Monday, July 22, 2024, Delray Beach, Florida


Notes From My Journal

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I’m Not Gloating, but… 

You heard it here first (and again and again). For more than a year, I’ve been predicting that Biden would drop out of the 2024 presidential race in order to allow someone with a better chance of defeating Trump to take over. I predicted that it would happen sometime between Thanksgiving of 2023 and the new year to give his replacement time to build momentum – but despite increasing pressure, he refused to do it.

It’s already past my deadline to post today’s issue, so I won’t say anything more right now about Biden’s decision to step down. But tomorrow, I will tell you why I thought it was inevitable so long ago, and what I think is going to happen next.

 

Worth Quoting

“Democracy is the only system that persists in asking the powers that be whether they are the powers that ought to be.” – Sydney J. Harris

 

One Final Thought on Japan? Hardly! 

Today, I want to dig into one of a half-dozen thoughts that have stuck with me since coming back from this trip. Thoughts that I’m pretty sure will lend shape to Wealth Culture, the book I’m writing about why some countries and cultures are indisputably much better than others at achieving certain goals.

So, picture this…

I’m in Japan, and it’s 11:00 at night. I’m on my way somewhere, on foot, approaching an intersection completely devoid of moving vehicles. And nearly devoid of people, except for one middle-aged Japanese businessman (I can see that he wears a blue suit), stopped ahead of me at the red light, waiting to cross this narrow, noiseless, utterly unoccupied two-lane road.

He knows, as I do after being in this city for only a few days, that the traffic lights don’t change quickly. If they stay red for a full minute before turning green, you are lucky. Most stay red for what seems like an eternity.

What I want to do, as I near this patient man, is walk quickly past him to cross the street and continue on my journey. But as the distance between us shortens, my resolve disintegrates. When I finally arrive at the corner, I stop and stand next to him. And the two of us stay there like programmed automatons for the next 90 seconds.

I can think of a few plausible explanations for his behavior – much having to do with the respect for order and compliance that is so much a part of Japanese culture. But how can I explain my decision to stop and honor the electronic signal? Never, in the US, would I NOT just jaywalk to the other side.

Before I give you my not-yet-baked theory, I should admit that this very same situation happened to me once before, years ago, late at night, at an entirely deserted crossroad. But that was in Bonn, Germany. And that time, I did hesitate for a moment at the red light, standing next to the only other person visible in that part of the city. But several seconds later, I came to my senses and jaywalked on my way.

I’ve been thinking about why I ignored the red light in Germany and respected it in Japan. The superficial circumstances were the same. But there was a difference. And that difference speaks volumes about Japanese culture, and why I think it is the best and possibly the most enduring national culture that exists today.

The Economy & Investing

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Chart of the Week: Small Caps Rebound? 

I’m halfway through a piece I’m writing on what I’m calling “the state of the US economy.” I’m looking at it from the perspective of what I see happening among my friends and acquaintances – those that have small companies (with revenues of less than $500 million) and those in the real estate business as well as the luxury goods and fine art markets. The outlook, as you will see when the piece is published, is not positive. But history tells us that the ups and downs of the stock market are not always corelated to the economy, including the market for low cap stocks, as Sean explains in his column this week. – MF 

Individual stocks typically swing up and down with unpredictable caprice.

But in aggregate, when you divide them up into industries or sort them by factors, stocks do seem to obey the simple physics of a pendulum swing.

We’re seeing that right now with small cap stocks. That is, shares of smaller companies with market capitalization of between $250 million and $1 billion.

While the major stock indices like the S&P 500 and Dow recovered from the 2022 bear market, small cap stocks, like those in the Russell 2000 (the purple line in the chart above), did not.

And that’s despite the fact that, historically, small caps tend to offer better long-term returns than the market overall.

Forbes, in June, even pointed to this as evidence of “extreme divergence” in the stock market, which can be an early sign of a faltering market.

The wealth management firm Pathstone points out that small caps had “their worst first half of the year compared to the S&P 500 on record. As interest rates have remained higher for longer, earnings for smaller and less growth-oriented businesses have been more heavily impacted.”

However, we’ve finally seen this start to change with the Russell 2000’s 3-year returns finally breaking positive. Even though the rate of corporate bankruptcies has been high and rising since 2023 as the cost of debt has exploded.

This raises an important question: Why? What’s leading small cap stocks higher?

Surprisingly enough, the answer is small regional banks, which have just spiked in a big way over the last few weeks.

Small regional banks have dragged down the performance of small cap indices since (1) interest rates spiked and the yield curve inverted, (2) the failures of Silicon Valley Bank, Signature Bank, First Republic Bank, Heartland Tri-State Bank, and Citizens Bank in 2023, and (3) Fed Chairman Jerome Powell’s assertion that “There will be bank failures” caused by exposure to commercial real estate loans.

But now that interest rate decreases are increasingly likely and the yield curve is looking just slightly less inverted compared to where it was at the start of the year, the future prospects for smaller banks are looking a little brighter.

Does that mean one should rush out to buy small caps or regional bank stocks right now?

No. The time to do that was December 2023, when these stocks were still cheap, hated, and at the beginning of an uptrend. And with all the other potential problems facing small banks right now, we don’t yet know if this growth is sustainable.

But if we take this data and combine it with the recent selloff in large growth stocks, we seem to be at the beginning of a big “churn” in the markets.

Money is on the move.

And I think this is foreshadowing quite a bit of volatility in August and September.

I have my trailing stops set for some of my positions that I don’t want to hold forever. I’m also amassing a war chest of cash and bonds to take advantage of any big opportunities that come up in the coming months.

I suggest you consider doing the same. Stay safe out there.

– Sean MacIntyre

Check out Sean’s YouTube channel here.

Worth Considering

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For Whom the Bell Tolls

 

By Ernest Hemingway
Originally published in 1940
480 pages

After reading The Hemingway Stories, the collection I reviewed on May 13, I pulled an old copy of For Whom the Bells Tolls from my home library, read it over the weekend, and was not the least bit disappointed.

I know a few smart people that don’t like Hemingway. One of them restricts his reading to non-fiction books and considers fiction largely a waste of his time. When I convinced him to read a Hemingway novel a decade ago, he complained that he found Hemingway’s style “irritating.”

An otherwise well-read woman friend says she doesn’t like Hemingway’s fiction because it is too “macho.” She equates his machismo to an aspect of toxic masculinity – i.e., talking endlessly about things (such as fishing and hunting and bullfighting) that are, from her perspective, “irrelevant and superficial.”

On the one hand, I am perfectly happy to excuse their Hemingway-phobia as a case of each-to-his-own. On the other hand, I secretly believe there is something missing in their literary sensibility that is worthy of condemnation or pity.

But never mind. I’m recommending For Whom the Bell Tolls to everyone that either enjoys Hemingway or is undecided because they have never read him.

The Plot 

For Whom the Bell Tolls tells the story of Robert Jordan, an antifascist American volunteer fighting in the Spanish Civil War in the 1930s. It is based on Hemingway’s experiences as a reporter during that war for the North American Newspaper Alliance.

What I Liked About It

What I always like in Hemingway. His prose style, which includes his unique way of composing sentences and paragraphs. His characters and their development. The way he establishes the mise-en-scene. The precision of his diction, the detail of his descriptions, his discipline of showing not telling, and the way he is able to put the reader into the action as a sort of invisible eavesdropper. I even like the way Hemingway makes dialog spoken in Spanish sound foreign by using antiquated English adjectives and pronouns.

What I Didn’t Like 

As with all my favorite novelists – C. Dickens, M. Twain, J. Austen, W. Cather, Dostoevsky, V. Nabokov, G. Orwell, J. Conrad, F.S. Fitzgerald, D. Hammer, E. Waugh, R. Chandler, R.P. Warren, J. Steinbeck, G. Greene, and M. Amis, to name more than you wanted to hear – there is really nothing in Hemingway’s writing that I don’t like. (And I have a much longer list of novelists I like very much, but with reservations.)

Critical Reception 

“If the function of a writer is to reveal reality,” Maxwell Perkins wrote to Hemingway after reading the manuscript, “no one ever so completely performed it.”

Widely considered to be one of the best war novels of all time, the Pulitzer Prize committee for letters unanimously recommended For Whom the Bell Tolls be awarded the Pulitzer Prize for the Novel in 1941. The Pulitzer board agreed. However, Nicholas Murray Butler, president of Columbia University and ex officio head of the board at that time, found the novel offensive and persuaded the board to reverse its determination. As a result, no Pulitzer was given in that category that year.

Fun and/or Interesting

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Five Quick Bites 

* Interesting. One of the things I was writing about while I was in Japan is how incredibly efficient the Japanese are. Here’s a perfect example: an airport that hasn’t lost a single piece of luggage in 30 years.

* Fun and Interesting. In the heart of Paris, there’s a new museum – the Musee du Fromage – dedicated to the ages-old craft of cheesemaking in France. Visitors can learn about the history of cheesemaking, see cheese made, talk to real cheesemakers, and, yes, taste the cheese. Click here.

* Fun. 16 animals with delightfully obvious names. Click here.

* Fun? Has social media expanded the number of oddball things people do for fun and entertainment, or has it simply exposed how many crazy things people have been doing? Here’s an event that apparently amuses some people greatly – running trucks off the side of a cliff. And here’s another one (considerably more benign) – the Annual Coopers Hill Cheese Rolling and Wake in Gloucester, England.

* Fun and Interesting. Ten of the most creative TV commercials you’ll ever see. Click here.

Quiz of the Week

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A Musical Puzzle 

I played the French horn for three years. And I won second place in a music festival of some kind when I was about nine years old. Therefore, I was very disappointed that I didn’t ace this quiz. In fact, I was right on only 16 out of 20.

Readers Write

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From RS re “Lessons Learned” in the July 19 issue: 

“Happy to report that I’ve been doing my shoelaces right. What unnerved me about the video is that he holds his first loop in his right hand instead of his left, so maybe he’s left-handed?”

My Response: Good question. As a right-hander, it took me a few weeks to adjust my coordination to tie the new knot. It was worth the effort.

 

From PN:

“I just read Ralph Waldo Emerson’s definition of success: ‘To laugh often and much; to win the respect of the intelligent people and the affection of children; to earn the appreciation of honest critics and endure the betrayal of false friends; to appreciate beauty; to find the best in others; to leave the world a bit better whether by a healthy child, a garden patch, or a redeemed social condition; to know even one life has breathed easier because you lived here. This is to have succeeded.’

“As I read this, I thought that you check all of the boxes. I am certain Ralph would agree.”

Postscript

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The Mind-Blowing Scale of the Milky Way 

This is very cool!

I first ran into this guy, who goes by the name Epic Spaceman, in this video, where he explains the scale of the Milky Way by shrinking himself down to the size of an atom.

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