Hey Subscriber,

First Off: Let's Get The New Normal Big Picture Right & Our Heads Screwed On Right

As I have shared many times over the years with subscribers, one of the "secrets" to our serious 8-10X outperformance of the SP 500's 7% average annual returns (including dividends) is not just accurately forecasting the macro and microeconomic CONTEXT of the next 12-24 months. We also need to get the macro and microeconomic metaphor and investment narratives right because when you get the macro and microeconomic metaphors right, you understand the core base investment narratives that drive portfolio managers to buy stocks that fit the investment narratives that they find a) easiest to grasp b) most believable and thus c) most likely to become their "high conviction go to trade."

And, when you get that right, you get the mindless robotic algorithm black boxes that buy your stock because it is going up and turn your fundamentally sound secular growth stock into a momentum stock (see our Nov. 16 NVDA and AMD stocks 2016-2020 or NKLA April to June 2020).

To me, an "investment thesis" is just a fancy way of saying "this is my best guess as to why we will get a positive return making and owning an investment." You can also call your investment thesis a "scientific wild ass guess (SWAG for short). But getting the macroeconomic and microeconomic narratives right is much more important because (as much as investment professionals don't like to admit it) narratives are stories, and we human beings are hard-wired to learn and act after hearing/reading interesting and revelatory stories, not reading spreadsheets. And the algos don't give a crap what your stock actually does as long as it is going up and maintains its trend line or 50-day moving average (more on that in a moment).

And of course, the market-beating macro and micro-narratives we invest in answer the biggest wealth creation and destruction catalysts in the world as in1) "what are the biggest macro/microeconomic secular (not cyclical) transformations occurring in the world (i.e., growth catalysts/growth destructors") 2) which companies enable and financially benefit most from these transformations/disruptions and 3) what is the expected duration of the transformation cycle (eh itt's secular as in 3-5 years of >20% CAGR ok?).

In short, get the macroeconomic narrative right, and the winning sectors and micro sectors narratives right, you significantly outperform the overall indexes and destroy the equal-weighted SP 500 index. For instance, the macroeconomic narrative we got right coming out of the 2008-2009 Great Recession was 1) the Great Chinese Economic Stimulus tsunami enacted by the CCP to dodge the Great Recession would turn them into the key marginal buyer of energy and materials in the world and 2) the most disruptive microeconomic technology transformation in America at the time was not the internet but hydrocarbon fracking that doubled the energy production in America from 2009-2015 (until Saudi Arabia declared war on the new American energy complex in 2014 when we sold them).

We made a fortune in energy E&P and infrastructure AND sold them with the transformative (as is negative) Saudi oil price war declaration on October 14. "Transformity" swings both ways (no jokes here). It's always the MAGNITUDE of the seismic transformation or disruption if you will that counts. It could be a major regulatory, technological or monetary transformative event that erupts a transformative wave of change or ENDS IT, too.

We had the thing order of magnitude transformation hit the world in 2015 as the cloud-based digital software/apps/infrastructure/consumer media/eCommerce platforms-as-a-service took off with the advent of 4G wireless broadband everywhere and data centers powered the entire digital platformity world.

But Now YOU Need to Understand That THIS TIME S-Curve Transformative Change REALLY IS Different

"This time is different" is almost always an investment trap. By the time everyone agrees it's different, the trend has peaked. In normal times a transformative change has a half-life as in an "S-curve" rate of the rate of change accelerates and then flattens off and then falls. I came up with the term "ChangeWave" to hopefully make this physics term comprehendible to mere mortals.

But about 20% of the time, things ARE really different--and investing in a post-pandemic world IS one of those 1-in-5 times when the traditional rules are not valid.

Here's why. #1 reason is the father of the S-curve transformative event investing really comes from the social science world, not physics (don't tell anyone). In 1962, sociologist E.M. Rogers came up with his “Diffusion of Innovation” theory. Rogers’ theory breaks down the transformative technology adoption life cycle into five main segments, ranging from the fringes of the early market to the completely mainstream.

As a piece of new technology or innovation moves through this adoption cycle, it gains more and more market share and value. This transformation diffusion cycle is based on innate human behavioral instinct, not technology. His key insight was that people of the same age who are early technology adaptors (like me) are DNA hard-wired differently than late majority adopters of the same age. It's innate instinct--it's why Howard Marks the great "value investor" sees the world differently than Tobin Smith the pretty good high growth investor (minus a few zeros in the bank)--it's our investment personality and risk tolerance.

In short, your adoption curve is NOT physics--it's how our brains are wired--it's behavioral science.

In the nascent stages, Diffusion Theory holds that a new technology’s growth is driven by innovators and early adopters. These are the people who want the latest and greatest, regardless of practicality.

In short, me. If I don't have the next great digital technology in my hands, I start twitching.

Key Point: But to make the leap from the early market to the mainstream, normally new technology must survive the chasm jump from early adopters to the early majority of the mass market aka people that are NOT wired like me. You know--normal people :)

Normally this leap from early adopter to early majority adopters akes years--think the internet, cell phones (I had the first brick in 1985), email (very early use of AOL), cloud computing, etc. because changing existing behavior and norms is always a difficult jump to make for the vast majority of human beings. This behavior is instinctual and Darwinian--the folks who were always curious about going to that place in the jungle or savanna in our Paleolithic days almost always became the "heavy Hors d'oeuvres” in the food chain--the safety-minded stayed home and passed on the primal safety genes.

Really Key Point: Call It Tobin's Rule: The S-Curve/Diffusion of Innovation law does NOT APPLY IN A GLOBAL EXISTENTIAL VIRUS PANDEMIC

THAT is what is so different this time from other transformative macro and microeconomic events; 7.5 billion human beings experienced the SAME transformity event and ALL got pushed OVER the technology and behavior chasm at the very same time (whether they wanted to or not). There WAS no adoption or diffusion chasm to jump because this time our survival instincts overcame our natural instinct to slowly adopt new things, new behaviors and new norms.

There was no "adoption period" per se--we all (ok most of us 7.5 billion humans) lept over the New Normal chasm in a few weeks. Those who ignored COVID-19 pandemic were the extraordinary risk-takers (and so far over 650,000 have paid the ultimate price).

In fact, this time we have the reverse adoption effect--we all got PUSHED into rapid adoption of all kinds of new behaviors and technology and now (to some extent), most have diffusion fatigue; we want to go back to the OLD normal and jump BACK over the chasm, not forward.

OK--So How Do We Get Rich (Or Get Richer) From Tobin's Law?

Answer: We identify the commercial and human behaviors that are not going to revert to previous norms and behaviors aka the New Normal, and which behaviors are going to revert to the Old Normal. I learned to do this exercise from one of my investment heroes Howard Marks who founded Oaktree Capital (now owned by investment giant Brookfield Global). I have read his monthly notes on macroeconomics and the investment world since the early 1990s. He has always been my favorite interview subject on business TV shows we both participated in and, as always, I learned the most listening to him answer my questions in the green room before a show.

Howard did not become a multi-$billionaire by accident. Even though he is a "bond guy" and is a risk-averse "value guy", he has been a subscriber to my newsletters for decades and when he asked for a signed copy of my first book "ChangeWave Investing" I almost fell over. In short, he is not locked into ANY worldview but he DOES understand his natural risk tolerances and instincts. As he has said many times, "my bias is risk aversion and to outperform my benchmarks taking LESS not more risk."

Anyway--here is the point: We now have the data and narratives in hand to, like Howard likes to say, " jump in the time machine and use the data and our imagination to see the world a year ahead." So let's do it--let's jump in the Transformity Research time machine and define what August 2021 will most likely look like in a macro and microeconomic sense.

First off, here is a classic Howard Marks explanation of the right COVID response and future metaphor (from his most recent investor letter at www.oaktreecapital.com) with some comments from me. "Earlier this month, I prepared a presentation for one of our sovereign-wealth-fund clients which I started with the following metaphor: To deal with particularly serious diseases, doctors sometimes have to take extreme action to save the patient: they induce a coma to permit the administration of harsh remedies, maintain life support, treat the disease, and bring the patient back to consciousness.

Thus the U.S. economy was largely frozen (put in a coma), causing 54 million Americans to file for unemployment benefits since March 21 and second-quarter GDP to shrink by an annualized 32.9%, three times the greatest quarterly decline in the 70 years of recorded quarterly history.

The comatose patient – the economy – required life-support, and the Fed and Treasury supplied it. They rushed in with trillions of dollars (economic blood) to keep the patient warm and alive: payments to individuals and households; grants to distressed industries; general business loans and tax relief; loans to small businesses; aid to states, hospitals and veterans’ care; and guarantees for money market funds and commercial paper. These are sometimes described as stimulus programs, but that’s a misnomer: they were (and are) support payments designed to replace cash that normally would have circulated throughout the economy.

With the economy comatose and on life support, elected officials proceeded to administer the pandemic cure. In the absence of a vaccine, this was designed to take the form of viral testing to identify those who had the disease and to identify those with whom they’d come into contact; quarantining and social distancing to keep them separate from others; masking to prevent the asymptomatic sick from infecting the healthy.

When the number of new cases, hospitalizations, and deaths declined, and in view of the desirability of allowing economic activity to resume, those in charge turned to resuscitate the patient. The economy began to reopen in May, supported by a near-zero base interest rate and the Fed’s provision of abundant liquidity, and the initial response was positive. Retail sales moved up 17.7% in May (after a 22.3% decline in March/April), and the unemployment rate fell to 11.1% in June, from a peak suspected to have been near 20%. To many Americans and leaders, this was "case closed."

But We Failed to Fix It (BTW--this is NOT a Political Statement--It's a Statement of FACTS not Opinion/Belief)

Howard goes on "If only it was that simple. Unfortunately, in some instances, the reopening took place before the number of new cases had declined enough for the spread of Covid-19 to be brought under control, and people in areas that had been spared in the early days acted cavalierly, allowing the disease to regain a foothold in their regions. Borrowing from Churchill (who probably borrowed it from Machiavelli), people who regulate economies and manage businesses say “never let a good crisis go to waste.”

But in the case of Covid-19, the U.S. did just that. The nations of Asia and Europe had the earliest outbreaks, but they took swift and stern action – some say Draconian – including enforcing isolation and fining violators. But they got the disease under control. Unfortunately, a number of somewhat unique American elements combined to weaken the actions taken in the U.S. which permitted a resurgence of the disease:

The absence of uniform national policies on shutdowns, social distancing, masking, and re-opening.
Inadequate support for the recommendations of health professionals and scientists (Howard is too nice here--there was and still is major push back on ALL the pandemic protocols against the "scientists" in many segments of America, unfortunately).
The foolhardiness of youth, who were misled by early statistics into believing they were immune.
“National hubris and belief in American exceptionalism,” according to Martha L. Lincoln, a medical anthropologist and historian. As one of our elected leaders stated on March 11, “The virus will not have a chance against us.”
The turning of masking and social distancing into partisan issues, raising suspicion that the virus is a hoax and protective rules an infringement of personal freedom.
The politicization of the difficult choice between reopening the economy and minimizing infections. The states currently seeing the greatest increases in new cases are mostly ones that emphasized the former over the latter.

Clearly, society reopened and people began to congregate before the virus was reduced to controllable levels, allowing it to reemerge. And shutting down to fight the disease in some locations but not others was dangerous when people can travel freely among them.

Now contact tracing – a very important weapon in the arsenal of the countries that got the spread of Covid-19 under control – has been rendered useless in the U.S. by the sheer number of people who’ve been infected.

So rather than the desired progression of infection, coma, life support, treatment, cure and resuscitation, we've had a progression of infection, coma, life support, treatment, and resuscitation. The cure is missing. Because much of America reopened before the disease was brought fully under control, the early lockdowns went to waste, and the current number of daily new cases far exceeds that of March and April.

RockCreek Group’s July 27 report put it well:
"By reopening when COVID-19 was still spreading and pervasive in many places, the US got the worst of both worlds: a sharp recession, which will leave scars in terms of business closures, bankruptcies and disrupted lives, and continued disease, that will be difficult if not impossible to eradicate, in the absence of effective treatments and vaccines."

Toby here--but in one of the new technology paradigms that has come out of the global pandemic (RAPID FDA Response Protocols) the Yale School of Public Health unveiled a new coronavirus test over the weekend. The SalivaDirect test they created is an easy, fast, and inexpensive way to test for Covid-19. The new test got emergency approval from the Food and Drug Administration in a matter of weeks not years.

“If cheap alternatives like SalivaDirect can be implemented across the country, we may finally get a handle on this pandemic, even before a vaccine,” said Nathan Grubaugh, a Yale assistant professor of epidemiology.

Bottom line: US macroeconomics and recovery to 2019 GDP levels are driven today by A) gaining access to immediate COVID-19 testing (to separate the new infected and asymptomatic from the crowd and slow the transmission and keep schools open until a vaccine is available to the public) B) A continuation of similar weekly subsistence payments to the 60% of American households who are living at or below the poverty line or between the $35-$60k annual "working poverty" line because the data shows households with >$75,000 income are using stimulus checks to pay down debt or build financial reserves and C) the wide distribution of one or more approved vaccines by late 2020-early 2021.

Key Point: We (and the overall market obviously) now assume ALL the above will happen in the next 2-3 quarters or we will UPDATE our macroeconomic recovery assumptions which represent a "Checkmark recovery pattern" until a vaccine, not a full V-shape recovery.

No straight-up V? Why? One reason--its' the math stupid (I hear my brother laughing now as he reads this.) But look; the U.S. economy deteriorated in the second quarter at the highest annualized rate in history, almost 33%. Without a vaccine, it is literally impossible for a dozen reasons to come back at the same rate (starting with the fact that it takes a 49% gain to offset a 33% decline, ok?).

Our TR MacroMarket Forecast 8-15 to 8-15-2020: Checkmark Recovery transforms to V-Shape post Vaccine

Why?

1. Because the pandemic does have an end date. Markets are forward-looking, and right now the stock market is expressing confidence that the pandemic will end eventually with a vaccine, and with help from better treatments in the interim. If this was a hockey game I'd say we have >130 "shots on goal" with 133 coronavirus candidates and counting. With the new normal turnaround time from the FDA, the odds are very good that we have at least one (beyond the Russian "vaccine") that is produced in 500 million unit doses (which have already been ordered by the FDA)>

2. Mass distribution of a proven vaccine (despite the small minority of America's "anti-vaxxer" believers--don't get me started) would create a somewhat binary market event that should power stocks to new highs--especially economically sensitive sectors like our Ultra Income investments. The pre-vaccine future got priced into the pandemic beneficiary stocks first--our digital platformity stocks being a prime example. But in the last 3 weeks, the S&P 500 has been led by industrial stocks up 8% and the energy group up 6% (with our Ultra Income stocks up more than 9% in the same timeframe.)

Of course, overall, 21st-century tech is still walloping 20th-century industries and "Epicenter" services industries.
Compare the even weighted SP 500 with the even weighted QQQE and market cap-weighted technology QQQ and SP 500: Here is the total stock market return to date: NOTHING.

Even weighted QQQ Return: 9%

Total S&P 500 Return: Nothing

QQQ (with 65% Digital Platformity & Digtial Biotech Discovery Platform Stocks) -- 18%

Key point: We are positioned to profit from both stock market scenarios: A slow but sure cyclical recovery in energy and WTI energy prices (in addition to the return to 10 million barrels a day of production as drilling and fracking oil rigs drop like flies with canceled contracts and ZERO private equity capital/lending) with our Ultra Income investment outperforming the SP 500 by 30X (including income and price appreciation since March 23) and our Ultra Growth profits taken (NKLA, NKLAU, NKLAW, MRNA sold) and new positions added up 30X over the QQQ.

PS: Update on FMCI HCCO SPAQ by Wednesday--but here are the expected merger dates for FMCI and SPAQ.

Remember the M.O. for SPACs is:
1) big pop on the announcement of merger target (if it's a great story with 5 years+ of secular growth), then
2) profit-taking by the early traders until the bids outnumber the sellers aka fundamental marginal buyers (aka as the high conviction buyers are)
3) followed by the pop again when the merger happens, the PR machine hits and people become aware of the high growth company and its ticker symbol.

Here is the upcoming merger schedule of the leading SPACS:

2. Lower and longer interest rates. While stocks are expensive, they are actually incredibly cheap when you compare them with US Treasurys, with the 10-year yielding about 0.6%. As I have mentioned a lot (but will again dammit) when you are discounting what you roughly believe the future profits of a secular growth company will be back at ZERO or less (i.e., negative real 10-year interest rates) equity valuations and price-to-earnings multiples EXPAND.

Key Points: In comparing the terminal valuation of equities vs. no-risk 10 treasuries, earnings multiples for those bonds DO have a price/earnings ratio as well--its the forward price-to-after inflation yield of a bond (over its duration) vs. the price to earnings ratio of that SAME duration.

So get this: Today the 10-year US Treasury trade at a price-earnings multiple of 180x, while corporate bonds trade at a price-earnings multiple of 40x!

Why do secular growth stocks trade at such high price-to-earnings or price to sales multiples? BECAUSE they are incredibly CHEAP compared to the bond market!

Final Point: Here is Mr. Risk Adverse Howard Marks on WHY Digital Platformity Stocks DESERVE to Be Valued So Much Higher Than 20th Century Industrial or Services Companies

When asked why the FAAMG stocks (Facebook, Amazon, Apple, Microsoft, and Google) are up 36% this year, against just a 4% rise in the S&P 500, Howard said (as only he can) "there are a few reasons and obvious merit to the bull argument for Big Tech:

They scale more rapidly than large companies in the past, protecting them from business cycle swings.The rest of the bulls’ arguments mostly surround the exceptional nature of the market-leading tech companies:
They grow much faster than the large companies of the past, and their growth is much less likely to prove cyclical.
In fact, the current crisis, with the accompanying movement on-line of a larger share of everyday life, has (a) served to accelerate their growth or (b) given them an opportunity to demonstrate their ability to grow regardless of conditions in the environment.
They have the scale, technological advantages and network effects (i.e., as the number of users and nodes on their digital platforms increase, there is more value derived by adding new services at ZERO incremental cost) that give them much greater protection against competition than their old-economy predecessors enjoyed.
Thanks to the role of intellectual property as the main “raw material” in their products, most of these companies can create additional units for sale at very low marginal cost (aka superior unit economics).
Likewise, they can grow without much additional capital, if any (all five of the top tech firms are in a “net cash” position, meaning their cash holdings exceed their debt).
Finally, their high p/e ratios today mean less than usual, since these tech champions are vastly under-reporting earnings: if they were to cut back on things like customer-acquisition costs and R&D and settle for lower (but still rapid) growth, they could report far higher earnings.

"If instead the tech giants were flat against this backdrop - or had just performed in line with the rest of the index - we'd probably say something was wrong," Marks said.

And finally, John Templeton allowed that when people say things are different, 20% of the time they’re right. And in a memo on this subject in June of last year, I wrote, “in areas like technology and digital business models, I’d bet things will be different more than the 20% of the time Templeton cited.”

It certainly can be argued that the tech champions of today are smarter and stronger and enjoy bigger leads than the big companies of the past, and that they have created virtuous circles for themselves that will bring rapid growth for decades, justifying valuations well above past norms.

Today’s ultra-low interest rates further justify unusually high valuations, and they’re unlikely to rise anytime soon."

Thank you Howard--your investment wisdom is as timeless as it is timely.

OK-lot's more to come this week:
1) our updated Transformity Sectors
2) Our updated Ultra Growth and Ultra Income Buy Lists and Portfolio
3) New recommendations in both portfolios.

Cheers!

PS--The USOI ETN has been creeping up in value 1-2% a day since we recommended it's 78%+ annual distribution rate and ZERO chance of redemption risk. Credit Suisse just redeemed on of its 3X leveraged notes at full value last Friday. Let's move the Buy Under to $15 but don't snooze--the next monthly ex-dividend date is August 19. Most amazingly, the market makers in this ETN (Credit Suisse is the primary) do not mark the ETN down by the ex-dividend date--such is the nature of an ETN vs. ETF.

Despite regulatory risks, their technological advantages and network effects (value of service dependent on the number of users) give them greater protection against competitors.
All 5 companies are sitting on huge cash piles, as their cash holdings exceed debt.
High price-to-earnings ratio indicate that investors expect higher earnings.

August Newsletter Part I: We Need To Time Travel to August 2021

Toby