By J.P. Szafranski
BridgeTower Media Newswires
What will the future be like? It’s a question as old as humanity. How do we apply what we know about past and present circumstances to best prepare for what is to come?
Isaiah Berlin’s essay on Tolstoy, “The Hedgehog and the Fox,” discusses two fabled creatures. The hedgehog focuses on “one big thing” about the world and views everything through how that one thing can be applied to any given circumstance. Whereas, the fox knows many things and sees the world as more complex and uncertain, while refusing to be bound to a rigid way of thinking.
If the goal is to be a successful investor (or a generally well-adjusted human for that matter), one needs to have the capacity to act as either a hedgehog or a fox depending on context and circumstance. Investor Fox could fail miserably by getting overwhelmed with the inherent uncertainty of investing, either through being frozen to inaction and analysis paralysis or at the other extreme, rapidly trading in and out of positions if news or conditions change in even the slightest way. Meanwhile, Investor Hedgehog might go careening off to disaster by stubbornly focusing too much on extrapolating a company’s historical financial results while ignoring materially altered industry conditions.
To be clear, there is plenty of room for varying ideologies in Camp Hedgehog and Camp Fox. It is not so much about specific ideas, it is about one’s relationship with the ideas. Camp
Hedgehog welcomes Perma-bear and Perma-bull personalities, alike. The same goes for politics, but that is for another column.
Applying the hedgehog versus fox comparison is not some sort of investing panacea or life hack. Most of us have both succeeded and failed miserably acting as both types. I certainly have. It is simply an interesting construct to think about as we reflect on our own actions and thoughts and observe the world around us.
So how about the world around us right now? How much will this pandemic experience change our behavior for the next year and for the next 10 years?
The federal government’s stimulus response is unprecedented and massive, both fiscally and monetarily. It will help remove some of the truly frightening near-term social and economic worst-case scenarios. That is great, but it defies logic to assume it comes without trade-offs.
The Treasury Department announced on Monday that it plans new borrowing totaling $2.999 trillion during the second quarter. It is an amount so biblically huge there is no superlative to appropriately describe it; perhaps we should make one up, maybe: scrumtrulescent (credit to Will Ferrell’s depiction of the late James Lipton on Saturday Night Live). Selling all this new debt should be no problem, thanks in no small part to the gusher of liquidity currently emanating from the Federal Reserve.
The bill will likely come due eventually, almost certainly through higher taxes and probably higher inflation. The massive downshift in aggregate demand will exert deflationary forces in the near term. But as the economy recovers, the Fed’s balance sheet expansion is kindling for future upticks in inflation. We also won’t be as efficient for at least a while (no middle seats in airlines, restaurant table spacing, a general need for extra labor to ensure sanitization standards, etc.) Will the disinflationary effect of an aging population be enough to mitigate the inflationary pressures?
In a time where things are weird and rapidly evolving, it’s probably best to be more like a fox, just don’t disappear in a foxhole for good. Warren Buffett reminded his fellow Berkshire Hathaway shareholders of this sage advice: “Never bet against America. That is as true today as it was in 1789, during the Civil War, and in the depths of the Depression.”
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J.P. Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital.com).
