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Pins and Needles

Updated: Jul 20, 2023

My friend Dan Niles at the AlphaOne NextGen Technology Fund recently had this to say on Twitter:

My immediate reaction was, good grief!-- how many pins do we need? …As Joe Biden would say, “Come on, man.”

Hurricanes in the South, millions of acres burning in the West, thousands of citizens displaced during a pandemic. More than 80,000 small businesses permanently shuttered and big companies going bankrupt at a record pace. Months of ongoing civil unrest. No on-campus school. And yet, stocks are on fire. At this point, the stock market’s new highs are indicating that the legacy of Covid-19 will be a massive increase in economic disparity across our country, a virtually un-crossable valley of death between the haves and the have-nots.

The sharp increase in wealth inequality recently is related to the concentration of financial assets among the top 10 percent of American households. The top 10 percent holds more than 80 percent of financial assets in the U.S., and since 2009, financial assets have performed far, far better than real assets. Meanwhile, many middle- and lower-income families, whose wealth is primarily in the form of housing wealth, have yet to even fully recover from the housing market crash of 2008.

And while wealth inequality is being exacerbated by the distribution of financial assets, we are now seeing the bifurcated nature of the pandemic’s impact on the U.S. housing market, too — the wealthy are taking advantage of historically low mortgage rates and buying larger homes while the unemployed and the financially fragile are facing evictions. Vornado Realty Trust closed on the sale of four condos at 220 Central Park South in Midtown Manhattan for $157 million just in the second quarter of this year, bringing total sales to 76 units for a total of $2.2 billion and profits of $810 million. Vornado CEO Steve Roth called the development along “Billionaires Row” near Central Park, which is largely sold, “the most successful residential project ever.” At the same time, the delinquency rate for residential mortgages shot up to 8.2 percent in the second quarter, up nearly 4 percent over the first quarter and the biggest such bump on record, according to the Mortgage Bankers Association.

The stark difference in the impact of the pandemic on the high-skilled white-collar workforce (capable of easily transitioning to remote work) compared to the low-wage service sector workforce (dependent on face-to-face interaction) is contributing to a widening of economic inequality, and the V-shaped stock market recovery, aided by the Federal Reserve’s liquidity injections and asset purchases, is compounding its effect. It’s now irrefutable that The Fed was able to engineer a huge rally in the markets by injecting trillions of dollars of stimulus and that it primarily benefited investment banks. Oh, wait—investment banks and Apple, Microsoft and AT&T-- the Fed’s Secondary Market Corporate Credit Facility has a whopping 4.5% of its entire portfolio in those companies’ bonds.

But how’s your local salon or restaurant owner doing? It seems to me that the Fed should be buying their debt, not Apple’s. Apple has $93 billion of cash on hand; why should we buy theirs? Taxpayers have essentially been sponsoring their dividends and stock buy-backs, which only serves to broaden this ever-growing wealth gap.

However, the Standard & Poor’s 500-stock index is trading at 26 times annual earnings, putting the index’s valuation at a two-decade high. Momentum and the likelihood that large companies will steal market share from crumbling small businesses could drive it still higher, but at some point, investors are going to demand better revenue growth. Even with everything else going on in the world, maybe that will ultimately be the pin…

Ergo we emphasize ongoing strategic commitments to:

  • Alpha-oriented, bottom-up strategies that can identify disruptions in the competitive landscape. We expect societal and consumer transitions that were underway prior to COVID-19 will be accelerated.

  • Income-oriented investing, with a move up-in-quality. Many securities may reflect challenges to market liquidity, not solvency or sustainability, providing excellent entry points to cash flow.

  • Diversified return streams that can buffer spikes in episodic volatility. This would include alternative and portfolio hedge investment strategies.

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