SECOND QUARTER 2015 UPDATE
The more things change, the more they stay the same… today, we see confidence in the US dollar, rising asset prices, continued increasing US domestic energy production, remarkable progress in technology, historically low interest rates with no real end in sight—we could have written all of these statements in any of our letters over the past year. In fact, I think we did.
The question we need to face, as investors, is “what is the inflection point”, and what is the trigger, which will result in a change to this status quo?
We wish we could provide an answer with the certainty* of some of those we see on the financial news networks, but alas, we’re not gifted with that level of confidence. The best we can do is to provide some things we think might be catalysts, and consider how some of these might impact our portfolio.
- Inflation. At some point, logic would indicate that money created would result in inflation. And, it has— but it has been confined to assets, rather than goods and services. Incidentally, we’ve been as wrong as anyone about inflation so far.
- Overseas debt. We would prefer to constrain this to Europe, but China’s debt levels, particularly at the local government levels, seem no less concerning.
- The impact of an overvalued dollar. This probably has the largest potential impact on our portfolio, as a high dollar could render some US exports uncompetitive.
- Asset values. To expand on Point 1 from above, the one near-term area of concern for us is the price being commanded by businesses available for sale. Given the relative attractiveness of the US compared to the rest of the world, availability of debt financing at fairly cheap levels (again!), and the number of private equity funds eager to deploy capital, we are seeing a meaningful rise in the price levels at which transactions are being completed. While we are not ready to declare yet another bubble, we do have some worries that the average hold period for some of these assets will need to increase in order to capture the expected value.
Since we don’t know which of these, if any, may come to pass, our best option is to continue doing what we’re doing—investing with high quality managers who are able to purchase entire businesses at reasonable prices and transform them, regardless of the external economic conditions.