Repetition Can Be a Form of Change

While I will cop to a mildly obnoxious habit of introducing references that almost always require an internet search, I will start this year-end letter off on the right foot by noting that the title refers to an Oblique Strategy Card by musician/producer Brian Eno and his artist collaborator, the late Peter Schmidt. Whether or not they would be amused or aghast that their creative game process is directly applicable to the financial world today is uncertain.

Despite Sauron and Einstein’s failed attempts at unified theory, 2019 was simply the tenth year whereby interest rates were low and went lower, credit remained both cheap and plentiful, the economy was “good enough,” and those who can print money re-dedicated themselves to a willingness to print money. The logical conclusion to this set of events is to buy and hold U.S. equities. Drop the mic—again.

Nothing “real” has changed in ten years despite all our collective work and consternation about this and that. While “Macro Investing” is a concept that has historically been a mess of practical application as far as getting it right, really good “Macro” is just beautiful simplicity to behold in the golden light of the aftermath.

And on September 20th, the Federal Reserve once again stepped up to the plate and committed to what is literally hundreds of billions of dollars of nightly support to the “repo market.” For those not playing inside baseball, that is equivalent to a massive commitment to the highest quality indoor plumbing: it makes everyone happy, it smells great, and it produces wonderful year-end melt-ups in equity prices.

Quick performance note here because no matter how eloquent and thoughtful we can be, we know that the reader is always thinking, “great, but how did they do?” Spoiler—we had an excellent year relatively and absolutely in small cap, and less so in adjacent strategies where more conservatism was once again not in any way rewarded.

So we posit that until interest rates change, credit conditions change, and Elizabeth Warren/Bernie Sanders get elected, “things” aren’t actually changing so fast, and despite our sense of history that something bad always happens to expensive markets, it’s just hard to accurately spreadsheet and PowerPoint what it will be. While something that cannot go on forever eventually won’t, things involving uncertainty, the future, and human nature can go on a lot longer than YOU have the capacity to imagine. We gave up trying about four years ago when we said almost exactly the same thing.