I have access to the 2016 year-end letter that Seth Klarman has shared with Limited Partners and stuff.
How important is Trump’s presidency that Seth divided the year between “Before” (44 weeks) and “After” Trump to share his view of the year. The first one was dominated by tepid economic growth, low-interest rate, rich valuations and relatively low volatility. Also, quantitative easing, QE-infinity and negative rate (quite nonrational IMHO).
The election was an inflexion point, “after“, post-election rally, winners and losers (of course, those in most influence Trump’s point of view will win more that the others).
Seth quote the last summer article called “It’s Getting Scarily Quiet in the Stock Market”, this article warned the complacency about the central banking, Seth’s point of view is that the central banks, with their policies, have increased the financial assets. Examples such as The market and Methuselah, Saudis bonds and Austria. The debt expansion was huge in 2016, IMF said last October that world debt is a real thread for 2017. A really good point is that last 35 years the modern world has been living in a bull market, low-interest rates and right now inflation is going up and interest will raise and not much of active managers have experience in this type of market. Seth is critical with this topic:
- Whenever interest rates return to more normal levels, these bonds will trade below price
- Inflation, if this comeback, these instruments will sell off further.
Animal spirits drove US stocks, election benefited infrastructure companies. News highs, especially shares of those companies expected to benefit most from lower taxes, expanded infrastructure spending, and deregulation. Post-election, interest rates jumped and bonds slumped in anticipation of policy changes and an acceleration in economic growth. As Trump promised, tax cuts and fiscal stimulus will cause higher corporate profits. Also, a relaxation of regulations is expected to boost the banking industry.
“Goldman Sachs notes that the S&P 500, in aggregate, recently traded at 85th percentile of its historical valuation over the last 40 years, while the median company in the S&P 500 had reached the 98th percentile of valuation”
The main point about Trump economy is that “may be able to temporarily hold off the sweep of automation and globalization, keeping jobs at home, bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces[…] the U.S long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off”.
For businesses and investors predictability it really importance to make assumptions, model performance and finds decisions. Elections matter, Trump will create investment opportunities and high uncertainty.
“A value investing approach is defensive by nature, emphasising preservation of capital through the purchase of investments with a margin of safety”.
In my opinion, the best part of the letter is the last one, when Seth explain that the key approach is to maintain conservative in weak markets. In top-down approach, you need to be right in the magnitude, path and timing.
The market is in bull market mode as we can see below.