Thursday, January 17, 2019

The Legend of Jack Bogle?

Art Carey and Erin Arvedlund of the Philadelphia Inquirer report, John Bogle, who founded Vanguard and revolutionized retirement savings, dies at 89:
John C. Bogle, 89, who revolutionized the way Americans save for the future, championed the interests of the small investor, and railed against corporate greed and the excesses of Wall Street, died of cancer Wednesday at his home in Bryn Mawr, his family confirmed.

Mr. Bogle, a chipper and unpretentious man who invited everyone to call him “Jack,” was founder and for many years chairman of the Vanguard Group, the Malvern-based mutual-fund company, where he pioneered low-cost, low-fee investing and mutual funds tied to stock-market indexes. These innovations, reviled and ridiculed at first, enabled millions of ordinary Americans to build wealth to buy a home, pay for college, and retire comfortably.

Along the way, Vanguard, which Mr. Bogle launched in 1974, became a titan in the financial-services industry, with 16,600 employees and over $5 trillion in assets by the end of 2018, and Mr. Bogle earned a reputation as not only an investing sage but a maverick whose integrity and old-fashioned values set an example that many admired and few could match.

“Jack could have been a multibillionaire on a par with Gates and Buffett,” said William Bernstein, an Oregon investment manager and author of 12 books on finance and economic history. Instead, he turned his company into one owned by its mutual funds, and in turn their investors, "that exists to provide its customers the lowest price. He basically chose to forgo an enormous fortune to do something right for millions of people. I don’t know any other story like it in American business history.”

Mr. Bogle is the second financial titan from the region to die in the last three days. Raymond G. Perelman, the master deal-maker and philanthropist who gave away more than $300 million to the University of Pennsylvania and other causes, died Monday at his home in Philadelphia.

Like Perelman, Mr. Bogle carved a remarkable path. In 1999, Fortune named Mr. Bogle one of the investment industry’s four giants of the 20th century, and in 2004, Time listed him among the 100 most influential people in the world.

Motivated by a mix of pragmatism and idealism, Mr. Bogle was regarded by friends and foes alike as the conscience of the industry and the sheriff of Wall Street.

“He was like the last honorable man, a complete straight-shooter,” said Rick Stengel, former managing editor of Time and former president of the National Constitution Center, where he worked closely with Mr. Bogle, who then chaired the center’s board. He was fond of saying that “‘so-and-so is all hat and no cattle.’ Jack was all cattle and not very much hat.”

“Whatever moral standards I may have developed over my long life, I have tried to invest my own soul and spirit in the character of the little firm that I founded all those years ago,” he wrote in his 2008 book, Enough: True Measures of Money, Business, and Life.

While Mr. Bogle was facile with numbers, he was much less interested in counting than in what counts, and his intellectual range was broad. He revered language, history, poetry, and classical wisdom, and frequently amazed and delighted people by reciting long passages of verse. He was the author of at least 10 books, mainly about investing — all of which he proudly wrote himself.

He was a social critic, civic leader, mentor, and philanthropist whose generosity to the institutions that shaped his character, notably Blair Academy and Princeton University, far outstripped his legendary frugality.

In his 70s, he displayed the energy of men half his age, and his pace and ambition were the more remarkable because of his lifelong battle with heart disease, the result of a congenital defect that affected the heart’s electrical current.

Mr. Bogle had his first heart attack in 1960, when he was only 30, and his heart stopped numerous times thereafter. When he was 37, his doctor advised him to retire. Mr. Bogle’s response was to switch doctors.

Mr. Bogle outlived three pacemakers, and kept a gym bag with a squash racket by his desk. In 1996, surgeons at Hahnemann University Hospital replaced his faulty heart with a strong one, ending a 128-day wait in the hospital. He reunited with his doctors years later.

With his new pump, Mr. Bogle experienced an adolescent surge of vitality that left associates panting to keep up.

“Jack operated at only two speeds, as fast as is humanly possible and stop,” said Paul Miller, the late private investor and founding partner of Miller Anderson & Sherrerd, who was a close friend of Mr. Bogle’s for decades.

“He was fiercely competitive when it counted, more intellectually alert than any person I’ve ever met, willing to face — indeed, almost court — controversy and criticism, stubborn but willing to compromise when absolutely necessary, and most importantly, loving, sentimental, kind, charitable, and courageous."

His greatest accomplishment, Mr. Bogle often said, was “putting the ‘mutual’ back in mutual funds.” His most important innovation was the index fund.

Mr. Bogle had long argued that a mutual fund representing a broad range of businesses — for instance, the Standard & Poor’s 500, an index containing the stocks of 500 large publicly held U.S. companies — would not only match the market’s average return but also generally surpass the performance of actively managed funds.

“You want to be average and then win by virtue of your costs,” Mr. Bogle said. “Cost is a handicap on the horse. If the jockey carries a lot of extra pounds, it’s very tough for the horse to win the race.”

That philosophy attracted a following, including a group of grateful devotees who called themselves the Bogleheads, and convened annually to swap investment advice and pay homage to the man who had done so much to nourish their portfolios.

“What impressed me most about Jack was his humility and approachability,” said Mel Lindauer, a leader of the Bogleheads and coauthor of The Bogleheads’ Guide to Investing. “His zeal for his mission of helping investors get a ‘fair shake’ was legendary. He worked tirelessly toward that goal, and his message never changed with the investing climate. The world won’t be the same without Jack. He was a true American hero.”

Mr. Bogle had hoped that the Vanguard model — “structurally correct, mathematically correct, and ethically correct” — would goad other investment firms to give customers a fairer shake. While index funds have become widely popular, Vanguard’s competitors often have been less than keen about following the company’s penny-pinching lead.

Nevertheless, Mr. Bogle, to use a pet phrase, “pressed on regardless.” After retiring as Vanguard's chairman and CEO in 1996 and its senior chairman in 2000, he became president of the Bogle Financial Markets Research Center, quartered in the Victory Building on the Vanguard campus.

When he was not touting the advantages of the Vanguard mode of investing, Mr. Bogle, a self-proclaimed “battler by nature,” was lambasting his professional brethren for “rank speculation,” reckless assumption of debt, “obscene” multimillion-dollar paychecks, and golden parachutes, and saying they had abdicated their duty as stewards in favor of self-interested salesmanship.

Along the way, Mr. Bogle attracted his share of critics. He was called a communist, a Marxist, a Bolshevik, a Calvinist scold and zealot, a holier-than-thou traitor and subversive who was undermining the pillars of capitalism with un-American rants.

Mr. Bogle characterized his pugnacious relationship with the financial industry as “a lover’s quarrel.” His mission, he said, was simple: to return capitalism, finance, and fund management to their roots in stewardship.

“He held our industry to a higher standard than it held itself, and I think a lot of people took umbrage at that,” said Arthur Zeikel, a former Merrill Lynch & Co. CEO who knew Mr. Bogle for decades.

“He never failed to mention, in speech after speech and talk after talk, that money managers had failed miserably to earn their high fees,” said Miller, the investment manager and longtime friend. “That he was correct in calling them the ‘croupiers at the gambling table’ did not endear him to the profession.”

“Simply put, Jack cared,” said William Bernstein. “He cared enough about his clients to personally answer their letters; he cared enough about his employees to be on a first-name basis with thousands of them, and to pitch in at the phone banks when things got busy; and in the end, he cared enough about his country that he spent much of his last two decades away from home tirelessly crusading against an increasingly elephantine and dysfunctional financial system.”

John Clifton Bogle early realized the value of a penny. His grandfather, a prosperous merchant, founded a company that became part of the American Can Co., and Mr. Bogle’s early years in Montclair, N.J., were affluent. But the Great Depression eventually erased the family fortune. Mr. Bogle’s father, an improvident charmer, was ill-equipped to cope. The Bogles lost their home and were forced to move in with relatives.

Mr. Bogle was proud of the many jobs he held in his youth — newspaper delivery boy, waiter, ticket seller, mail clerk, cub reporter, runner for a brokerage house, pinsetter in a bowling alley.

“I grew up in the best possible way,” Mr. Bogle said in 2008, “because we had social standing — I never thought I was inferior to anybody because we didn’t have any money — but I had to work for everything I got.”

Mr. Bogle attended Blair Academy in northwestern New Jersey, where he blossomed academically. From there, he went to Princeton, which offered him a full scholarship and a job waiting tables in the dining hall. At first, Mr. Bogle floundered, and his low grades in economics, his major, almost cost him his scholarship. But he applied himself and slowly mastered the demands.

In December 1949, while leafing through Fortune, he happened upon an article about the embryonic mutual-fund industry, and Mr. Bogle developed the topic for his senior thesis.

Mr. Bogle produced a scholarly opus that proved to be a blueprint for his career. “The principal function of mutual funds is the management of their investment portfolios,” Mr. Bogle wrote. “Everything else is incidental.... Future industry growth can be maximized by a reduction of sales loads and management fees.”

The thesis earned Mr. Bogle a top grade, and he graduated magna cum laude. After he sent a copy to Walter Morgan, Class of 1920 and founder of the Wellington Fund, based in Philadelphia, Morgan hired Mr. Bogle. In short order, Morgan became Mr. Bogle’s mentor. In early 1965, when Mr. Bogle was only 35, Morgan anointed him his successor.

Headstrong and impulsive, Mr. Bogle arranged a merger with high-flying investment managers in Boston. For six go-go years, the partnership flourished, but when stock prices plunged in 1974, Mr. Bogle was fired.

Refusing to surrender, Mr. Bogle persuaded the board of Wellington to split from the management company that canned him and appoint him to administer the funds at cost, thereby saving a bundle in fees.

Inspired by the 1798 Battle of the Nile, during which Lord Horatio Nelson sank the French fleet, snuffing Napoleon’s dream of world conquest, Mr. Bogle chose the name Vanguard after Nelson’s flagship.

“I wanted to send a message that our battle-hardened Vanguard Group would be victorious in the mutual fund wars,” Bogle wrote in Enough, “and that our ‘vanguard’ would be, as the dictionary says, ‘the leader in a new trend.’ ”

Now one of the world’s largest investment-management companies, Vanguard vies with BlackRock and Fidelity Investments for the title of biggest mutual-fund group.

If Vanguard runs a tight ship, it’s a direct reflection of its founder. When traveling, Mr. Bogle usually took the train or flew coach. From the station or airport, he walked to his destination rather than taking a cab, or hailed a cab rather than riding in a limo, even in his 70s.

When he was president of the Constitution Center, Stengel regularly met Mr. Bogle for power breakfasts at one of Mr. Bogle’s favorite eateries, Benny’s Place at Fourth and Chestnut Streets. There, Mr. Bogle ordered his customary breakfast of two eggs over easy, fried potatoes, two slices of rye toast and coffee, all of which he consumed, Stengel recalled, in an “incredibly systematic” way. Price: $3.60. Said Stengel: “I often felt compelled to leave an extra tip so the waitress wouldn’t feel shortchanged.”

Bill Falloon, an editor at John Wiley & Sons, remembers when Mr. Bogle visited the publisher’s Park Avenue office for a marketing strategy meeting about Mr. Bogle’s The Little Book of Common Sense Investing.

Weary from the train trip, Mr. Bogle asked where he could catnap. There was no bed or couch, he was informed. Not to worry, Mr. Bogle said. Just find me a room.

“So he walked into this little office and pushed a chair over so its back was on the floor,” Falloon recalls. “And then he stretched out and put his head on the back rest.”

Before nodding off, Mr. Bogle issued instructions: “If anybody wonders what I’m doing, tell them I’m dead.”

Mr. Bogle’s children recalled growing up in a drafty house in Haverford where the thermostat was set low in winter and they piled into their parents’ bedroom on steamy summer nights because it was the only spot with an air conditioner.

“He wore the same wool ties and suits forever,” said son Andrew Armstrong Bogle. “He had no desire to be ostentatious, and he didn’t hang out with just investment titans. He was just as comfortable, if not more so, with someone whose cab he happened to get into, talking to people in the subway or to a waiter at the Princeton Club. He genuinely liked talking to people and hearing their stories.”

While Mr. Bogle may have been cheap in the transactions of daily life, he was remarkably generous in a grand way. For more than 20 years, he donated half his annual income to philanthropic causes, particularly those institutions that helped develop his mind and form his character.

At Blair, Mr. Bogle chaired the board of trustees, chose the headmaster, and helped finance the construction of several buildings.

“He was like a surrogate father to me,” said former headmaster Chan Hardwick. “He told me the most important thing in a relationship is trust, and trust is based on honesty. After he hired me, he said, ‘You’re going to make mistakes. There will be things you’ll do that you’ll wish you hadn’t, and things you won’t do that you’ll wish you had. If you’re honest with me, I’ll support you fully.’ ”

At Blair and Princeton, Bogle endowed the Bogle Brothers Scholarships, which enabled scores of budding scholars to further their education. His twin brother David died in 1995.

“He took chances on people because someone took a chance on him,” said Stengel. “Much of his own altruism stems from the fact that he was a scholarship kid.”

“It will surprise no one who knew Jack that he directed his support to financial aid and promoting community service,” said former Princeton president Shirley Tilghman. “He served his university on many occasions — from leading the Class of 1951 at its 25th reunion to advising the Princeton University Investment Co.”

Mr. Bogle’s philanthropy reflected his belief that to whom much is given, much is expected.

Two of his children followed his example of service in an obvious way. His daughter Barbara Bogle Renninger served on the board of the Gesu School in North Philadelphia, where she was also a volunteer math tutor; his son Andrew was a patron of Robin Hood, a philanthropic organization established by investment bankers and hedge-fund managers to alleviate poverty in New York City.

“When we were growing up, we were told that we’re very fortunate in so many ways and that we were expected to give back,” Andrew Bogle recalled. “We could choose our own way of contributing, whether it be time or money or just our thoughts, but we knew that the default option is that you're going to give back.”

Disengaging himself from guiding Vanguard and forging a new role for himself was challenging for Mr. Bogle, who was dismayed by the rift that developed between him and the man he had groomed to succeed him, John J. Brennan. Mr. Bogle was incapable of retirement.

Although he played no role in managing Vanguard after 2000, he continued to show up every weekday, usually in suit and tie and shined shoes, to discharge his duties as president of the Bogle Financial Markets Research Center. He wrote articles, speeches, and books, answered questions from investors, granted interviews to reporters, and continued to cultivate and encourage members of Vanguard’s “crew” while keeping a three-person staff busy.

“In a lot of ways, the last decade, an extra decade of my life, has been the happiest of my life,” Mr. Bogle said in 2008. “I’m contributing to society. I’m doing what I want to do. I’m writing what I want and saying what I want, and I think my name and reputation, for whatever that’s worth, have been enhanced.”

Mr. Bogle wasn’t afraid to criticize his own index fund creation — which he wrote may have grown too large. In an op-ed for the Wall Street Journal in 2018, he warned that the concentration of ownership created by indexing firms presented a threat to the markets.

Three index fund managers dominate the field with a collective 81 percent share of index fund assets: Vanguard has a 51 percent share; BlackRock 21 percent; and State Street Global 9 percent.

“Most observers expect that the share of corporate ownership by index funds will continue to grow over the next decade. It seems only a matter of time until index mutual funds cross the 50 percent mark. If that were to happen, the ‘Big Three’ might own 30 percent or more of the U.S. stock market — effective control. I do not believe that such concentration would serve the national interest,” he wrote.

Another institution that benefited tremendously from Mr. Bogle’s involvement was the Constitution Center, whose board he chaired from 1999 to 2007.

“Introducing the center to the nation with Mr. Bogle as chairman was a huge advantage,” said Joe Torsella, the center’s president at the time and now Pennsylvania treasurer. “It declared to the outside world that we were national and bipartisan, and aspired to the highest level of excellence.”

Mr. Bogle served on numerous boards during his career, including the board of governors of the Investment Company Institute, which he chaired in 1969 to 1970. He was also a fellow of the American Philosophical Society and the American Academy of Arts and Sciences. He received honorary degrees from a dozen universities, including his alma mater, which also bestowed on him its highest accolade, the Woodrow Wilson Award, for “distinguished achievement in the nation’s service.”

In addition to squash, Mr. Bogle enjoyed tennis and golf, sailing, and summering at Lake Placid, N.Y. He kept his wits sharp by daily attacking the New York Times crossword puzzle, which he was known to complete in less than 20 minutes.

Mr. Bogle especially loved to write. Most recently, he published Stay the Course: The Story of Vanguard and the Index Revolution” (Wiley, 2018).

“I don’t think there’s an author who spent greater care on the words he chose,” said Falloon, the Wiley editor who worked with Mr. Bogle. “When he did a book, he was so meticulous; he’d rewrite and rewrite. He always went the extra mile to make sure there wasn’t a single person who could not understand what he was saying.”

Despite the heavy demands on his time, Mr. Bogle put his family first. When his children were growing up, he was almost always home for dinner.

“This was our time to talk to each other and find out what was going on in each other’s lives,” Andrew Bogle recalled. “Looking back now, I find it remarkable that he was able to work as hard as he did but still say, ‘This is a priority and what I’m going to do — be home every night.’”

Another family rite revolved around the Fourth of July, a holiday that evoked Mr. Bogle’s strong sense of patriotism. Children and grandchildren gathered at the family camp on Lake Placid. They sang patriotic songs (Lee Greenwood’s “God Bless the USA” was a favorite), and Mr. Bogle raised a toast to the country of which he was so proud.

“My dad may have seemed like a hard-charging businessman, but underneath there was real emotion and care and concern and empathy,” said daughter Barbara. “Even as he became more prominent, he did not change within the family. He remained a man without pretense and pomposity.

“When he had the heart transplant, it changed him dramatically. He became much more connected to the family. He was very emotional, and teared up easily over things. He was literally reborn, and he really appreciated the chance of having a second go at life.”

A man who believed in the value of introspection and who was always questioning his own motives and behavior, Mr. Bogle sought to define what it means to lead a good life. It was not about wealth, power, fame and other conventional notions of success, he concluded.

“It’s about being a good husband, a good father, a good colleague, a good member of the community. Everything else pales by comparison. The accumulation of material goods is a waste — you can’t take them with you, anyway — and the waste is typified by our financial system. The essential message is, stop focusing on self and start thinking about service to others.”

In addition to his son and daughter, Mr. Bogle is survived by his wife, the former Eve Sherrerd, whom he married in 1956; children Jeanne Bogle England, Nancy Bogle St. John, Sandra Hipkins Bogle, and John C. Bogle Jr.; and at least 12 grandchildren.

A private service will be held next week.
I absolutely love this article on Jack Bogle, he was and will always remain the most important person in the investment world very few people will know about and he would be fine by that.

You might find it odd that I'm devoting an entire post on Jack Bogle but I can think of nobody else who has helped millions of retail investors all over the world invest properly in markets using low-cost exchange-traded funds (ETFs), and help build their retirement savings over the long run.

Jack Bogle realized early on the value of 1) proper diversification, 2) keeping fees as low as possible and 3) staying the course over the long run.

And it's not just retail investors. Institutional investors including mutual funds and hedge funds routinely invest in ETFs to lower their cost and mimic market returns.

You can call Jack Bogle a maverick, a legend, a titan, the great disrupter but these are all titles he cared little about.

His measure of success was simple: “It’s about being a good husband, a good father, a good colleague, a good member of the community. Everything else pales by comparison. The accumulation of material goods is a waste — you can’t take them with you, anyway — and the waste is typified by our financial system. The essential message is, stop focusing on self and start thinking about service to others.”

Bogle comes from another generation, the greatest generation. The late President George H.W. Bush also came from that generation. There aren't many people left from this generation, much to the detriment of our society.

In a society where we glorify billionaire money managers for reaching the pinnacle of success, Jack Bogle has done more to irrevocably change the investment landscape for everyone than all these billionaires put together.

His net worth was roughly $80 million, nothing to scoff at, but when you read about the outrageous pay packages being doled out on Wall Street to investment managers producing mediocre long-term results, you realize Bogle earned every penny of his fortune.

Today, Vanguard is one of the largest investment companies in the world with over $5 trillion in assets under management, 16,000+ employees working in 18 locations worldwide, and 20 million investors in over 170 countries. The firm produces great research and has an excellent YouTube channel.

The very same values that Jack Bogle brought into work every day remain the guiding principles of this company which posted a beautiful tribute to its founder on its site.

In terms of retirement, millions of investors are now able to save and earn more over the long run because of Jack Bogle, up to 30% more over many decades (if not more from saving on lower fees as they get exposure to the stock market over many years).

Active managers including hedge funds criticized Bogle and the shift to passive investing but the truth is he had the last laugh and always put investors' interests first.

We can have a debate, a rigorous debate on the limits of passive investing and I'm sure Jack Bogle would welcome it, but there's no denying the shift to passive investing is here to stay and it will grow over the decades to come.

Still, my personal belief is there will be periods where active investing will outperform passive and there will always be a mutually symbiotic relationship between the two.

Also, the boon in passive investing since the 2008 crisis was helped by the longest bull market in history which was in turn helped by quantitative easing from the Fed and other central banks.

In other words, the structural landscape for the boon in passive investing couldn't have been better. It will be a lot tougher growing passive assets in a long bear market or a long sideways market that goes nowhere (that's where active managers will shine but you still need to find them and make sure they aren't charging you crazy fees for outperforming the market which is no easy feat).

And in his last major interview, Jack Bogle gave a warning about this bull market:
In a Barron’s interview published in December, Bogle said investors should prepare for 2019 by decreasing exposure to stocks and increasing investment in defensive strategies, such as fixed income securities like bonds.

“Trees don’t grow to the sky, and I see clouds on the horizon. I don’t know if and when they’ll arrive. A little extra caution should be the watchword,” Bogle told Barron’s. “If you were comfortable at a 70 percent to 30 percent [allocation to stocks and fixed income], under these circumstances you’d like to go back to 60 percent to 40 percent, or something like that.”

Bogle did not believe investors for the long term should try to pull completely out and time the market, which he said is “a really dumb strategy.” Instead, he said it’s time “to really be thinking how much risk you want to have” and make some defensive moves.

“If I had a big liability in a year, I’d get prepared for it right now,” Bogle added.

Even before the year-end extreme stock market volatility, Bogle told CNBC in April that he had never seen volatility like this in his 66-year career. For 2018, the S&P 500 and Dow Jones Industrial Average posted their worst annual losses since 2008.

Vanguard has more than $5 trillion under management.
The full Barron's story is available here and it's well worth reading, especially now that markets snapped back and everything seems fine.

Bogle's wisdom, however, goes way beyond markets and investing. He was much more concerned about civic duty and helping the less fortunate.

In fact, if you were to teach your children a few life lessons, I would start by making them read Jack Bogle's The Little Book of Common Sense Investing and then teach them the following:
  1. If you always spend more than you earn, you'll never save a dime.
  2. Diversify your investments. Your first $10,000 should be invested in the S&P 500 ETF (SPY) and as you build your nest egg over the years, maintain an appropriate balance between stocks and bonds (70/30, 60/40 or even 50/50 if you're very conservative). You can invest in individual stocks later after you've built a nice nest egg.
  3. Rebalance your portfolio at least once a year and sometimes more often, like after a disastrous quarter where stocks get roiled.
  4. Whether or not you become a successful investor following these principles, always give back to society and help those who are less fortunate than you. It's simply the right thing to do and it will give your life a lot more meaning and purpose.
I highlighted that last one because Bogle was right, you can't take material wealth with you once you've departed this world so make sure you do your part in making this a better world while you're alive.

That's exactly what Jack Bogle did and the more I read about him, the more impressed I am with his intellectual breadth and depth and his generosity.

So, for all these reasons, I dedicated an entire post to this great man, he deserves it.

And I agree with Warren Buffett on Jack Bogle: "If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value."

Below, John Clifton "Jack" Bogle was an American investor, business magnate, and philanthropist. He passed away on Wednesday, January 16 at age 89. I embedded a clip in honor and remembrance of his legacy as a champion of index investing and putting investors' interests first, both of which were core principles in the company he founded, The Vanguard Group. If it doesn't load below, watch it here.

In the second clip, Jack Bogle explains why "if you hold the stock market, you will grow with America." Wise advice from one of the greatest long-term investors of our time.

Wednesday, January 16, 2019

Rethinking Sustainable Investing?

Geoffrey Briant, President & CEO of G2 Alternatives Advisory Corp., sent me a guest comment, What is Sustainable Investing? Investing in the Nexus between Climate Change, Energy, Food & Water:
Sustainable investing is not just investing in solar and wind farms as renewable clean energy solutions to climate change. It is a broader notion. Institutional investors can capture sustainable investment opportunities by investing in the nexus between climate change, energy, food and water.

The energy, food and water nexus means that energy, food and water supplies are inextricably linked and that actions in any one area usually have impacts in one or both of the others. When climate change is added to this nexus, it is climate change that usually has impacts on one or all of energy, food and water supplies.

Energy-food-water connections lie at the heart of sustainable economic and environmental development and protection. Demand for all three resources continues to grow brought on by a growing population, ongoing population movements throughout the world from farms to cities, rising incomes and increased desires to spend those higher incomes on energy and water-intensive goods.

What’s an example of sustainable investing in the nexus between climate change, energy, food & water?

Water is a valuable resource literally going down the toilet. By 2025, two-thirds of the world’s population could be facing water shortages, while water demand is growing rapidly. The UK alone flushes 740 billion liters of perfectly clean water down the toilet every year, which is the equivalent of more than 300,000 Olympic-sized swimming pools. One of the main culprits is the outdated design of toilets.

The toilet hasn’t fundamentally changed since the late 1800s, and with UK toilets alone averaging up to nine liters of water per flush and accounting for up to 90% of commercial water use in buildings, it’s not hard to see why the traditional toilet system has become inefficient.

Propelair, an Earth Capital portfolio company, makes water efficient toilet that uses an integrated air pump to conserve and reduce the amount of water per flush from 6-8 liters to just 1.5 liters. It uses 84% less water and 80% less energy than conventional toilets. It is also more hygienic, reducing the spread of germs by 95% and removing 99.9% of waterborne contaminants. It gives a fast, powerful flush, which reduces queueing in busy public areas, and the design is leak-proof. For commercial buildings and other high-use sites such as gas stations and fast food outlets, this means significant savings in water, electricity and maintenance bills, as well as a healthier, safer and more productive workforce.

How does it work? The lid is closed before flushing, which forms an air seal with the bowl. A small quantity of water enters the bowl to wash it, followed by displaced air. As the air can’t exit the bowl, it acts to efficiently and effectively expel the contents of the bowl without water, pumps or maceration. After flushing, sufficient water replenishes the water trap seal, and the Propelair toilet is ready for the next user. The entire flushing cycle takes around three seconds to complete.

Investec became very interested in the product from a sustainable investing perspective and, as the high-use first-floor toilets of its UK headquarters were frequently blocked, the Investec facilities team decided to trial Propelair toilets. Since the four Propelair toilets were installed in March 2017, no maintenance was needed. In the first year, just four Propelair toilets saved nearly 300,000 liters of water, without compromising efficiency. Because of the water tracking device that Propelair installs in toilet cisterns before and after installation, they were able to demonstrate that in the first 25 days, the four toilets at Investec’s office had saved 31,000 liters of water.

Investec, Earth Capital and Universal Partners have made a substantial investment in Propelair. Earth Capital, through its Nobel Sustainability Fund, was already an existing shareholder and has now increased its shareholding.

They have invested in Propelair to sustainably invest in the nexus between climate change, energy, food & water by funding a Cape Town roll out to conserve water and help avert the threat of the taps being turned off as a result of the drought brought on by climate change. Climate change caused the drought that threatened water supplies. In addition to the residential and commercial implications of the water being turned off for a metropolis with a population of almost 4 million, turning off the water supply would have detrimentally impacted the irrigation of locally grown food. In Cape Town, climate change was linked to both the supply of water and the supply of food.

Investec led the growth capital PE financing and will be Propelair's largest shareholder followed by Earth Capital and Universal Partners. Existing shareholders are all able to participate in the second stage of the recapitalization so as to benefit from the expected growth of the business as it cements its footprint in the UK and starts its overseas expansion.

After the investment, the new focus of Propelair is to accelerate business growth, at home and abroad. One of their new target markets is South Africa. With Cape Town recently going through the worst water crisis that a modern city has faced, their aim is to exploit a sustainable investment opportunity by investing in Propelair as an investment in the nexus between climate change, energy, food & water

Investec, Earth Capital and Universal Partners are using their local and global presence, and huge footprint in South Africa, to increase Propelair’s potential scale. To achieve the scalability institutional investors require, there are now numerous trials with well-known companies and institutions with very large orders expected soon.

For example, through a technology transfer to China, Propelair may achieve scalability by installing over 13,000 of its toilets in the 13,000 dorm rooms being built for a new university.

Propelair is an example of how sustainable investing is more than investing in climate change by investing in solar and wind farms. It is investing in the inter-locking nexus between climate change, energy, food and water. Combatting climate change with solar and wind farms is one climate change-related investment opportunity but combatting the consequences of climate change with low-flow toilets is another.
I thank Geoff for sharing this great comment with my readers. I also invite my readers to read Investec's press release, Flushed with success, to learn more about Propelair's incredibly efficient toilet.

Geoff is right, we need to stop thinking about sustainable investing through the climate change lens and broaden it out to climate change, energy, food and water.

I met Geoff at the CAIP conference in Montreal in October along with Gordon Power, CEO of Earth Capital Partners and Richard Burnett, Chief Sustainability Officer at the same fund.

They're all exceptionally bright people with years of experience and I enjoyed covering that conference in detail here.

On Monday, I covered Michael Sabia's thoughts on doing sustainable investing right and wanted to follow up with this comment to broaden the scope away from just climate change.

As you will see, there's increasingly a sustainable investing component in many of the big pension fund investments, including PSP's recent acquisition of BFB, Australia-based diversified farming business.

You have to start thinking about sustainable investing not just in terms of how it impacts climate change but how it impacts food, water, energy and more.

Below, see how Propelair has reinvented the toilet to save forward-thinking organizations water, energy and money. A simple yet powerful idea which is very scalable all over the world.

Tuesday, January 15, 2019

PSP Invests in Australia's Agribusiness?

Kirk Falconer of PE Hub reports, PSP Investments acquires majority of agribusiness BFB:
Public Sector Pension Investment Board (PSP Investments) has acquired a majority stake in BFB Pty Ltd, a Temora, Australia-based diversified farming business.

Terms weren’t disclosed.

The seller was U.S. resource private equity firm Proterra Investment Partners, which invested in 2008.

PSP, which did the deal through its natural resources group, said it will support BFB’s continued strategic development.

Established in 1985, BFB has a cropping portfolio comprising 44,167 hectares of arable land, as well as grain storage, fertilizer, agronomy, livestock, farming and logistics businesses.


BFB, one of Australia’s largest grain growers, announces new majority shareholder, PSP Investments
  • BFB will maintain current management team, head office and business structure
  • Several BFB Managers will continue to be investors in the company
  • PSP Investments provides the stable, long-term investment horizon required for BFB to achieve its strategic objectives
TEMORA, AUSTRALIA, January 15, 2019 –B.F.B. Pty Limited (BFB) today announced the sale of Proterra Investment Partners’ majority stake to the Public Sector Pension Investment Board (PSP Investments), one of Canada’s largest pension investment managers and a major investor in the Australian agricultural sector.

The transaction delivers a strong outcome for its outgoing shareholders, as well as long-term, patient capital to support the continued strategic development of one of Australia’s most significant and successful agriculture companies.

The completion of the sale followed an extensive, competitive process and the clearance of all applicable regulatory requirements. PSP’s bid was considered the most compelling based on: its offered price; its low execution risk and creditworthiness to complete the transaction; and PSP’s Natural Resources Group’s strategic fit with BFB—and the financial resources at its disposal to support BFB’s expansion plans.

PSP’s Natural Resources Group is a global agriculture investor and is already invested in Australia’s agriculture sector through partnerships with local operators in the areas of animal proteins, row crops, fresh produce and tree nuts.

“Since partnering with Proterra in 2008, we have achieved outstanding growth underpinned by scale and efficiency,” said Terry Brabin, Founder and Managing Director, BFB. “Now, with PSP Investments, we look forward to succeeding in the next phase of our growth strategy to support our business, employees, customers, suppliers and the broader Australian community.”

“We are impressed with BFB’s team, performance and integrated business model, and we are excited to partner with them in their continued strategic development,” said Marc Drouin, Managing Director and Head of Natural Resources, PSP Investments. “This investment is emblematic of PSP’s strategy to partner with world-class and like-minded local operators who are also committed to best practices in the areas of employee health and safety, the environment, community engagement and corporate governance.”

“We have full confidence in BFB’s Management team and its employees to continue to grow this incredible farming business, for the benefit of BFB, the local community and Australia’s agricultural sector.”

“We are proud to have been a part of BFB’s transformation over the last 10 years into a top-tier and diverse agribusiness with deep operational expertise,” said Brent Bechtle, Founding Partner, Proterra Investment Partners. “We believe that PSP Investments is an ideal partner to support the next stage of BFB’s growth.”

“Over a period of 34 years, Terry and his team have created a best-in-class agribusiness and have become an important local employer,” he added.

Proterra was advised by PwC including M&A, Legal and Transaction Services.

About BFB

Established in 1985 and based in Temora, New South Wales, BFB has accumulated a blue-chip cropping portfolio comprising 44,167 hectares of arable land, in addition to significant grain storage, fertilizer, agronomy, livestock, farming and logistics businesses. BFB is a proud supporter of the local community.

About PSP Investments

The Public Sector Pension Investment Board (PSP Investments) is one of Canada’s largest pension investment managers with CAD$158.9 billion of net assets as of September 30, 2018. It manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt. Established in 1999, PSP Investments manages net contributions to the pension funds of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York and London.

PSP Investments’ Natural Resources Group is committed to responsible, long-term investments in the agriculture and timber sectors globally. With CAD$4.8 billion of net AUM as of March 31, 2018, the Group currently has more than a dozen partnerships with best-in-class local operators in the agriculture sector across North America, Australasia and Latin America.

For more information, visit or follow us on Twitter and LinkedIn.

About Proterra Investment Partners

Proterra Investment Partners is an alternative investment manager focused on private equity investments in the natural resource sectors of agriculture, food, and metals and mining. Proterra has offices in Minneapolis, London, Sao Paolo, Mumbai, Singapore, Shanghai and Sydney.
Before I discuss this deal, a little background information. In September of last year, Andrew Marshall of Australia's farmonline reported, Proterra quitting ties to Temora's BFG agribusiness as new investors flood in:
Potential offshore bidders are almost falling over themselves in the scramble for a $300 million-plus NSW farming and farm service business seeking new corporate capital backers.

The intensifying US-China trade war, plus our comparatively cheap agricultural land are among key reasons overseas investor groups have ramped up buying interest in rural Australia this year.

Market observers say the 48,700-hectare BFB Limited grain growing, storage and pig production operation is ticking all the boxes for buyers seeking strategically diverse investments with scale and stable earnings capacity.

Spread from the Riverina to the mid Lachlan Valley, BFB’s business includes a 332,000-tonne grain storage site owned in partnership with global farm commodities giant, Cargill (Cargill’s 50 per cent stake is not for sale).

Temora-based BFB started out as a trucking company in the late 1980s, expanded into cropping and storage, and now includes the big Moore Park contract grower piggery, plus fuel and fertiliser distribution operations.

The private equity-funded company has amassed 28 properties, employs 81 full-time staff, plus 57 part-time workers, and typically produces about 110,000t of wheat, barley and canola annually.

A further 75,300t of grain storage is held on the various properties, including holdings in the Henty, Gundagai and West Wyalong districts.

First round offers from aspiring buyers are due late this month.

“The whole BFB operation is extraordinarily attractive to the sort of interest Australia is drawing from North American and European pension funds and private wealth offices,” said food and agribusiness advisory partner with PricewaterhouseCoopers, Greg Quinn.

“There’s a significant amount of money coming from Canada and the US looking for a home here at the moment.

“They’re investor groups who probably have put money here in the past six or 12 years, but they’ve been getting a lot busier in the past six months or so.

“They see Australian farmland and agricultural production’s value growth as a good long term investment option, and they’re not fazed by the drought.”

Mr Quinn said Australia’s strengthened trade ties and proximity to hungry Asia had lately, conveniently, coincided with rising apprehension about US trade with China and a cooling appetite for agricultural connectivity between the two economic giants.

Australian farms and agribusinesses were well positioned to take advantage of the US business uncertainty, or US investors turning their attention “down under” rather than buying at home.

Elders real estate general manager, Tom Russo, noted Australian farmland was still considered good value compared with much of the northern hemisphere.

Strong farm commodity prices, coupled with increased demand for land had driven double digit property valuation gains in many areas, adding to farming’s upbeat capital return story.

Solid capital gains

The Australian Farmland Index recently reported capital return for the corporate farm holdings it monitored totalled 13.25 per cent – including 6.8pc capital appreciation – for the three years to the March quarter in 2018.

Demand for quality broadacre and permanent horticultural properties growing avocados, citrus, nuts and table grapes was particularly strong, pushing land value returns up from 8.4pc in March 2017 to 11.8pc this year.

Coincidentally Elders has just begun marketing a 10,000ha horticultural development property, Monash Station near Berri in South Australia’s Riverland – a former grazing property now fully approved for irrigated almond, table grape, avocado and citrus crops.

Although yet to be planted and developed, interest is already emerging from the likes of North American pension fund managers, plus local funds and farm management groups with experience in almonds and irrigated cropping.

Mr Russo, said the farm commodity price surge of the past five years had also beefed up the bank accounts of family-owned enterprises across the farm sector, some of which were now making strategic, and often large, investment moves to grow and diversify their business.

Based on comparable market activity for similar undeveloped irrigation land, and the unprecedented growth in demand for horticultural produce and appropriate land, the “dig ready” Monash Station was likely to fetch more than $25m.

It promises to yield more than 60,000t of crops worth the current equivalent of $130m annually when in full production in the coming decade.
Local buyer interest, too

The diversified BFB grain-based business is also being pitched to Australian investors, notably superannuation funds, which have begun showing greater interest in ag investments in the wake of the tide of overseas pension fund money washing in during the past few years.

A big attraction are asset-rich BFB’s numerous cashflow streams and its footprint in several climate zones.

Its $327m asset base, much of it accumulated since 2010 with funding from Proterra Investment Partners, includes property, plant and equipment worth about $267m.

BFB is largely owned the private equity investment manager, Proterra, which in turn is 71pc owned by Cargill’s agricultural asset investment arm, Black River Asset Management.

Black River has other Australian farming interests ranging from Queensland sugar and beef properties to grain growing in NSW and southern Queensland and Tasmanian horticulture, plus assets in about 12 other countries.

Depending on the successful buyer, BFB's current management under company founder, Terry Brabin, may continue to have a stake in the new ownership model.

BFB still has an active expansion agenda and hopes the new backer will help fund its plans when Proterra moves on.
Knowing PSP well, I can tell you they absolutely wanted Terry Brabin, BFB's founder and Managing Director, to stay on and have a sizable stake in the deal. This deal would never have been done without PSP demanding he stays on to manage the company and own part of it (skin in the game).

As far as Australian agriculture, it's booming and it's part of a secular theme, the rise of China's middle class increasingly looking to adopt a Western diet. Global pensions and sovereign wealth funds all want a piece of this agricultural pie.

As far as the actual bidding process, typically the way this works is pensions and other investors that invested in a private equity fund - in this case Proterra Investment Partners -- will bid on a portfolio company, building, land, etc. once the fund's life ends and the PE firm looks to unwind assets and raise money for its next fund.

It was a competitive bidding process and PSP had to clear all Australian regulatory hurdles to purchase its stake, which it obviously did.

It should be noted, however, that agriculture, timberland, collectively called natural resources, do carry risks and big investors have suffered mixed performances in the past. In 2017, Bloomberg reported that Harvard's endowment was taking a $1.1 billion write-down on the value of its natural resources investments in fiscal 2016, contributing significantly to its poor performance that year.

In May 2018, Bloomberg reported that Harvard's Endowment then headed by Jane Mendillo blew $1 billion in a bet on tomatoes, sugar, and eucalyptus in Brazil that went sour.

In May 2017, I discussed why CPPIB was retreating from farmland, mostly in North America.

Australia is a different market and as discussed in the second article I posted above, the Australian Farmland Index recently reported capital return for the corporate farm holdings it monitored totalled 13.25 per cent – including 6.8pc capital appreciation – for the three years to the March quarter in 2018.

It's obviously a hot and growing market. Will this double-digit growth continue indefinitely? Of course not, Australian farmland will experience booms and busts just like all other asset classes but this is why you need to partner up with the right management team that knows how to deliver great value even in tough times. This is why PSP needs Terry Brabin and his team as much as the latter need PSP as a long-term patient partner.

Anyway, PSP's Natural Resources Group headed up by Marc Drouin is doing a great job finding these deals in Australia and elsewhere. It's not an easy portfolio to ramp up quickly but as they find more deals, I'm sure it will grow from the current 3% to close to 6% over the next few years.

Below, Growth Farms is a leading Australian agricultural investment manager, having invested over A$400m in Australian farmland since 2008 and has achieved a portfolio return of 10.1% after fees to 30 June 16. Further information is available here.

I included this clip because I couldn't find something comparable for BFB featuring Terry Brabin. It's very informative and explains why institutional investors are attracted to Australian farmland.

Monday, January 14, 2019

Sabia on Doing Sustainable Investing Right?

Mary Childs of Barron's reports, How to Do Sustainable Investing Right, According to a Pension Fund Manager:
Michael Sabia has one of the most enviable jobs in investing. The chief executive officer of Caisse de dépôt et placement du Québec, or CDPQ, helps oversee more than 300 billion Canadian dollars (US$226 billion) for public and parapublic pension and insurance plans.

The scale is nice, but it’s the structure that makes the difference: Canadian pension funds have more autonomy and are arguably built with a higher risk tolerance, and tolerance for failure, than their U.S. counterparts. They have stronger in-house teams, bolstered by competitive pay; empowered employees accountable for their own decisions; and less politicking interfering with investment decisions.

All that gives them room to make investments we might view as unorthodox or aggressive, like buying entire buildings, competing in private credit, or building toll roads and green transit systems. But most of all, they can focus on long-term results for their long-term liabilities, instead of managing under a board that stresses about each annual figure.

It has arguably resulted in better annual performance: CDPQ—which invests in equities, fixed income, and real assets—generated an annualized weighted average of 10.2% over the five years through 2017, beating its benchmark by 1.1 percentage points annually, the most recent data available. The find has beaten its benchmark seven out of the 10 years through 2017.

In October, CDPQ and Generation Investment Management, the sustainable-investing firm co-founded by David Blood and Al Gore, announced a partnership to invest US$3 billion in “sustainable, resilient businesses” that are a “net positive for the environment, [and] benefit society.” The investments will have a duration of eight to 15 years—up to twice the standard private-equity time horizon.

We caught up with Sabia, 65, this past Monday to discuss CDPQ’s priorities and framing, what shortsighted short-term investing misses, and why he thinks investing along environmental, social, and governance—or ESG—guidelines is destined to outperform.

Barron’s: What’s your approach?

Sabia: We come at this based on a very fundamental principle that underlies all of our investing. Being patient capital, working with management teams to build great businesses, great infrastructure, buildings, across our whole portfolio—it’s guided by a focus on the long term. To use a phrase that’s a bit hackneyed now, things that are built to last. If more long-term investors were doing that, we’d be collectively making a bigger contribution to economic growth. Growth is in our long-term interest, and right now we’re staring at a world where there’s going to be insufficient growth. One of the reasons is too much capital is focused way too much on short-term perspectives.

That same principle underlies what we’re doing around climate. There are way too many investors who address climate as a constraint—it means not doing things. We think about it as an opportunity. The amount of capital that’s going to be invested in new, more durable, more climate-friendly technologies over the next number of years—Bloomberg some time ago said 50% of the world’s power generation is going to be wind and solar by 2050, and US$11 trillion invested [globally, in new power generation capacity between 2018 and 2050].

That’s just one number—there’s lots. Climate change is not going away—this is a long-term trend that’s going to transform a lot about how the world works. As an investor, we need and want to a) promote that transformation, but b) benefit from it, as new industries and technologies develop, to make sure, as they take off, that we’re positioned to benefit substantially from the growth.

I hope this doesn’t sound like good intentions. We’re very commercial. We need to make money; we need to be good stewards of people’s savings. We manage people’s savings, and we have to get returns something on the order of 6% to 6.5% a year over the long term to meet the liabilities that, in effect, we manage. This is not noble purposes and aspiration. We believe this is a sound investment strategy, because we believe it’s going to pay substantial returns.

I think we’re North America’s largest institutional investor in wind power, and those investments are paying us essentially double-digit returns. Our investments in solar in India are paying us, very comfortably, double-digit returns; we’re building leading-edge buildings in Houston, Paris, Chicago, and Toronto, and those are paying us very comfortable double-digit returns.

It’s not like we think this is profitable—we know it’s profitable, and we’ve done enough that we’re comfortable that if we make the right decisions, there is a substantial amount of money to be made. The more we focus our investing teams on the positive side of climate change, the more money we think we’re going to make, because we’re in the game early.

What are some of other climate-related initiatives?

One pillar of this [announced in 2017] is we’re going to increase our low-carbon investments by 50% by 2020. Over 2018, 2019, and 2020, we’re going to increase by C$8 billion our investments in low-carbon assets. I’m happy to tell you we’re ahead of the game: Through 2018, in our first year of implementing, we’re already up C$3 to C$3.5 billion. The other component is we’re going to reduce the intensity of our carbon footprint by 25% by 2025. We’re very much on track there as well. The way we’re doing that is integrating climate change into every decision. Investors evaluate investments by comparing the return to the risk, optimizing across those two things. Now our investment teams have to optimize against three: return, risk, and climate.

How much harder is that?

Eh, pretty hard. I think we’re the first people to do this. In the same way each investment team has to work within a risk budget, now they have a carbon budget. That carbon budget year over year goes down so we can accomplish the 25% reduction. That requires every investor to weigh the climate and carbon consequences of every investment decision. If somebody wants to invest in something that isn’t very green, we don’t refuse, but we say, “Well, you still have to live within the carbon budget, so you’ve got to give up things in other areas.”

What was the response?

Initially, I don’t think it was greeted with overwhelming applause. It does make people’s lives more complicated. That said, in many ways the worst thing you can do to someone running a portfolio is tell them “You can’t do this or that.” They need autonomy. We’re trying to structure their environment where they have to take this into account, where climate’s an element of the culture.

Saying “We’re not going to invest in coal” or “we’re not going to invest in hydrocarbons”—there’s nothing wrong with that, but by and large that’s a political statement. It doesn’t change the way the organization works. We’re changing the way our place works.

Will profits come as people realize the urgency?

Yeah. Too many people think that climate change is essentially about what governments do. Governments have a role to play, but this is becoming a consumer issue, influencing how consumers make choices. Therefore, it’s causing companies to worry about how their brands are positioned relative to climate change. That then causes them to be concerned about what kind of buildings they’re in. As millennials become more and more an important part of the labor force, they care as employees about where they work and [how their companies] address an existential issue. With all those changes, the demand for, and therefore pricing of, highly energy-efficient buildings gets affected.

Similarly, there’s a lot of first-mover advantage in wind and solar. In Montreal, we’re building what will be the third or fourth largest automated transit system in the world. That project is carbon-neutral beginning to end, from the construction process through the operation. That’s [projected to] pay us somewhere between 8% and 9% a year, for 30 years. Now we hope we’re going to be able to do the same thing for the city of Auckland, New Zealand, along with a local counterpart.

We do have a sense of urgency about this, and we are trying, along with others, to mobilize. The industry has a responsibility to get with it.

This notion in the investment business—“Well, we want to do these good things, but oh gosh, it’s going to cost us in terms of return”—it’s just wrong. You took the math test and you got the wrong answer. Done smartly, there are big opportunities to get highly attractive returns. People are more and more becoming aware of and assigning some importance to these issues, which is good, but what fundamentally has to change is this view: “It’s good to do good things, but those good things cost you. We’d like to, but it’s contrary to our fiduciary obligation.” We don’t believe you have to give up returns to do this. If anything, it’s probably positive from a return point of view. This is a false debate.

Some say ESG investments will not outperform their “sinful” counterparts, because as investors divest, it will raise the cost of capital for those sinful companies—which translates to higher yields for those who do buy them, which means a higher return for investors.

Companies making decisions for the long term are better investments. There’s growing and significant evidence that more companies focusing on issues of climate durability, of sustainability, over the long haul perform better. So as a long-term investor, we don’t think that argument holds water at all. But the time frame can make a difference. The investment industry needs to get more focused on building things that actually last, rather than the short-term craziness of the past 20 years.

How did we get so shortsighted? Fear of missing out on dot-com riches, post-9/11 carpe diem, regulatory changes?

It’s a million things. It’s the rise of mutual funds, in particular of mutual funds run by publicly traded investors that have to live with the tyranny of quarter-to-quarter results, which cause people to manage their portfolios in a particular way, because the organizations have to worry about earning targets, et cetera. There’s the rise of algorithmic trading, more sophisticated technology. It’s not all the doing of the investment industry. There are consumers of financial products who themselves have a very short-term perspective: “If my mutual fund isn’t performing over a couple quarters, I take my money somewhere else.” That creates a whole environment where, in order to continue to accumulate assets, the key to their profitability, [funds] have to keep performing on a quarter-to-quarter basis.

In 1960, the average hold on the New York Stock Exchange was eight years; now it’s eight months. If you’re thinking quarter to quarter, you’re basically a tourist, just visiting companies. You’re not taking a longer-term perspective on how that company is going to grow and develop, so you don’t really care whether they’re investing enough in their future, doing enough R&D. But from a social point of view, those things really, really matter.

I’m not saying there’s a “fault” on the side of the investment industry; people are responding to what their clients want. But that’s given a very tyrannical short-term focus to investing.

The upside is more and more you see big investors starting to go, “Wait a minute, we can’t do this anymore.” Larry Fink’s letter to shareholders, influential firms like McKinsey, CEOs, investment organizations, ours and others, saying you’ve got to have a longer-term perspective. There’s a long way to go, but there’s a lot of positive change under way to get out of this prison of short-term thinking that we’ve been in for the last 20 to 25 years.

This fits with the current reexamination of financial-market capitalism, with everyone from Paul Tudor Jones and Ray Dalio to the Democratic Socialists of America saying our system isn’t working.

I agree with that, but let me go a little further. Yes, it involves climate, appropriate treatment of employees, human rights. But from an economic and investment point of view, if because of short-term, delivery-of-results pressures, companies are systematically compromising what they’re doing—on R&D, capital investment—that has real economic consequences. If that’s happening on a systematic basis, we are collectively underinvesting, underinnovating, and that’s undermining growth.

The financial crisis of ’09 was the poster child of this: The financial system has become disconnected from the real economy. The financial system is the circulatory system of the real economy, but it’s forgotten that role—it’s become an end in itself, a source of profit-making in and of itself, as opposed to playing its social role. Thinking long term is going back, or forward, to a world where the financial system will once again do what it’s supposed to: support the growth and expansion of the real economy.

That contributes to what we’re seeing politically, whether it’s left or right populism in Western Europe, Eastern Europe, other countries, to some degree in the U.S. These things are all connected. We’re a pension fund, we have the luxury of time, so I understand when I say it, it doesn’t apply equally to other people in other circumstances. But there are more and more people arguing this, who believe something’s got to change, and I do think we’re beginning to see that.

Thanks, Michael.
In December, Michael Sabia sat down with McGill University professor Karl Moore as part of his CEO series to discuss sustainable investing and more. Sean McNally of Bull & Bear, McGill’s student-run magazine, covered it in his article, Michael Sabia on Sustainable Investing and Our Ability to Change the World:
In last week’s CEO Series, Michael Sabia did not sugar-coat his response when Professor Karl Moore asked him to share his perspective on the current global landscape. “The world’s in a hell of a mess,” he said convincingly. The audience was lured. For those who know Mr. Sabia, an introduction like this should not be surprising. In his investment and managing styles alike, convention is of little concern to him. As the incumbent CEO of Caisse de dépôt et placement du Québec (CDPQ), Canada’s second largest pension fund, Mr. Sabia is somewhat of a pioneer, emphasizing ‘building’ over ‘trading,’ and venturing “way outside the mainstream of pension investing.Rather than traditional pension methods of funding projects through debt or specialized securities, CDPQ under his watch offers a ground-up approach by offering financial, construction, and operating services.

He elaborated on his ominous opening remarks by outlining the root of this ‘mess’ as “a departure from core values,” which has given rise to populism and demagoguery. From Brazil to India, political divisiveness introduces a high level of political and economic unpredictability, dissuading funds like CDPQ from investing in burgeoning economies that need it most. Further, this global instability has contributed to the quarter-to-quarter myopia that commands Wall Street’s largest funds. Mr. Sabia refers to his most hated entities, hedge funds, as “the blight of the landscape”, offering a prime example of the short-term invest return obsession at the expense of social decency. The way Mr. Sabia sees it, these companies have become nothing more than “commodities traded on an exchange.”

Perhaps aware of the pessimistic lens he is using to view the world, Mr. Sabia shifted his tone and put the onus on the audience, an eager class of MBA students. “The responsibility will be on you guys,” he continued with a more sanguine mood, “to step in and attack these issues head-on.” Ultimately, it is about bringing your “core values to work every day,” and ensuring those align with your employer’s. While the issues of the world are pressing, they are not insurmountable. True leaders, he went on, emerge in times of distress, not prosperity. Getting excited about tackling these issues rather than discouraged will give rise to this generation’s great problem solvers. The formula for strong leadership was surprisingly simple: combine your core values with an eagerness to solve key issues.

When asked about these values, Mr. Sabia answered in the same manner he responds to every question, with a quick grin and slight seat readjustment. “You need to go to work every day and tell yourself ‘I do what I do because I am contributing to something a lot bigger’.” That ‘something’ could be anything; your family, society, or the corporation itself. This sort of selflessness is exactly the culture with which CPDQ operates. The fund has made exceptional returns on good-for-society investments, with a portfolio centred on renewable energy, urban transit, and the mitigation of climate change. “Doing good for society doesn’t mean sacrificing your returns,” he told the class compellingly.

Like all great leaders, Michael Sabia has an incredible knack for articulating key issues. By outlining them as he did last week, he is able to provide angles for attacking the world’s most daunting problems. Perhaps unknowingly, Mr. Sabia taught the class an important lesson in problem solving: by clearly defining the problems, from macroeconomics to personal budgeting, the path to resolution becomes less ambiguous. Despite beginning the discussion with a sharp dose of reality, Mr. Sabia departed on a more optimistic, cheerful note “you are all capable of solving the world’s greatest challenges,” he assured the MBA students.
Those of you who don't know him, I can tell you Michael Sabia is a tireless leader who has a set of core values and beliefs that go way beyond his role as the Caisse's chief. He sees his role as not only producing the requisite long-term returns the Caisse's beneficiaries need but also as a leader who isn't afraid to shake things up and transform the business as usual culture.

For example, in December, I discussed his vision for a new paradigm on growth where he sees an instrumental role for large pensions and other long-term asset managers in helping debt-ridden governments meet their growing infrastructure and other needs.

No doubt, Michael is extremely intelligent but definitely not the easiest person to work for (think he'll be the first to admit this) because he has extremely high expectations of himself and often passes those on to those working under him without realizing there's a limit to what you can ask for without placing undue stress on them.

His management style is more hierarchical, top-down, and to understand this you need to understand his upbringing and the important influences in his life. The same goes for his tireless work ethic which he inherited from his father and mother.

I mention this because each CEO has their style, their vision, their way of managing, and Michael has tremendous strengths and some weaknesses too, just like everyone else. I wouldn't say he rules by fear but it's not always pleasant having to deal with all his demands, some which are legitimate, others which are onerous.

I also believe there is an aspiring politician in Michael Sabia. I've said this before and I'll say it again, I believe he eventually wants to return to public life for his last chapter and will likely follow in the footsteps of Roland Lescure, the Caisse's former CIO who is now at the forefront on Macron's reforms, once his mandate at the Caisse is completed.

There, I don't blame the man. I'm a lot more cynical than Michael when it comes to the state of the world. He calls it "a hell of mess", I believe the "world is a sewer," an expression that stuck with me from one of my mentors at McGill University, professor Tom Naylor, the combative economist, historian, criminologist and now ecological expert (when I used to ask Tom about his beliefs, he'd stare right at me and say: "just call me an eclectic cynic").

But Michael is right about something, good leaders aren't cynical people by nature, they don't focus on problems but on working on long-term solutions to problems and setting achievable goals that are measurable.

Climate change is a perfect example. My own personal belief is we are screwed, way past the point of no return and the biggest problem of all is there are way too many people on this planet. Admittedly, even if true, this isn't going to solve the ongoing climatic challenges humanity is facing and will face over the next 100 years.

We need to stop dithering and start taking steps toward reducing our carbon footprint, and the Caisse and other large asset managers can play a role by taking concrete steps to reduce their carbon footprint and put pressure on public and private companies they invest with to do the same.

OPTrust's climate change symposium was all about this, how institutions can start by taking small steps which collectively will produce the desired result of addressing climate change and investing in technologies of the future which will bring about much-needed change.

Notice how in the Barron's article, Michael talks about how the Caisse's investment teams have to now optimize for three things: return, risk and climate.

He's not saying the Caisse needs to divest from fossil fuels, something I don't believe is realistic, but if there is a better way to invest in public and private markets to achieve the same risk-adjusted returns and reduce the carbon footprint over the long run, then it is incumbent upon the investment staff to do so. Other Canadian pensions are also doing this as they cross the ESG threshold, but admittedly, the Caisse has taken the lead here and the REM project is just one example of this.

I'll give you another example, today I was looking at the relative performance of First Solar (FSLR) relative to Exxon Mobil (XOM) over the last five years (click on image):

It's a 5-year weekly chart showing relative performance of the two and there are times when First Solar outperforms Exxon and others when it underperforms like from March 2016 ro April 2017 when you had global synchronized growth.

I'm not going to get into the mechanics of this but my point is there are times when investing in alternative energy makes sense and others when it makes less so. Still, over the long run, the trend will be to invest in solar and wind across public and private markets as the world shifts away from fossil fuel sources of energy. That's a very long-term trend but that's definitely where we're heading.

In private markets, Michael Sabia said the Caisse is already a leader in wind and solar projects all over the world, many of which have produced double-digit returns. There, I must admit, I was dead wrong about the Caisse blowing hundreds of millions in the wind (someone told me without government subsidies, these projects are money losers).

Lastly, as far as short-termism in capital markets and his disdain for hedge funds, I can't say I'm surprised. Since his arrival at the Caisse, the focus has shifted away from hedge funds into long term private markets like infrastructure. The Caisse has drastically reduced its hedge fund portfolio since 2009 and only invests with top hedge funds I covered last week as part of legacy investments.

By the way, Ontario Teachers' Pension Plan has also significantly trimmed its hedge fund portfolio over the last four years, all you need to do is look at their annual reports.

But here I'm not completely in agreement with Michael and would caution him to discuss hedge funds at length with Ron Mock, his counterpart at Teachers' because it's not as simple as Michael portrays it to be.

Don't get me wrong, I think many hedge fund managers are insanely overpaid for the mediocre results they deliver over the long run, contributing to gross income inequality, but in my opinion, it's wrong to call them the "blight of the landscape". This isn't exactly true or wise and could lead some to question whether you're taking your fiduciary duties seriously by properly diversifying across liquid and illiquid alternative investments.

In these markets, you need as many degrees of freedom and sources of alpha as possible. Period. You also need to balance your portfolio to manage your liquidity risk.

Anyway, I've covered a lot here. Just like CPPIB is ramping up its green team, the Caisse is taking sustainable investing very seriously, Michael Sabia is making sure of this.

Below, a conversation with Michael Sabia, CEO of the Caisse de dépôt et placement du Québec, during the World Bank Investor Forum in Argentina which took place late last year. Good discussion, he explains his vision on sustainable investing very well.

Update: Geoffrey Briant, President & CEO of G2 Alternatives, shared a follow-up guest comment on rethinking sustainable investing. You can read it here. Watch the clip below.

Friday, January 11, 2019

Beyond the Market's Mid-Life Crisis?

Lu Wang of Bloomberg reports, Tom Lee Says S&P 500 to Rise 13% in 2019:
The fourth-quarter U.S. equity sell-off was nothing more than a “mid-life crisis” that set the stage for further gains in the market, according to Tom Lee, the co-founder of Fundstrat Global Advisors LLC.

The S&P 500 Index will rise 13 percent this year to 2,835, driven by a continued profit expansion, Lee said. Earnings will increase to $169 a share in 2019 and $183 next year, he predicted.

Lee’s optimism echoes Wall Street strategists calling for a big comeback after stocks fell to the brink of a bear market in December. To Lee, the latest rout was reminiscent of two other episodes, in 1962 and 1987, when a sell-off sent the S&P 500 to its 200-week moving average price and proved only an interruption to a prolonged bull market (click on image).

This time, “stocks overshot to the downside, on the heels of a cumulative panic around mounting trade tensions, excessive bullishness and then a knockout blow from the Fed,” Lee wrote in a note to clients. “Unless the U.S. is headed for a recession, this should lead to a bounce in stocks in 2019.”

For now, history is on the bulls’ side, judging from the Institute for Supply Management’s manufacturing index that has called the tune of past market turmoil, according to Fundstrat (click on image).

In addition to the one that happened at the end of last year, the S&P 500 had posted ten other declines of 19 percent or more over 60 days since World War II. Three of them were accompanied by the manufacturing index sitting below 50, an indication of contraction, and stocks eventually plunged into bear markets. The others coincided with expansions and the market ended up faring well. The measure’s latest reading was 54.

Last year’s plunge in stocks “is a sign of a major tradeable bottom,” Lee wrote. “This was true especially considering that PMIs >50.”
Tyler Clifford of CNBC also reports, Strategist Tom Lee: ‘Buy the dip’ because the S&P could rally 17 percent in 2019:
Stocks are poised for double digit growth in 2019 — and could potentially jump as high as 17 percent, Wall Street strategist Tom Lee said Friday.

“The buy the dip, which people thought died last year, is back,” the Fundstrat Global Advisors co-founder and head of research said on CNBC’s  “Fast Money: Half Time Report.”

“The probability of a double-digit year we think is the highest since 2009,” added Lee, who is also the firm’s head of research.

In his latest investor note released Friday morning, Lee predicted the S&P 500 would hit 2,835 by the end of the year. That would be a 13 percent increase from where the index finished 2018.

Lee acknowledged in his note that “contrarians were slaughtered” last year. In mid-December, after a late-year collapse in stocks, he told CNBC there was still time for the S&P 500 to catch a 10 percent rally going into 2019.

However, the stock market actually fell further into the red, with the S&P 500 hitting a 2018 low of 2,346 during the Dec. 26 trading session. Since that intraday low, the S&P 500 has gained more than 10 percent based on Wednesday’s close. The index was up 3.5 percent year-to-date.

“The crash of 2018 mirrors the mid-life crisis seen during the middle of bull markets a la 1962 and 1987,” Lee said in his note. In both those cases, he argued, the bull market found its footing at the 200-week moving average, which currently is “2,350 or so” on the S&P 500.

“Is a retest in 2019 possible? Yes, but if so, we would view that as a buying opportunity,” he wrote.
Lee also stated technology shares (XLK) will lead the secular bull higher and there's a new technology bull being formed, away from FAANG stocks and into newer tech names millennials love.

Got to hand it to Tom Lee, he reminds me so much of Abby Joseph Cohen, another famous bull on Wall Street who eventually succumbed to the 2008 crisis and ensuing long bear market.

So, is Tom Lee right? Did the market just have a mid-life crisis? Is this a huge buying opportunity, especially if we retest the lows of the Christmas Eve Mnuchin massacre?

The first thing I would suggest is you all read last week's comment, Outlook 2019: When Doves Cry, as well as my comments on the bad Santa selloff of 2018 and making stocks great again.

I wrote a lengthy outlook last week which is well worth reading and watching the clips at the end.

In short, my thesis was going into the new year, I thought stocks were extremely oversold and due for a major bounce just based on rebalancing going on at major pension and sovereign wealth funds around the world, the most influential allocators, and when the Fed turned dovish last week, it assuaged my concerns that a global recession was right around the corner and the shift in tone also fed the upward momentum in all risk assets, not just stocks.

Now, I'm still concerned about a slowing US and global economy, just a little less so since Fed Chair Jerome Powell stole Christmas.

I still think the US economy is slowing and the government shutdown isn't helping, which explains why US long bond yields are declining.

But I'm unclear to what extent it will slow and whether global economies can start growing now that the Fed is supposedly out of the way for the year and the US dollar (DXY) seems to be rolling over, relieving dollar-denominated debt pressures all over the world (click on image):

As I stated in my outlook, you need to pay attention to what the Fed is saying and doing, to the US dollar (UUP), emerging market stocks (EEM) and bonds (EMB), and you need to keep an eye on financials (XLF), high yield bonds (HYG) and US long bonds (TLT). You also need to pay attention to some of the riskier sectors of the market, like biotech (XBI), to try to gauge risk appetite.

Think of the market as a bunch of moving parts, a symphony if you'd like. When the composer (the Fed) is on their game, the orchestra is playing beautiful music, but when the composer if off their game, it sounds god awful. And when the music stops abruptly, like in mid-December, it gets real ugly, real fast.

So what's going on right now at the concert? Fred Imbert and Sam Meredith of CNBC report, Stocks rise more than 2% for the week:
Stocks posted solid weekly gains, but an ongoing U.S. government shutdown and worries about an economic slowdown in China pushed shares marginally lower on Friday.

The Dow Jones Industrial Average and S&P 500 both rose more than 2 percent this week while the Nasdaq Composite jumped 3.45 percent. Amazon and Facebook both rose more than 4 percent this week, while Netflix surged 13.45 percent as investors put money into the beaten-down names from December. The Dow and S&P 500 also posted their first three-week winning streak since August.

This week was also the calmest on Wall Street in a while. It was the fifth day without an S&P 500 move greater than 1 percent in either direction, the longest quiet streak since early October for the benchmark.

But Nancy Davis, CIO of Quadratic Capital, thinks volatility will remain high in the foreseeable future. “We’ve seen the rise in volatility coming back into the markets,” said Davis. “This is just the beginning of what we should expect to see. These big ups and downs are going to become more common.”

On Friday, the Dow slipped 5.97 points to 23,995.95 while the S&P 500 closed just below breakeven at 2,596.26. The Nasdaq Composite dipped 0.2 percent to 6,971.48. This was the first decline for the major indexes in six sessions.

The federal government remained partially closed on Friday for a 21st straight day, stoking fears the shutdown could drag on for a long time. On Thursday, President Donald Trump tweeted he would skip the annual World Economic Forum at Davos later this month due to the shutdown.

Trump also said he will “probably ” declare a national emergency if the White House and Congress cannot reach a deal to end the shutdown.

“We think a deal will be reached to reopen the government, but only after economic, financial and/or political pain is felt,” Joseph Song, an economist at Bank of America Merrill Lynch, said in a note to clients. “Every two weeks of a shutdown trims 0.1 [percentage points] from growth; additional drag is likely due to delays in spending and investment.”

Concerns over a possible slowdown in China weighed on equities Friday.

Goldman Sachs analyst Karen Holthouse said Starbucks would be the next company to warn of a slowdown in China following Apple’s recent revenue guidance cut. “The recent AAPL [Apple] announcement (while potentially also product-driven) cited trade concerns/macro, and MCD [McDonald’s] acknowledged softer trends in the region at a late November event,” said Holthouse, who downgraded the coffee maker to neutral from buy.

Starbucks shares fell 0.7 percent.

Apple slashed its revenue guidance for fiscal first quarter last week, citing an unexpected slowdown in China. On Thursday, Federal Reserve Chairman Jerome Powell said that warnings shows the Chinese economy is slowing. “It’s showing up a lot in consumer spending,” Powell said. “Weak retail spending; everyone has seen the Apple news.”

Concerns around Chinese economic growth come as China tries to strike a permanent deal with the U.S. to settle a punitive trade war. The world’s largest economies have slapped tariffs on billions of dollars worth of goods since last year.
It remains unclear what's going on with US-China trade negotiations and according to some analysts, the risk of talks breaking down remains high.

I'm not so sure. Trump knows the stock market will tank if talks break down and China flirting with deflation can ill-afford to have talks break down.

All this to say, there remains uncertainty on the macro front, whether it's trade talks with China or the US government shutdown which is already the longest shutdown ever and costing the economy more than Trump's wall.

If you watched the news tonight, you saw federal workers weren't paid today, many are hurting and rightfully worried as they cannot afford to make their house and car payments. Some are resorting to food banks too because they cannot afford groceries.

It's crazy when you think about it, all this economic pain and anxiety to fund a $5 billion wall which Trump promised his base.

I don't know what the president is going to do but he's already backtracking from declaring a national emergency and if he's not careful, this bloody wall is going to cost him political capital from within his own party and possibly his re-election bid (sometimes I wonder if he really wants a second term or just to build 'his' wall).

Anyway, enough politics, let's get back to markets. As shown below, if you look at the one-year daily chart of the S&P 500 ETF (SPY), you'll see it's well off its December 24th low (234) and trying to cross back above its 50-day moving average (click on image):

Bearish technicians  will point out the index's price action broke down in early December when we had the dreaded "death cross" (where the 50-day moving average fell below the 200-day moving average) but I would caution all of you to take all this talk of death crosses with a shaker, not pint, of salt.

Importantly, if you step back and look at the 5-year weekly chart, you'll see the SPY crossed back above its 100-week moving average this week and remains well above its 200-week moving average but still below the 50-week which it needs to cross above to resume an uptrend and make new highs (click on image):

In fact, looking at that chart, it does look a lot like Tom Lee's mid-life crisis thesis but I warn you, the easy gains have been made and if something goes wrong, we will retest the December 24 lows and possibly go much lower.

I don't want to sound the alarm on this market or leveraged loans, I'm constantly looking at a lot of things and thinking ahead of the curve.

Next week, the big US banks are reporting earnings and I want to see if financials (XLF) surge higher to cross above the 100-week moving average or get hit and drift lower back down to the 200-week moving average (click on image):

I must confess, I'm not very bullish on financials given my view that the US economy is slowing and rates are headed lower this year but we shall see.

What else? I'm looking at early cyclicals like homebuilders (XHB) to see if the worst is over in this key sector of the economy or just starting (click on image):

I'm also looking at biotech stocks (XBI) which surged this week but are now at important resistance levels (click on image):

And while many stocks have bounced back strongly, it's worth noting only 30% of S&P 500 stocks are above their 50-day moving average, most remain below their 200-day and there are very few stocks making new 52-week highs in this market (you can check here).

These aren't bullish signs and shows the market remains sick and we're definitely not out of the woods yet.

Still, if Risk On dominates markets this month and you see sectors and industries like financials (XLF), homebuilders (XHB), and biotech stocks (XBI) surge higher, that's good news. Also, if you see industrials (XLI), metal & mining (XME), energy (XLE) and emerging markets (EEM) move higher, that too is good news because it shows global growth is staging a comeback.

I remain highly skeptical that global growth is coming back but I'm keeping my eye on markets to try to gauge what's going on.

What I can tell you is I think rates on the US 10-year Treasury note peaked in early October and typically the worst of the economy isn't felt till a year later (click on image):

I hope I'm wrong but I fear that come this fall, the US economy will be in a recession and the magnitude of the slowdown depends on what the Fed and Congress do in the months ahead.

If there is a policy error on any front, Tom Lee's mid-life crisis will spiral into something far, far worse.

This is why I think it's way too early to throw in the towel on defensive sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) and US long bonds (TLT) which could get hit in Q1 if Risk On markets dominate.

The year is very long, anything can happen at any time but right now, I'm cautiously bullish and short volatility. We'll see if my mind changes next week after financials report.

Lastly, I share something new, the biggest gainers in the stock market over the last week (click on image):

The full list is available on barchart here.

I'm only sharing this to show you there were some huge moves in individual stocks this week and there were even nice trades to be made in stocks that got killed earlier this week, like La Jolla Pharmaceutical Company (LJPC) which took a 50%+ haircut on Monday and then rallied nicely into end of week (click on image):

Don't get excited, if you look at the 5-year weekly chart, you'll see this biotech has been decimated (click on image):

But some very big biotech funds like Perceptive Advisors, Tang, and Fidelity are major holders and I'm curious to see if they dumped or added to it as it got killed.

Here are some other stocks I was looking at this week (click on image):

That's all from me. Hope you enjoyed reading this comment. As always, I ask all my readers to please donate or subscribe via PayPal on the right-hand side, under my picture. I thank all of you who take the time to donate, it's greatly appreciated.

Below, Fundstrat's Tom Lee makes the bullish case for stocks in 2019, stating we will see double-digit gains. He may be right but I seriously doubt it, think it will be another very choppy and weak year when we reach the end.

And top technician Carter Worth says it's time to fade the financials heading into earnings with CNBC's Melissa Lee and the Options Action traders, Mike Khouw and Dan Nathan. Keep your eyes on financials this week and how they trade after they announce their earnings.

Third, David Zervos, Jefferies chief strategist, and Alli McCartney, UBS Managing Director, join 'The Exchange' to discuss their predictions for bank earnings next week and the state of US markets. Zervos said the Fed could cut rates this year but I doubt it unless the economy tanks really bad (never say never).

Fourth, Oxbow Advisors Managing Partner Ted Oakley joins Fox Business to discuss the factors that could potentially weigh on the markets in 2019, stating there's a bigger risk of recession than everybody thinks. I'm afraid he's absolutely right.

Lastly, my favorite interview of the week. Jeff Vinik, CEO and CIO of Vinik Asset Management, joins "Squawk Box" to discuss why he's re-opening his hedge fund and why it's a good time for stock picking. Vinik is a legend in money management, will be tracking his fund's activity closely.