Quarterly Investment Update: 2019 Quarter 3



One of the most basic laws of economics is that if something is valuable and becoming scarce, then its price is likely to rise. For example, when the supply of a commodity such as oil fails to keep up with the demand for oil, the price of oil will rise.  Pretty simple.  However, in practice scarcity is a pretty tricky thing to capture.  For example, if the price of oil rises enough, it can become a powerful incentive for suppliers to increase production and for consumers to find ways to consume less oil.  These responses will both increase the supply of oil AND reduce the demand for oil.  Before long, the market could be trying to work through a glut of oil, which will almost certainly collapse the price.  This type of response is so reliable that there is a saying in commodity markets, “the cure for high prices is, high prices.”

In many cases, scarcities resolve themselves so quickly that trying to chase them around is unprofitable.  Occasionally, a new source of long-term demand bumps into a durable constraint on supply creating a long-term, persistent, scarcity for a commodity, product or service.  These long-term scarcities are the holy grail of investing and they can create investment opportunities known as “mega-trends.”  Investments that were well positioned to gain from recent mega-trends in globalization (outsourcing technology & services) and falling interest rates (long-term bonds), have been long-term home runs.  By long-term home runs, we mean these investments have been consistent winners almost every year for the past 20 years. 

Unsurprisingly, earning outsized returns based on a mega-trend requires getting in early, as in before everyone knows it is a mega-trend.  While investors can still do quite well investing in the middle of a mega-trend, just like any other investment they can eventually become too popular, especially when investors begin to take the continuation of the trend for granted.  Or as Warren Buffett often says, “what the wise do in the beginning, fools do in the end.”  This quarter we will take a look at popular mega-trends and consider some forces that could threaten existing mega-trends and potentially ignite some new mega-trends.

Executive Summary

  • The Quarter in Review
  • Sentiment & Value Update
  • Recent Mega-trends
  • Populism
  • Climate Change

The Quarter in Review

US and international stock markets stalled in April, then fell through May before hints from the Federal Reserve convinced markets that interest rate cuts will commence in July.  This precipitated a huge rally in global stocks in the month of June.  The Dow Jones Index of US stocks had its best June since June of 1938, when it was recovering from a brutal 45% selloff.  Meanwhile, long-term US bonds defied expectations again and rallied strongly throughout the quarter.  Virtually all risk assets performed well this quarter, even bitcoin (+135%).

Relevant Index Performance

Sentiment & Value

The chart above shows our opinion on where various markets are as of June 28th, 2019. Many of the best purchase decisions are made when prices are cheap and sentiment is bearish or depressed (bottom left quadrant).  Conversely, many of the best sell decisions are made when prices are expensive and sentiment is bullish or euphoric (top right quadrant).  This chart and the comments below are intended as a behavioral guide, not as a timing tool.

Despite all the fanfare, the S&P 500 price level closed the quarter only 2.40% higher than it was in late January 2018.  Over the last 17 months the prospects for US and global economic growth have slowed significantly and central bankers around the world have shifted their tone from raising interest rates in order to reign in inflation, to cutting rates in order to stave off a recession.  The fact that markets are cheering for the Fed to cut interests rates while the S&P 500 is hitting all-time highs is yet more evidence that stock prices are being supported mostly by low interest rates and that economic fundamentals are lagging at best.  Rate cuts may help boost prices of both stocks and bonds in the short-term, but they are unlikely to resolve the underlying weakness in the global economy.  All things being equal, if the S&P 500 were to trade below 2,600, we would be interested in increasing our exposure to US stocks and if the 10-year treasury yielded more than 2.75% we would be interested in adding to our long-term bond positions.

Recent Mega-Trends

Hitching a ride on a mega-trend that is likely to continue for another 5-10 years can be a fantastic investment tailwind.  Knowing where we are in a mega-trend is not an exact science, but we believe that by focusing on scarcity we can distinguish between trends that are likely to continue and stories that are played out.  This boils down to judging the potential for further growth in demand and the durability of the constraints on supply.  Generally, we think of constraints on supply as being physical (it gets used as fast as it can be created), but we also believe that constraints can be legal (patents, licenses, etc) or politcal (e.g. lack of political will for change).  Ideally, we can find undervalued opportunities in trends that are likely to endure and unload assets that are overvalued and dependant on trends that are running out of steam.  Here is a look at some prominent mega-trends.


Issue: Populism is a political approach that appeals to ordinary people who feel that their needs are overlooked by established elite groups.  In the US and internationally, populist candidates and policies are gaining momentum.

Impact: At its heart populism is about re-writing the rules for dividing up the economic pie.  If these policies gain traction, it could dramatically upset the value of businesses and the cost of labor.

FC Advisors’ Take: Populism has reared its head before, it typically occurs when wealth and income inequality are very high, as they are today.  The chart above shows that the % of the national income going to labor in the US has reached unprecedented lows in the past 10 years.  This means a very high percentage of the economic rewards are going to asset owners, or capital.  Both globalization and falling interest rates have exacerbated this trend.  Globalization has reduced demand for US labor and falling interest rates have boosted the value of assets. 

We have faith that the US will avoid the worst of populism (governments nationalizing businesses), but we expect to see rising political will for populist causes such as fighting trade wars, raising wages, modern monetary theory and expanding government safety nets such to include healthcare & education.  Should any of these policies take hold, they are likely to push interest rates higher.  We believe that businesses with low debt levels, US centric businesses and businesses that control hard assets with long useful lives are well positioned to persevere.  Examples include telecom, energy infrastructure and transportation businesses.

Climate Change

Spencer Glendon presenting at 2019 Sohn Investment Conference: https://www.youtube.com/watch?v=-Z19mqw1j1U

Issue: Climate change has not negatively impacted the day-to-day operations of US businesses, yet.

Impact: Rising temperatures and sea levels could create new constraints on resources that will dramatically impact the operation of many businesses in the next two decades. 

FC Advisors’ Take: Spencer Glendon makes an easily understandable argument about the financial consequences of climate change in his 16-minute presentation from the Sohn Investment Conference in May.  If temperatures continue to rise, we believe that it could create scarcities for newly desirable real estate.  Moreover, new regulations could create scarcities in energy and many other commodities.  We agree with Spencer that these risks are not reflected in asset prices currently.  Businesses that own land, buildings and other assets in less vulnerable areas may offer a free option to capitalize on these new scarcities.

The possible disruptions from climate change are too broad and complex for us to predict.  If the future that Spencer predicts comes to pass, financial markets are likely to be chaotic while investors struggle to make sense of the new dynamics.  When markets do get chaotic, focusing on scarcity and constraints can help investors keep their cool and capitalize on the excellent long-term opportunities that can emerge amidst the confusion.

If you have questions about these topics or any other financial needs, please contact

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Following Claire Advisors, LLC DBA FC Advisors is a Registered Investment Adviser. This brochure is solely for informational purposes and is not intended to provide investment advice. Advisory services are only offered to clients or prospective clients where FC Advisors and its representatives are properly licensed or exempt from licensure.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by FC Advisors unless a client service agreement is in place.