David Ross

What I think I learned last week #35

After a month-long absence during which I put the “world” in Echiquier World Equity Growth, I have returned a weary, but better informed, traveler. I started by attending a Global Interdependence Center Central Banking conference with the Banque de France. Highlights were keynote presentations given by François Villeroy de Galhau, Governor, Banque de France and Loretta Mester, President of the Federal Reserve Bank of Cleveland as well as presentations given by several other distinguished economists and strategists from the US and Europe.  I followed this with a week of company visits in the New York area, another week in New York attending investment conferences, with a final week visiting companies in Seattle, Silicon Valley and San Francisco.

I came away with four main takeaways from the month:

1- The US is the outlier in terms of economic growth and optimism. As one speaker put it: “The war on business in the US is over. The Clinton, Bush and Obama administrations all placed extra burdens on business, and in the case of the Clinton and Obama administrations, created a regulatory nightmare. This is over and corporate America now has a wind at its back, which is leading to increased optimism on the part of consumers and small businesses.” This feeling was reiterated across the many company meetings that I had; while there was some concern that trade wars might erupt and slow down some investment, for the time being it seems to be “full speed ahead.”

2- Europe has troubles. While the crisis in Italy has passed for the moment, the same populist political strains keep popping up in elections across the continent. One astute economist noted that in an effort to halt the euro crisis earlier in the decade, the ECB has managed to transform government debt from a riskless asset to a risk asset. In such an environment, if there is no safe haven, then the cost of funding rises (instead of falling as it normally would) in a crisis, thereby hindering the ability of government to run a deficit in fixing the crisis.

3- This is the Cloud era, and it is enabling everything from Big Data to Artificial Intelligence. Not only has Cloud computing become a core technology for new companies, this year is the year that enterprise computing adopts the Cloud. Regarding the cloud infrastructure, there is no real third competitor. It is an AWS/Azure world (outside of China).

4- It is all about scale: the big will get bigger. I heard this message from the CEO of an Asian bank, a restaurant analyst, a pharmaceutical company, a real estate company and several technology companies. The main reason is that Artificial Intelligence and Big Data are the biggest disruptive forces that we have seen in many years. The economic value created by Artificial Intelligence and Big Data will be enormous and only the big companies will have the resources to completely adopt the full capabilities of these disruptive forces. Smaller players, unable to afford the needed level of technology investments to compete in the era of AI and Big Data, will find it difficult to survive.

As a conclusion, a theme that I heard several times was the notion of risk and that people today are too risk-averse. According to this theory, the growth in debt over the last few decades is merely a reflection of this preference for avoiding risk. Therefore, it is not surprising that there is a large concentration of wealth when there are fewer risk takers. As a final example, one speaker noted the enormous response in the US to the Ebola epidemic with an Ebola response coordinator established along with rapid response teams, screening at airports, travel restrictions, mandatory 21 day quarantines and school closures. After all was said and done, it turned out that far more Americans had married a Kardashian than died of Ebola.

Investors need to remember that sometimes the biggest risk is not taking any risk.

And that’s what I think I learned last week (and the week before and the week before…..)