Frank Boland's blog

Is it possible for seven stocks to represent the economic activity of the other 493? Especially when six of the seven are essentially in the same business. Advertising, communication or both.  As we all know, there are 500 stocks in the Standard & Poor’s index. What is less widely known is, the S&P index was introduced in 1957 to the “modern” era of investing as a measure of professional performance. Prior to that epochal event, the Dow Jones Industrial Average was the standard reference for well over 100 years.

Ours is a unique consumer driven economy. Estimates put it at 60-63% of our GDP. If we were to think of the economy as one large operating business, it would have a 330 million customer base. Such a focus would make it not only the largest business in the world (which it is) but one whose customer base had the highest standard of living.  Its success would originate from targeting the large size of the customer base. In a civilized society, everyone has a need for food, clothing and communication.

The enclosed chart of Fed funds is illustrative of what enabled the outperformance of active managers at the start of the modern investment era and what subsequently penalized their performance for the last 30 years.  The cause: it was the dramatic rise and fall in interest rates. The chart shows, the secular direction of interest rates moving up from less than 1% for 27 years to 20%, and then back down for 27 years to 0%. A perfect parabolic move. When I first saw the chart, my mind went back in time.

The last time inflation and interest rates started to rise simultaneously was 58 years ago. Then, as now, it had its genesis from too much government spending. The process was euphemistically called “Guns and Butter.” “Guns” represented the expense of the Vietnam War and “Butter” was the euphemism for the then newly introduced welfare structure in 1965. Little has changed. Currently, entitlement programs are still a growing massive part of the federal budget (49%), and we are currently in a proxy war with Russia and possibly China.

If the “name” CMGI isn’t familiar to you, it’s probably because it’s an investment story that’s over half a century old. Yet, its relevance to FAANG and technology stocks today is remarkable. In its time, it was one of the few stocks whose trading symbol was better known than its corporate name of College Marketing Group Inc. Others similar with symbol familiarity were RCA in the 1920s and IBM in the ‘50s.  All three represented technological advancement.

As you might recall, we identify the period of 1955-1956 as the beginning of the modern investment era. Prior to that, stocks had yielded more than bonds as they were deemed inherently riskier. It was a belief that changed in the 1950s with the arrival of Jerry Tsai at Fidelity Investment Management. His mother, who had influenced him throughout his life, was a stockbroker in Shanghai, China. Tsai had gone to college here graduating from Boston University with an MBA.  Fidelity Capital Fund was launched in 1958 with Tsai as the manager.

“The Road to Hell is Paved with Good Intentions.” Such is the old (1828) Portuguese proverb. It would seem to be a reasonable description of the Federal Reserve’s prior policy for 12 years with interest rates at 0%. Ironically, there are also 12 Federal Reserve Governors on the Federal Reserve Board. These board members have more than 400 Ph.D. economists giving them their “expert” advice.