“Kee” Points with Jim Kee, Ph.D.

  • Government Shutdowns  
  • IMF Upgrades Global Outlook  
  • Impact Investing  


Government Shutdowns   

If you’ve been watching the news lately, you know that a little bit of coverage on the government shut-down goes a long way! The Senate voted Monday to reopen the government after a three-day standoff, with a stop gap spending bill passed that will fund government up until February 8. The last shutdown was in 2013 and lasted 16 days. Prior to that was a 21 day shut-down, the longest in modern history, that ended on January 6, 1996. Many government agencies continue to operate during a shutdown, as does the U.S. Postal Service and workers considered essential to Social Security, Medicare payments, federal retiree benefits, etc. (Wall Street Journal). There have been 19 shutdowns over the past 40 years, though many did not involve any furloughed government employees. 


Stocks reacted very little to all of this, which is pretty consistent with history. Why is that? Well, one of my mentors in the investment business used to take my comments on macroeconomics and government policy and ask, “Does it or does it not help us describe an individual company’s future (multi-year) cash flow (revenues minus costs) stream?” That’s a good way to evaluate news flow in general. Few short-term political actions really have much impact on the future cash flows generated by individual companies, which are determined by each company’s return on investment (i.e. profitability) and how much they compound those returns by reinvesting or growing the business. That takes some patience and some real expertise, and then you have to figure out what the market has already priced in! So sure, a defense contractor or firm whose primary customer is the US government might suffer from a prolonged shut-down, but markets tend to look beyond the transient, and of course, no government shut-downs have ever been permanent.

 

IMF Upgrades Global Outlook  

Looking internationally, the International Monetary Fund reflected the “ebullient mood “(Financial Times) at the World Economic Forum in Davos by describing the current global economy as “the broadest synchronized global growth upsurge since 2010.” The IMF upgraded its forecasts for global growth for 2017 (numbers not all in yet), 2018, and 2019. Only the UK was given a modest growth downgrade, and that was due to uncertainty regarding Brexit (Britain exiting the European Union). British Prime Minister, Theresa May, signed the letter to invoke the provisions for exit (Article 50) on March 29, 2017. That starts the two-year clock for exit, so the UK has to leave the European Union by March of 2019. 

 

Impact Investing  

Technology writer Andy Kessler took a somewhat one-sided jab at socially responsible investing in today’s Wall Street Journal, arguing that, in reality, “there are only returns.” That invokes one of the fundamental questions for investors intending to make a positive impact on the world with their investments, namely, “Do I just maximize investment returns and then fund causes I care about, or do I restrict my investments to those companies and opportunities that are themselves doing what I most care most about?” Kessler didn’t mention that fundamental question directly, but it is important and is often brought up at conferences on the subject. For example, many investors may have a preference for companies that address pollution issues (i.e. “green” or “sustainable” initiatives). Others desire companies that try to promote more women to senior leadership, or that emphasizes employee quality of life issues (these fall under the rubric of ESG, or Environmental, Social and Governance). It is not really clear how the notion of maximizing investment returns first, and then funding favored causes second, can be applied here as opposed to trying to influence these firms directly. 


A newer development following socially responsible investing has been “impact investing,” defined by the Global Impact investing Network in 2009 as, “investments made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return.” This can be anything from providing mosquito nets in emerging countries, to funding schools for the under-privileged in developed countries. Brian Trelstad has introduced a simple concept, “The Spectrum of Capital,” which I think helps make sense of this evolving field.  Just imagine investments focused solely on investor returns or profits at one end of a line, and imagine pure philanthropy (gifting) on the other end. Socially responsible investing and direct impact investing lie between these two, and exactly where on the spectrum an investment lies is probably best determined case-by-case. 


Interestingly, free-market advocates have been knee-jerk critics of socially responsible investing, invoking (as Kessler does) Milton Friedman’s famous 1970 New York Times article, “The Social Responsibility of Business is to Increase its Profits.” In a sense Friedman was arguing that many people don’t really understand the role markets play and the functions they perform; that businesses already do a lot of good as defined by their customers or they wouldn’t be profitable. That lack of understanding is probably as true today as it was when Friedman wrote. As Nobel Laureate Frederick Hayek used to say, “it is not necessary for the system to work that anyone understand it, and few are willing to defend what they don’t understand.” In other words, the ability of a decentralized, price-directed market economy to function without being centrally-directed was also its Achilles heel, according to Hayek.


But this should give free-market critics of impact investing reason to pause. Wouldn’t it be exciting to use the capital-disciplining effect of markets to guide impact investments towards their most beneficial outcomes? Wouldn’t it place more emphasis on outcomes and results? Doesn’t applying the “market test” to solving social problems have a lot of potential? I think it does, and the practice of impact investing is certainly a big step in that direction. But the most import issue for impact investors right now is the fact that there is more demand for genuinely impactful investments than there is supply of them.  That can and has led to hokey products amounting to conventional investments repackaged as impact investments – "portfolio placebos" as Forbes called them.