Special to the Globe and Mail
by Tom Bradley
When I’m travelling, I find myself watching business television – BNN, Bloomberg TV and CNBC. It’s not something I do regularly, but I can’t resist turning it on while I’m getting ready for the day.
Business television has little to do with long-term investing and a lot to do with market timing, trading and, of course, entertainment. Unfortunately, I’m finding it more aggravating than amusing these days because of the daily focus on the U.S. Federal Reserve and Brexit. For me, these two obsessions are numbers 22 and 242 on the list of things investors and business people need to be thinking about.
If I were at the controls (ratings be damned), China and India, the growth engines of the world, would get regular coverage, as would alternative energy and the environment. The following topics would also be on the focus list.
The world is changing faster than ever. Consumers, businesses and even governments are doing things differently and they’re taking no prisoners.
As a result, investors need to look for companies that understand what their competitive advantage is and are using cheap computing power, intelligent software and algorithms, mobile applications, GPS and social networks to grow and better serve their customers. The Amazon effect, and others like it, means that no business can take its revenue and profit for granted.
When researching the purchase of a consumer item, we used to have seven or eight options. Now, we have three or four, or maybe just two. This reflects a change in the type of business deals done today. In the eighties, research revealed that most acquisitions didn’t work – empire building was good for the chief executive’s ego, but not the shareholder’s return. Over the past two decades, however, deals have been more profitable because of a narrower focus – mergers and acquisitions are all about market share and cost efficiency in existing lines of business.
In other words, more scale and fewer competitors. In most industries, consolidation is forcing analysts to change their assumptions about risk and profitability.
Debt out of control
The level of debt we have in the world today means we’re operating without a safety net. Canadian consumers, for instance, have little room for error. Higher interest rates, increased unemployment and/or government cutbacks will cause severe hardship.
Governments are in a similar bind and may already be hitting the wall. Ontario and Quebec desperately want to upgrade deteriorating infrastructure and stimulate their economies, but are being forced to start living within their means. Many countries, including post-Brexit Britain, are in cutback mode at a time when the opposite is required.
High debt loads inhibit growth – yesterday’s debt-induced consumption cuts into today’s sales and economic activity. It also widens the range of possible outcomes, good and bad.
Government and central bank intervention
One of the good things about capitalism is that it goes through down cycles from time to time. I say good because these periods help to sort out the winners and losers, normalize supply and demand and, importantly, expose and extinguish the excesses of the previous cycle.
Since the Bush/Greenspan era, governments have had little appetite for sorting, normalizing and extinguishing. Any kind of slowdown is perceived as bad for a politician’s prospects. Central bankers, despite their supposed independence, have dutifully changed their job descriptions, focusing more on cheerleading for growth and less on protecting the integrity of the financial system.
This micromanagement has led to distortions and unsustainable extremes. I’ve speaking of debt levels, negative interest rates, pension deficits and particularly, Toronto and Vancouver housing prices.
And finally, there’s one that’s always in the top 10 but is often forgotten: The world is getting older. The impact of changing demographics makes the preoccupations with Brexit and the Fed look ridiculous. We should be talking about the impending shortage of skilled labour, escalation of health-care spending, pension deficits and shifts in housing needs and shopping patterns.
Okay, I’ll stop throwing things at the TV and get back to what I’m supposed to be doing – eating breakfast, getting dressed and building diversified portfolios for our clients that take into account all of this boring but important stuff.