“Look straight ahead. What’s there?
If you see it as it is
You will never err.”
Bassui Tokusho
I’m probably not the person to weigh in on the issue of whether the indications of inflation that are surfacing in the economy are anything more than temporary as we are being told by the Chairman of the Federal Reserve Board. That said, at least in terms of energy and food, something more than anticipated seems to be happening. When the cost of gasoline in Chicago starts hovering around $4 a gallon, that gets my attention. When the price of fresh chicken also starts hovering closer to the $4 a pound mark, that gets my attention. And let us not ignore dairy, where the price of butter has increased to close to $4 a pound. More and more, we hear tales in the hospitality industry of the inability to get workers without having to pay a wage premium. This accompanies the need for restaurateurs to push through menu price increases, lest the costs of running their businesses do to them what COVID and state governments failed to do over the last fourteen months.
I mention all of this as it forces one to ponder the attendant investment implications. As building and other raw material components surge in price (not to mention availability), we see the ratcheting up of the costs to build or repair a home. The ripple effect is the inability of those who would like to purchase a home being able to find an affordable one. Will this be the end of the American dream, home ownership for the aspiring and present middle class? Will it parallel the inability for most to get a college education without carrying a mountain of student debt? Have colleges and universities become the new loan shark class?
What I will weigh in on is to say that I agree with Larry Summers, the economist and former chief economic advisor to President Obama. Summers, somewhat in the fashion of Cato the Elder (“Carthage must be destroyed”) now at every opportunity warns the current administration and central bank about the dangers of unleashing rampant inflation as a result of too much well-intended but unnecessary economic stimulation. One of the major differences we see from previous days is that foreign central banks are less inclined to let us inflate away our national debt than they were twenty years ago. Absent their support, we face a rather bleak future.
A Manager Update
Recently, I put in a call to John Deysher, the manager of the Pinnacle Value Fund (MFO profile, fund factsheet) a fund that I have long admired for the consistency of its philosophy as well as the implementation of same. What had caught my eye was that the fund’s assets under management had been cut in half over the last three years.
Part of that I attribute to value being out of favor for a good part of that period. I also think that small-cap value has been an especially hard sell during that period. After all, with Google, Facebook, Apple, and the like being part of the new core growth stocks (or value stocks), who wants to invest in a fund that invests in stocks that no one has heard of (and can’t brag about) at Zoom cocktail parties?
The short answer is that I think the masses are once again missing the boat. Mr. Deysher has been making some tweaks to his strategy, which I think will improve the fund’s potential as an investment vehicle. One, the fund will be looking for investments where there is a potential catalyst for change on the horizon (lessening the chance for a security to be a dead money investment). Two, there will be a renewed emphasis on the quality of company management. Everyone says they want to invest alongside good management. In the universe Mr. Deysher is hunting in, he actually gets to interface more with management than a mid-cap or large cap manager. Try doing that with Tim Cook of Apple at something other than a well-choreographed investor day. And finally, the extensive due diligence performed by Mr. Deysher will be attuned more to weeding out the “cigar butt” businesses that may look cheap but are cheap for a reason. Given the paucity of small cap value funds out there that are not tied to a large asset gathering firm’s desires for bigger paydays, I would suggest the fund is worth a look.
Asset Allocation Thoughts
At this juncture, l think the shift from growth to value will continue for some time, leaving value overall as an attractive area. But all things being equal (and they are not), I would prefer to be investing new money in the areas of emerging market value stocks that fall outside the current group of benchmarks. I would also be interested in a domestic small-cap value that falls under $1B in market capitalization. (Snowball’s interjection: There are just nine such funds, with North Star Micro Cap being a standout and both Aegis Value and Pinnacle Value performing well.) And finally, to the extent the investments involved are denominated in non-U.S. dollars, I would want to make sure that they remain unhedged. An interesting vehicle in that regard to look at would be the unhedged version of the Tweedy Browne Global Value Fund.
Royko Wisdom
Many years ago Mike Royko wrote a column entitled “A ChicagoFest Lesson” for the Chicago Sun-Times that espoused bringing back the draft (compulsory military service). One of his arguments was that those who had been exposed to the draft got to see first-hand how big government was “unwieldy, wasteful, indifferent to the individual, bullying, secretive and bureaucratic. And anyone who has been exposed to it for two or three years will come out disliking anything like it.” Contrarily he made the point that “those generations to whom the government is just a smiling face on a TV set ……. will be the easiest for government to control and manipulate.” Think about that the next time you see on television a governor or Federal official at a podium, with a row of flags against the wall behind him or her, with another row of Charlie McCarthys interposed in between.
