Uncertainty is Not Pro-Growth

Overall, it’s a simple observation: political instability all over the world is not pro-growth. And for 2019, markets will face tough “compares,” reflecting the optics of high growth in 2018 from tax cuts. On top of optics, real growth itself seems fundamentally slower. Interest rates have been rising on the one hand and tariff wars have been depressing investors’ psyche on the other. In a world of “all’s well that ends well,” we may get to better growth and contained inflation, but there is much that must go right. In the meantime, we can’t overlook political developments in Washington, DC and around the world, some of them being violent.

Unfortunately, there will be no short cuts through this bog land, a quagmire that grows more vexing by the day. Importantly, in this era characterized by doubts over key institutions—executive, legislative, and judicial—the Federal Reserve remains credible over monetary policy, as a de facto fourth branch of government. The Fed chair seems less enamored with achieving the celebrity status of predecessors and more diligent in balancing policy moves against data. There appears to be no agenda other than fulfilling the Federal Reserve Act mandate of “maximum employment, stable prices, and moderate long-term interest rates” (Federal Reserve website). At the first sign the Fed chair has been contaminated by executive tweets, our backs will be to the sea.

So, it’s no wonder stock markets are equivocating. Investors shudder at uncertainty, and so do corporate capital planners. While there has been no earthquake, tremors abound. The only way through all this shaking is to have a strong foundation and then ride it out. Basic elements of strength are diversification, flexibility, liquidity, and dry powder. Our fund has all these pillars. We are highly diversified—by single security, by theme, and by mix of long investments and short sales. Our investments are liquid. And we hold excess cash. Importantly, we carry no financial leverage.

We expect that most people are in a similar place: they are diversified, their investments are generally liquid, and their allocations reflect risk tolerances regarding time and capital.

Where this is true, there is no need for sudden moves. Capital that becomes available incrementally through cash flows (income from earnings or investments) can be accumulated for future opportunities. This is how we see the world and why we view volatility as opportunity rather than threat. It might mean sacrificing upside when the bulls are running, but protecting capital means you will be making new investments at very low prices when the time arrives.

(Excerpt from our latest letter to KCA limited partners; refer to all risk disclosures; for educational purposes only; not a solicitation of any kind)