done virtually everything in the credit expansionary playbook. Their Keynesian schemes are getting thin with little economic impact, and the free markets are now calling their bluff in the world’s major currency markets. Ludwig von Mises’s forthright plea for ‘voluntary abandonment’ of easy money policies has been repeatedly scorned by the Keynesian economists within the world’s central banks. With most advanced economies’ fiscal ‘credit card’ nearly fully spent up, and with no rational real economy buyers willing to support such lofty bond prices and low interest rates – the dangerous end of an era is precariously close. Nations around the world are aggressively devaluing their currencies in order to make their economies more competitive. There have been a record number of currency devaluations in 2015, with multiple rate cuts in the major economies of the Eurozone, China, India, and South Korea. Despite the rhetoric that US monetary authorities are soon looking to raise interest rates for the first time in over 9 years, a major global currency war is well underway. Welcome To The First Government Debt Crisis In The World’s Core Economy Of The 21st Century (click to enlarge) Global economic growth, particularly across the advanced economies of the U.S., the Eurozone, and Japan has been slowing for the last 20 years despite creating two major ‘private sector’ financial asset bubbles (2000, 2008) whose ultimate ‘bust’ nearly took the world’s economy into a global depression. With global growth now approaching ‘stall speed’, the emerging market ‘BRIC’ nations are now in steep decline for the first time in many decades. China, most notably, as the second largest economy in the world, has witnessed a near 40% crash in its stock market with real economic consequences just beginning to surface. Many market participants are skeptical of the Chinese economy and official economic reporting going forward, with some predicting a severe recession ahead for the country. (click to enlarge) We are entering the first public sector, global government bond bust in the world’s core economy of the 21st Century. The catalyst or series of catalysts to the next investment cycle change can be anything now – from economic, financial, non-financial, political or geopolitical. Arguably, geopolitical risks are now higher than at any point since World War II. We strongly believe the short years ahead will present the most challenging investment period for the great majority of investors in our lifetime. A Traditional Portfolio Asset Allocation Won’t Necessarily Help Your Wealth Survive What’s Ahead “The next crisis could be a very different type of crisis…we’re talking the 1930s where you could have a chain-link of government defaults.” Jeremy Grantham Founder and Chief Investment Strategist of $118B GMO Advisors Managing wealth and advising wealthy clients over our collective lifetime has been relatively simplistic. The primary ‘old school’ mantra can best be summed up by the following common financial advisory cliches: #1 – Diversify your portfolio holdings (stock, bond, cash, real estate) # 2 – Stay the course and don’t panic Pretty easy, right? Truth be told, as simple as #1 and #2 above seem to be, most investors have had trouble over the prior decades and boom & bust markets sticking to this modern day wisdom. After all, human nature and behavior economics have tended to work against the masses. The proof in that statement is the plethora of professional investor services that closely monitor investor sentiment and behavior across time, geography, volatility, and asset classes. The major challenge for global investors going forward is that no investor alive today has ever had to manage wealth through a major public sector debt crisis in the world’s core economy – a crisis that will soon lead to a major secular uptrend in global interest rates as a result of credit quality deterioration (insolvency) in public sector debt including federal, state, local, and municipality paper. Every financial crisis since WWII has been essentially a private sector crisis (industrial, oil, tech stocks, real estate, etc.) or a public sector problem in the peripheral economy (Russia, East Asia, Argentina, etc.). If our deep dive into global economic history and market cycle research proves to be correct, our lifetime of virtuous risk market ‘tailwinds’ are about to turn into vicious risk market ‘headwinds’. According to a recent report from Deutsche Bank, there is an estimated $225 Trillion of total debt in the world today, which is over three times the total world stock market capitalization of $69 Trillion. In the end, the global central banking cartel is powerless to maintain record high debt prices by suppressing low interest rates forever. Investing is simply a confidence game, and sooner or later, investors will lose confidence in the authorities’ futile attempt to control the global economy and free markets. The longstanding risk-free interest rates of our global government debt markets are about to begin rising around the world – likely starting in Europe and onto Japan and Asia, and eventually working its way back to the world’s deepest safe haven U.S. Treasury bond market. Make no mistake, at some point down the road, even the United States of America as the world’s ‘least dirty shirt’ and world’s reserve currency is not immune from major financial market upheaval. As a result, the long-standing ‘old school’ cliches bear two important challenges going forward: #1 – Diversification of assets as opposed to diversification of ‘risk’ will not prevent widespread wealth destruction for most investors. Where will investors hide to protect their wealth when traditional ‘safe haven’ investments are no longer safe? Realized and unrealized losses commensurate to the Great Recession of 2008-9 will likely unfold once again. #2 – Staying the course and ‘waiting out’ the next crisis will likely prove to be a costly approach for most investors. Our global policymakers will not be in a position to execute a quick fix to the economy and your portfolio. Over the last century, there have been multiple periods of extended stock market recovery times in the US lasting from 10 years (1973-1983) to 25 years (1929-1983). In fact, both Japan (1989-today) and Germany (1913-1948) have incurred 26 years (and counting) and 35 years break-even return periods respectively. Again, investor memories are short, and today’s investors have been fortunate to live in a 35-year period of credit expansionary schemes, which has artificially compressed economic recovery times. A Non-Traditional Portfolio Allocation Is Warranted Given The Major Public Sector Financial Crisis Ahead As traditional safe haven investments disappear, investors will look to non-traditional investment opportunities to protect and preserve their wealth and purchasing power. History has provided a road map of how international capital moves through public sector government debt crises. In 2011-2012, for example, European investors experienced first-hand a sovereign debt crisis across southern Europe. Greek government debt, as well as Spain, Portugal, and Italian sovereign paper all sold off dramatically in a very short period of time. Capital flight to other ‘blue chip’ countries including Germany and the US took place in rapid order. Although a short-term fix was put in place by the International Monetary Fund (IMF) and European Central bank (ECB) in 2012, safe haven investors were stunned at the time with huge paper losses in the billions of euros in perceived ‘risk-free’ investments. Investors should intuitively recognize that negative interest rates in Europe, or potentially soon here in the US, are major signals of an impending crisis. Near negative interest rates on long-term Japanese government bonds are further signs of major crisis in the making, particularly as Japan’s fiscal nightmare now widely surpasses Greece’s dangerously high debt-to-GDP and debt-to-revenue solvency ratios. Non-traditional portfolio strategies should consider tail risk and bear market strategies, tangible asset allocations, precious metals, commodities and inversely correlated assets – a combination of both long market and short market strategies – over the years ahead. Major crises never happen ‘all-at-once’, and the coming financial crisis ahead should prove to be no different. Kirk D. Bostrom Chief Portfolio Manager Strategic Preservation Partners LP For more information, please contact Mr. Bostrom and Strategic Preservation Partners LP. Disclaimer: The views expressed are the views of Kirk Bostrom and are subject to change at any time based on market and other conditions. This material is for informational purposes only, and is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, the author does not guarantee the accuracy, adequacy or completeness of such information.

Innovation And Scotch Tape

Summary We think too many investors put too much stock into being “first movers.” We use research from HBR to show how calm waters and scotch tape can lay the foundation for solid portfolios. We prefer building a portfolio by investing in companies with large moats using a calm waters approach. In business and economics, a “first-mover advantage” is defined as the benefit accrued to a company whose product is the first to enter a market. These products often create or define an entirely new market opportunity that the world hadn’t known before. Some “first-mover” examples have created very attractive long-duration opportunities. eBAY (NASDAQ: EBAY ), a company we own in our portfolios, was the first online auction service. It has maintained leadership in that area for the last two decades. Kleenex (NYSE: KMB ) was a first mover in the facial tissues market, and has become so common that most people don’t know what a facial tissue is without saying the product name. A prime first-mover example is Coca-Cola (NYSE: KO ), which created the soda pop market in 1896 and continues to dominate it 120 years later. Examples like these give credence to the idea that the early bird indeed catches the worm. The notion has become more powerful as you consider the massive ego and financial benefits of being the next Elon Musk or Jeff Bezos. The possibility of relatively immediate notoriety and wealth has not been lost on private equity investors. It is estimated that private equity firms sit on more than $1.2 trillion of cash that is waiting in the wings to find those kinds of attractive targets. When looking at the cash plus advantage that private equity firms can apply towards deal-making, it has never been higher than today. The private equity deals of today are done at very rich multiples. EBITDA and net income multiples of 6x and 21x higher than the S&P 500 are typical. All this sounds very exciting to us. It brings to mind something Warren Buffett says, “Investors should remember that excitement and expense are their enemies.” At Smead Capital Management, we like companies which have a long history of profitability and strong operating metrics. With very few exceptions, we will not consider a company for which we can’t find at least 7-10 years of history in the public markets. We like businesses that have very wide moats (defensible positions) around their products and services. We like products that are so ubiquitous that they are associated with categories or industries. We think Aflac (NYSE: AFL ), H&R Block (NYSE: HRB ), and Disney (NYSE: DIS ) are nearly inseparable to concepts like supplemental health insurance, taxes, and wholesome family entertainment. Creating brand identity and awareness of this sort translate to very strong and durational business value. We know this sounds substantially more boring than what goes through the blood of those who believe there’s “gold in them thar hills.” There may be gold, but most of the real-world stories told around the campfire of first movers are laden with pain and destruction. After all, was it really helpful to be the first mover in online search (AltaVista / Infoseek), videotape (Betamax), cellular phones (BlackBerry (NASDAQ: BBRY ) / Motorola (NYSE: MSI )), social networking (MySpace), new grocery delivery systems (Webvan), or new and innovative ways of transportation (Segway)? Especially in a world where most innovation efforts are geared towards the technology sector, an area that can be defined by disruptive innovation, we at Smead Capital Management don’t think so. What we find exciting is attempting to understand how our portfolio of companies may be able to leverage brands and products using newer technologies that will extend awareness and increase interaction. What kind of probability can we assign to the success of our companies gaining meaningful leverage from modern-day innovation? A Harvard Business Review article by Fernando Suarez and Gianvito Lanzolla gave us a very helpful framework to think about the concept of technological changes in relation to market development. Suarez and Lanzolla argue that maintaining a long-lasting dominant position is most probable if the market and technological evolution is slow and stable. They use Scotch Tape as an example of “calm waters,” where being first to market has a high likelihood of durability. For calm-water situations, even if technological innovation is attainable, the advantage is not large enough to disrupt or dislocate the core value proposition. The appeal and adoption of calm-water products is also very gradual, giving ample time to organize production, distribution, and branding. Scotch Tape was originally intended for industrial use, and as the product developed just prior to the Great Depression, became widely used by individuals looking to repair household items that might otherwise be discarded. Its parent company, 3M (NYSE: MMM ), had plenty of time to build a strong and wide moat before full market adoption. Nordstrom (NYSE: JWN ) began in 1901 as a humble shoe store, and began selling apparel in the early 1960s. Starbucks (NASDAQ: SBUX ) has been selling an addictive legal drug for over 40 years, and H&R Block began its campaign towards dominating the world of tax services just after WWII. Gannett (NYSE: GCI ) and News Corporation (NASDAQ: NWSA ) operate media franchises whose brands have been around for decades. Experts who are the most excited about the evolution of technology think these brands have far less relevance in an on-demand era driven by digitization. We think these are examples of calm-water situations. The moats are very large, and the products and services have been developed over many years. The possibilities for innovative disruption are real, but in our opinion, far less likely to interrupt the value proposition of the brands themselves. We think we can assign a reasonably high probability of success as these companies utilize innovation to extend brand awareness and reach. Nordstrom’s Direct (online) business has mushroomed from less than $500 million in 2006 to nearly $2 billion last year, but management speaks of this as just one important piece of the company’s larger omni-channel strategy. It’s very complimentary to the core proposition, and greatly leverages what Nordstrom has done extraordinarily well for years. Starbucks has greatly enhanced the experience of its customers through innovation as well. Gannett and News Corporation are dealing with the challenge of applying technology to its core content offerings, causing the stocks to trade at deep discounts to intrinsic value. We believe they are very well positioned to leverage their brands in the digital world. News Corporation, with waterfront property brands like the Wall Street Journal and Barron’s (whose subscriber bases continue to grow), has highlighted the success it is having with digital migration in recent earnings calls. Similarly, we believe the content Gannett provides with its 5,000+ journalists will be relevant for years to come, and is set up to extend the company’s brands digitally. Calm-water situations provide an essential buffer for a company to positively leverage the technological evolution, not be displaced by it. A wide moat affords a company the time necessary to properly assess the best strategy to position itself in new channels and venues. At Smead Capital Management, we don’t expect our companies to win every battle. We are very optimistic about how our companies are positioned to win wars even as evolutionary change presents itself. The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Tony Scherrer, CFA, Director of Research, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.