Salt Creek Weekly: October 9, 2017

There’s plenty to keep an eye on these days, from unruly and ill-mannered politics to an equity market that seems to go in only one direction.  Keeping up with short-term events is a daily challenge.  But all of the day-to-day drama is just noise designed to loosen our focus on the bigger picture.

When it comes to our economy, the lowest common denominator and ultimately the most important factor is supply and demand.  Most amateurs only pay attention to the demand side.  Whether it’s demand for goods, credit, or capital, anticipating changes in these factors is the roadmap many amateurs use when making investment decisions. Don’t limit yourself to one side of the equation.

Understanding the supply side is equally important and could actually be more insightful for understanding trends.  Of course, there’s an obvious momentum factor at work in the market today working outside the normal rationale of fair value and mean reversion.  Markets going up-and-up, fueled by optimism and bets on the political “come line” have kept volatility at bay.  This could change.  Understanding the dynamics of supply in the marketplace will help you be prepared when volatility strikes.

Managing the supply aspect of an entity takes skill.   All capital allocators are not created equal.  Buffet comes to mind.  John Malone is another.  Increasing M&A activity would suggest we’re late in the bull cycle.  But other signs are appearing as overzealous corporate chiefs become greedier, extrapolating profits further and further into the future.  Supply equals demand is easily understood, and the demand side is widely reported and visible.  Better to keep an eye on supply, especially when supply becomes greater than demand.  Markets don’t like imbalances, especially a market fueled by momentum.