ROC – Rate of Change
September 20th, 2023
To: Clients, Friends, & Family
From: Julien B. Booth
Good afternoon:
Happy Fall 2023 – I hope this note finds you doing well. Age brings a lot of gratitude, especially for good health.
You cannot produce a baby in 1 month by getting 9 women pregnant. – Warren Buffett
Key Points:
- My college fear of calculus masked its real value – measuring rates of change and inflections.
- Commodities and other non-traditional financial assets are wonderful inflation hedges; and
- Post the interest rate change of 2022 – today’s environment is a Golden period for savers.
My NC State calculus experience was not good – primarily attributable to my poor effort and attitude. The younger version of me did not fully appreciate the beauty of calculus for measuring fundamental behavioral, life, and market indicators. Calculus can be used for just about everything, whether financial assets, macro-economic indicators, or cattle prices. My favorite use is measuring rate of change (mathematically) to model human behavior – the Covid period was amazing to observe, primarily for the sheer acceleration of risk-taking!
In short, Calculus is a mathematical tool for measuring the rates of change (ROC) for any series of numbers. We use it to model the acceleration and deceleration of prices and economic numbers. In absolute terms, the “numbers” parroted by the media on a daily basis have little real value. The context of their rate of change (the specificity) is the real importance. For example, the rate of acceleration, or deceleration in oil prices has tremendous predictive power to future consumer spending and inflation. Attached you will find a series of charts on inflation, interest rates, and commodity prices. I believe the acceleration in each is self-explanatory. Backward-looking economists and market commentators (news) offer little predictive value. A little understanding of calculus would go a long way.
Real assets are the name given to markets dealing in actual, tangible materials, energy inputs, and real estate assets. Real assets are thought relatively un-exciting relative to the world of Stocks, especially those with wonderful stories of endless parabolic growth. Silicon Valley Bank & Republic Bank are the most recent poster children for the Trees That Grew Forever (both seized by Federal Reserve 2023). We like real assets and companies that deal in tangible and essential services, especially energy/pipeline-related. The obsession with financial assets is quickly fading in the world of Real interest rates. Net, net the quality of the Real asset companies is improving (ROC) as their cash flows increase. We love an accelerating stream of cash flow, it enhances the safety of the underlying company, and our dividend or interest payment. Note – the time to purchase energy is not today.
The policymakers “architecting” the 0% rates of the past 15+ years created a mismatch between asset prices and Savers. From 2008 through early 2022 the short-term risk-free rates averaged less than 1% and incentivized massive risk-taking. Today that rate is roughly 5.5%, the highest since 2007. Note the rate of change (steepness) of this line. While this historic rise in rates was frightening, we are now provided with the highest risk free savings rate in a generation. I absolutely love this environment – it is high time Savers get rewarded. Yields from 5.5% to 9% are readily available in high-quality assets with strong credit quality.
Time takes time – the imbalances built up 2008-2022 remain significant. The next 2 quarters will likely be quite unpredictable and choppy. Thereafter, the Calculus of growth becomes more straightforward. In the meantime, we look forward to collecting a series of increasing cash flows. We are in a Golden period for Savers.
Thank you again for your interest in Forest Capital. I appreciate being able to work for you.
Julien B. Booth
704.608.3100