“There’s an answer here, if I look hard enough
There’s a reason why I always reach for the harder stuff
It wasn’t my daddy’s way
He was down in the mines all day
I know he wanted more than mouths to feed and bills to pay
Maybe the Cumberland Gap just swallows you whole”
-Jason Isbell 2017
The good times are indeed good; markets have started 2018 like a SpaceEx rocket heading to Mars, that is, unless the times are not so good. Jason Isbell’s lyrics we quote in the introduction are from his song, “Cumberland Gap,” a poignant piece describing life in coal country. Isbell hits on the hopeless feeling brought about by the shift in energy markets, but he also adds a less noticed reality of 2018. We are not as mobile as we once were. A strength that the United States has always enjoyed over other developed countries, was our ability to pick-up and move from Huntsville, Alabama, to Butte, Montana for work. Not so much anymore. Much of this is due to our aging demographics, not to mention the expense of moving and steep real estate valuations; the effect is real. Coal country struggles, much like Detroit, Michigan, Bethlehem, Pennsylvania, and other locales that have been upended by rapid industrial shifts. In fact, we are living in one of the most dynamic and fluid moments the globe has ever witnessed.
Over a century ago we were rocked with the internal combustion engine, telephony and electrification of our country. This brought about massive change and the ATTs and General Electrics sprang into high gear. We would argue that today is equally as historic. The world of robotics brings vast change to the industrial and medical landscape; health care innovation led by genomic sequencing and gene editing are on the cusp of massive breakthroughs; artificial intelligence and big data touch most aspects of our lives; electrification (much like the 1800s) is raging in transportation with battery storage bringing new concepts of power availability, and I would finally add Blockchain, or distributed trust, bringing forth new protocols for many business and research functions. Small wonder markets have posted positive returns, but not all are capable of boarding this train as it leaves the station, hence the discussions (sometimes shouting matches) on the gap between those who enjoy the ride and those left without a ticket.
Eighteen years ago, markets were roiled by the dotcom bubble bursting. Today a rally in technology stocks looks much like the 1999-2000 timeframe, with one glaring difference; these companies are quite profitable today and appear will continue so. We caution that regulation looms. Government will touch these new companies with requirements to collect sales tax on Internet transactions and with other social media related legislation. It will slow the growth in earnings, but not be a death knell for the sector. At the same time, non-traditional technology companies, like WalMart, are rallying to become legitimate competitors with Amazon. WalMart has announced a partnership with the Japanese company Rakuten to market e-books and e-readers in their stores. The acquisition of Jet.com has begun the transformation of the world’s largest retailer into a new tech-savvy animal, one that aims to co-exist with Amazon, not be annihilated. Here too, mobility comes into play. Technology jobs for WalMart will exist on the west coast, and most Bentonville, Arkansas employees are hardly prepared to pick up and buy San Francisco real estate. Blending into city life and eagerly embracing software coding would be a bridge too far. Jobs will move, but many employees will not.
It would be malpractice on our part not to delve into the Bitcoin and digital currency conundrum as well as the underlying Blockchain technology. Every publication and media outlet seems to comment on it, and investors have certainly embraced the phenomenon. We do not advise investors to rush out and buy Bitcoin, rather to learn the significance of this new monetary instrument. We avoid the term “money” as it seems to lack either the quality of being a store of value (too volatile) or a medium of exchange (few businesses accept it), but it is a monetary instrument nonetheless. If you were located in Zimbabwe or Venezuela and saddled with a worthless currency, odds are your perspective would be different when evaluating digital currencies. Perhaps the likeness to gold is more accurate, just not as heavy to carry or as expensive to store. As for digital currencies being a tool for criminals, we would simply point out that daily, here in Atlanta, criminals exchange US Dollar bills for drugs, stolen goods, and weapons. The difference is lost on us. Remember that there are over two thousand digital currencies, and Bitcoin might not be the ultimate digital currency to garner global acceptance. Others, such as Ethereum and Ripple hold promise as well. More on Ethereum later.
The Blockchain is a decentralized ledger, or distributed trust, among thousands of geographically dispersed actors that prevent fraudulent transactions from being successfully enacted. Fraud is unlikely when everyone holds the original information and no central depository of such data exists. This is what Blockchain offers to supply chains, real estate deed recordings, financial transactions and scientific research. They all can employ Blockchain to improve efficiencies.
Also proving disruptive is the Initial Coin Offering (ICO) that looks much like an Initial Public Offering (IPO). With an ICO, a company sells digital “coins” to investors, who hope they will appreciate with the company’s success. In some instances the coin is useful in allowing the investor access to the company’s services. Imagine a data center with an ICO allowing coin holders access to bandwidth in the company’s facilities. Huge risk of fraud exists in any ICO and no regulatory protections exist, but the band plays on. In 2017, seven ICO events raised $100 million or more, and in early 2018, we are watching the proposed ICO of the messaging app Telegram looking to raise over a billion dollars. Now the biggest venture capital players are eager to get in on attractive ICOs, much like they chased Google, Facebook and Skype in the past. Despite the fraud risks, the availability of capital through ICOs is only a positive to countless companies that can hardly get a credit card from a commercial bank. It is the commercial bank and Wall Street who look vulnerable to these new digital currencies. The seamless transfer from peer-to-peer eliminates the need for a commercial bank, and the ease of an ICO eliminates Wall Street investment bankers whose capital and retail brokerage networks often insured IPO success. No wonder a major bank CEO first called Bitcoin a fraud, and then toned it down to simply “irrelevant”. It serves many banks’ interest to see digital currencies fail. It serves many individuals’ interest to see them thrive. The race is on.
We touched on genome sequencing and gene editing as we opened this piece. At last week’s World Economic Forum in Davos the Earth Bio-Genome Project (EBP) and the Earth Bank of Codes were presented to attendees as major projects uniting to gather DNA sequences from specimens of all complex life on Earth. The Earth Bank of Codes aims to begin this project in the Amazon region using Blockchain to store the biological data. The code bank would employ smart contract technology resident on some digital currencies such as Ethereum (mentioned above) to monitor usage. If the data is utilized by a commercial entity, the digital currency would register a payment for the data service. This would allow governments to benefit financially from their collected national DNA data and still allow unhindered commercial and scientific use of the data to allow ongoing breakthroughs. Studies on antibiotics from Amazonian frogs to combat antimicrobial resistance, to algorithms for self-driving vehicles derived by studies of Amazonian ants are being considered. The Davos gathering will hopefully attract attention and funding to further these genetic sequencing efforts globally.
Staying in the healthcare sector, we would point to neurological research that will offer great investment possibilities. The brain is exceedingly complex with some 85 billion neurons in an adult brain. Each neuron has approximately 10,000 connections to other cells. Scientists are busy mapping these connections and the findings drive the ability for neural activity to control external devices. Such devices are already in use for early stage basic activities for paralyzed limbs. Neural stimulation is being used in cochlear implants for hearing, and brain implants for Parkinsons Disease. Kernel, a young Silicon Valley company, and another Elon Musk start-up, Neuralink, are pursuing various brain implant and artificial intelligence link-ups to further product development in the medical space. We live in dynamic times and opportunities will abound in coming years.
Obviously we are positive on the healthcare sector. Value exists in many companies in the various areas of healthcare, and many have not been as extended in price as some technology companies. There is reasonable evidence that inflationary pressures will build as the Federal Reserve normalizes interest rates, call it Quantitative Tightening. Commodity sectors will benefit, and real estate will be a good place to search for value in that environment. Energy will continue to be a focal point. We are considering investments in pipelines and utilities for income investors.
Be assured that markets will pull back as they did last week in frightful fashion, fearful times will be upon us again, and many will panic. This is simply how markets work, as fear and greed play their usual roles. Remember, your top priority as you invest, is to stay focused on what lies ahead; it will be a show you do not want to miss!
In that spirit of capitalistic fervor it is fitting to have Jason Isbell rivet our attention where it belongs with the final verse in his song Cumberland Gap:
Remember when we could see the mountain’s peak?
The sparkle off the amphibole?
Like a giant golden eagle’s beak
Now they say no one wants the coal
I thought about moving away
But what would my mama say?
I am all that she has left and I’m with her every day
As soon as the sun goes down
I find my way to the Mustang Lounge
And if you don’t sit facing the window
You could be in any town
Maybe the Cumberland Gap just swallows you whole”
E.B. “Chip” Beard
February 4, 2018