'Buy the Umbrella' - Issue #6
Hi there!
Here is your latest dose of “Buy the Umbrella”, a short list of interesting things I’ve been reading and thinking about during the week.
Book of the Month
I have recently started reading Michael Lewis' latest book, The Premonition, an easy-to-read and detailed account on the U.S.' pandemic preparation and the aftermath. The book is a fascinating insight into the heroic actions of a small number of individuals and a sweeping indictment of the Centers for Disease Control and Prevention (CDC). As usual, Michael Lewis takes on a complicated subject and explains it in ways most can understand.
Much has now been written about the Covid-19 pandemic. Yet little is known about how in October 2005, under the request of George W. Bush, the first draft of the United States' plan to fight a pandemic was written. Bush deeply appreciated that events that once were considered unfathomable (e.g. 9/11 and Hurricane Katrina) can and do happen.
After he read John Barry's book "The Great Influenza" over summer 2005, Bush returned to the White House with a new interest in pandemics. He pushed for a whole-of-society plan, specifically addressing the questions of schools, borders, travel and commerce. Bush went as far as asking Congress for $7.1 billion to spend on his three-part pandemic strategy, which they approved.
Incredibly, the pandemic strategy assumed that the virus would first emerge a long way away from the U.S., likely in Asia, and therefore the U.S. would have time to prepare. Central to the pandemic strategy was to close schools, distance children, ban mass gatherings amongst other interventions.
While we all know how poorly the U.S. ended up managing the early stages of the pandemic despite this detailed plan, I am keen to keep reading to learn how events unfolded behind the scenes.
Tweet
It's pretty comical to see the U.S. Energy Secretary Jennifer Granholm sidestep a basic question like "how many barrels of oil does the U.S. consume per day?".
Granholm was asked the question during a press conference, following the Biden Administration's decision to release 50 million barrels of oil from their Strategic Petroleum Reserve (SPR), in an attempt to lower oil prices.
In reality, Granholm likely did know the figure, but was strategically guided to avoid sharing it. The follow-on question would have been too revealing: "How many days worth of demand are you addressing by releasing these barrels from the SPR?". Given the U.S. consumes about ~20 million barrels a day, the answer is less than 3 days. This would have explicitly highlighted that Biden's actions would not have had a long-lasting impact for American's at the pump.
The Biden administration continues to blame the oil and gas industry for rising oil prices, claiming that they should increase oil supply amid "enormous profits" at the expense of American families. This is ironic given it was only a few months ago that his government canceled the Keystone oil pipeline and tried to ban drilling on federal land, over concerns around climate change. In simple terms, he wants to have his cake and eat it too.
Separately, the International Energy Agency, accused Saudi Arabia, Russia and other major energy producers of creating “artificial tightness” in global oil and gas markets and urged OPEC+ to accelerate the return of supplies, and in turn lower oil prices.
Quotes
"Thinking is the hardest work there is, which is the probable reason why so few people engage in it"
— Henry Ford
“To a disciple who was forever complaining about others, the Master said, ‘If it is peace you want, seek to change yourself, not other people. It is easier to protect your feet with slippers than to carpet the whole of the earth.’”
— Anthony de Mello
Charts
Incredibly, investors continue to chase hot U.S. equity markets, deploying ever larger amounts of leverage via brokerage margin (borrowing) to buy equities, the use of leveraged ETFs and derivatives.
Due to all this cash being invested in U.S. equities, valuations continue to rise, with the total market value of companies priced at over 20 times revenues has now surpassed $4.5 trillion.
Unfortunately, despite these warning signs, we have no way of knowing for sure how much longer this can go on for. Will it be one year? Three years? Five years?
What is clear is that when people start to rush for the exits, it won’t be pain-free, as we have seen time and again throughout history. Being positioned with more of a defensive mindset will be key.
Article
Since the start of the pandemic, workers have gained an edge over employers at the negotiation table due to ongoing labour shortages. Last week, John Deere workers approved a new deal, ending a month long strike.
The new deal includes a $8,500 signing bonus, a 10% increase in wages, 20% increase in wages over the life of the contract, in addition to cost of living adjustments, 3 lump-sum payments and changes to retirement and performance benefits.
John Deere initially offered workers an immediate 5-6% wage raise, which was overwhelmingly rejected by the union. A second offer of an immediate 10% wage rise plus an improvement in retirement benefits was also rejected, demonstrating the union's confidence in being able to secure a better deal given the economic backdrop.
Incredibly, there have been over 185 strikes across the U.S. so far this year, helping average hourly earnings for private-sector jobs hit the highest levels in decades - a boon to employees, so long as inflation does not remain at currently elevated levels for too long, which would cancel out any wage gains.
The EU is experiencing a similar dynamic, with workers across Germany, France, Spain, Belgium and other countries going on strike over over pay disputes.
Governments also seem to be supporting wage increases. The German coalition government has agreed to raise the national minimum wage to €12 an hour, and seeks to "limit rent increases", while the Netherlands is planning to reduce taxes on income and earnings to raise workers' spending power.
After experiencing decades of declining share of income, the balance, at least for the moment, seems to be slowly shifting back towards labour versus capital. This is encouraging news for workers.
Until next time...
Thank you for reading this week’s issue. If you found it interesting, please consider sharing it with a like-minded friend or family member.
If you have any questions or feedback, please reach out!
Have a great week.
Why ‘Buy the Umbrella’?
Individuals, many of whom also run businesses and governments, tend to not think of the downside when the present is stable, and the future is looking positive (usually when we feel most in control).
Just because it is currently sunny, does not mean it will never rain. We need to buy the umbrella before it rains. Otherwise, by the time we are running around looking for an umbrella in the middle of a storm, they tend to be in short supply.
At the same time, we cannot allow our awareness of risk to make us fearful, pessimistic, or paranoid, as this too works against us over the long-term.
Having the right mindset in advance is critical. The challenge is getting the right balance between being optimistic about the future and being able to not only withstand future crisis, but in fact grow stronger due to the opportunities they tend to present. It is not enough just to be conservative. You need to be willing to put cash to work when others feel least comfortable doing it. To do that with confidence, we need to have a foundational understanding of business and markets.
Our mission is to learn as much about the world as possible, and in doing so, to try to find investment opportunities with favourable risk/reward characteristics. These should, over the long term, help build sustainable wealth.