Technology and the Fight for the Cash Flows of the Future

Rick Rieder and Russ Brownback argue that there’s little benefit to “trading the news” today, as prices adjust instantly to highly-transparent information. Rather, investors would do well to follow long-term cash flows, of which the lion’s share is to be found in tech.

Ignore market noise and look to longer-term fundamentals

Roughly a month ago, on May 5, investors awaited news of a sweeping U.S./China trade deal, but instead President Trump shocked the world by announcing the implementation of incremental punitive tariffs, signaling an apparent breakdown in negotiations. When U.S. financial market futures opened for trading several hours later, the news was instantaneously reflected in market pricing, leaving little opportunity for investors to “trade the news.” This phenomenon, which we term “discontinuous pricing,” has become a persistent market theme over recent years (see first graph), as the real-time dissemination of every bit of market-moving news has squeezed the alpha generating capabilities from those investors who traditionally relied on reacting quickly to profit from an “information advantage.”

Rapid news dissemination and discontinuous pricing inhibits “Trading the News”

Fortunately, a straightforward solution can be found in this world of information hyper-transparency, which is that successful investing actually means that people need to invest again, as opposed to trading news flow. Thus, the most effective portfolios are aligned to the large structural influences that are playing out across the global economy and that will drive the growth and distribution of future cash flows. Of course, we make some allowance for incrementally tweaking positions based on the headlines, and for hedging against extreme outcomes, but in short: longer-term cash flow is more valuable than news flow.

Accordingly, we place great emphasis on how the world’s major contemporary “battle-lines” are being drawn, and not surprisingly they are in the locations where future economic value is thought to exist, which is similar to historical experience. As a case in point, the wars of long ago often revolved around control of necessary resources: land, food and water. Later, the colonial wars of independence and revolutions, up until the early 20th century, can be seen as advanced versions of the same theme – a battle for trading routes, spices, vast tracts of arable farmland, and lastly industrial commodities. More recent history has seen numerous Middle Eastern conflicts, which isn’t surprising, given the incredible global reliance on oil. And since this region controls a third of global oil production, and can act as the world’s swing producer, the involvement in these wars by the world’s largest consumer (U.S.) was also no surprise. The arena for the “wars” of today and tomorrow, however, will be quite different, but the conflicts will continue to center around perennial themes of national wealth and economic potential.