Lately, I’ve found the Bloomberg Odd Lots podcast to be a good way to stay upon market trends while on the road. Recently, they interviewed Bridgewater’s Co-CIO Greg Jenson. The podcast made waves by prognosticating a number of things related to interest rates and the valuation of the stock market. It’s a seductive narrative because Bridgewater not only uses a valuation methodology to explain its views, but a breakdown of supply (buyers) and demand (sellers) in the various asset classes he discusses. It’s one thing to believe something will be worth more or less, it’s much more convincing to have a strong hypothesis of which groups will cause a supply / demand imbalance to change pricing.
Here’s one clip from the interview regarding stocks that don’t generate any cash flow and have relied on equity / debt issuance to fund themselves:
Alas, the reason the podcast made the rounds is it simplified the economic system into a pithy explanation that makes the listener think and feel – “Aha! This all makes complete sense. I can get behind this.”
My opinion is, unfortunately, while Greg is not absolutely wrong in what he is saying, he likely speaks so eloquently and simply that the listener tosses out the hardcore fact that the economy is far too complex to simplify and make accurate predictions on. There are likely 25+, maybe 100, legitimate economic inputs whose relative importance vary by the day / month / year. In hindsight, it becomes obvious which few factors drove certain outcomes, but looking forward at the potential performance of a complex and constantly adapting system is somewhat futile to do with any accuracy (and precision).
Personally, I think the way to deal with this massive unknown is to just not play that game. I try, though don’t always succeed, to own assets in which not much has to go right to do “just okay.” Said differently, prices are such that most market participants aren’t excited about the businesses and therefore an incremental buyer isn’t underwriting much in the way of good things happening in the future.
An example is a shopping center we recently committed to investing in. It was underwritten with near zero rent growth, reasonable expense growth (effectively triple-net but there are some expenses), and modest cap rate expansion (the bad way) upon exit. It isn’t a home run investment by any means. It may do roughly an 8% tax advantaged cash return annually. It is a low leverage deal and leverage drops further upon the sale of certain out-parcels (while cash return on remaining equity pushes past 10%). However, what has been unexpectedly happening in outdoor shopping centers is leasing spreads (the difference in rent from the prior lease) have been expanding rather dramatically in select cases. I’ve seen spreads gap out anywhere from high single digits to well north of 20%. Perhaps this center may see spreads expand, perhaps not.
As always, there is no free lunch and every investment, especially equity, comes with risk, it’s just helpful when one can turn off the stress of the future and just focus on the returns of today to sleep well at night.