More on Toilet Paper, Milk and Skinny Cows


The last 6 months was the worst start to the year we have seen in over two centuries in the bond market and for over 50 years in the stock market.  We’ve seen periods like this in the past, and it brings to mind a story about milk and skinny cows.


Once upon a time in the country there worked a dairy farmer who was having trouble getting his cows to produce milk.  They seemed well fed but as the cows grew fatter and fatter, the milk they produced did not ever seem to increase, but actually seemed to diminish over time.   He grew disheartened by this ever-diminishing supply of milk and sought the help of a “milk guru” to help with the milk production.
The guru advised him to sell his current cows at the meat market and he was more than happy to because the dairy farmer received much more from sale than he had originally bought the cows for (they were originally bought by the pound when they were much thinner).  The guru also advised the farmer to buy a different breed of “Yieldstein” cows that did not need consume as much food but provided a higher yield in the form of milk production.  Again, the dairy farmer was happy because he was able to buy more cows and generate a greater amount of milk production than ever before.
A few months went by, and the cows seemed healthy.  The milk production was continuing to increase.  But the dairy farmer was starting to grow a little concerned because the cows were not gaining much weight and in fact some seemed to be losing weight, even though milk production for the farm was at an all-time high.  If one of the cows started to get a little too overweight, the guru would recommend the farmer sell the cow at the meat market and buy more slimmer cows.
This continued for many months and the dairy farmer’s milk production kept hitting new highs.  He kept getting concerned however that his cows were not as fat and seemingly well fed as before.  In fact, when he weighed the cows, he found that the “Yieldstein” cows weighed less than when he had bought them.  He grew nervous and started weighing the cows every day (sometimes even twice a day) whereas before he had never bothered when he had the fat cows.   His milk production was at all-time highs, but he reasoned at this rate of weight loss these cows were going to waste away to nothing in no time.
He called up the guru and complained that the weight of his cows continued to diminish, and he was worried.  He did not know what to do.  The guru told him that it was just a seasonal anomaly and that these cows had wider weight fluctuations but would fatten up approaching wintertime.  A couple more months passed, and the cows continued to lose weight but also continued to produce more milk.  The farmer started to talk to his other farmer friends who had also bought this alternate breed of cows as well as his friends who had held onto their original cows.  He and his friends with the new breed were all generating record milk production from their farms, but the cows all kept getting skinnier.  Those friends with the original breed of cows were barely surviving because they could not get their cows to produce much milk, but the cows all looked fat and healthy.
Some of the farmers friends decided that they had had enough and decided to sell before the cows grew too skinny and died.  This continued for a few weeks until the farmer was one of the only ones still owning the skinny cows.  He was thinking about calling the guru and giving him a piece of his mind for talking him into the skinny cow business even though his milk production was still at all-time highs.  The guru called and related to him that the price of “Yieldstein” cows was now at all-time lows and that he should look into buying more.  Of course, the farmer thought he was crazy but decided that the guru knew what he was talking about and even though he did not buy any more, felt a little better about owning his skinny cow herd.
A few weeks more passed and heading into winter, the cows developed more of an appetite and started to put on weight again until they weighed more than they ever had before.  As before when a cow got too fat, the guru would advise the farmer to sell the fat cow and buy a skinner cow that produced more milk.   The farmer did not worry too much about his cows after that, until the next season when they started to get skinny again.
Of course, in reality, skinny cows do not typically produce more milk.  But oftentimes companies with lower market capitalization are healthier with higher earnings yields than the fattest most popular companies.  Unless we know that the fattest most popular companies will be even fatter and more popular in the future, we typically find higher earnings yields from temporarily unloved “skinny cows”.  We want to own the companies that have the highest earnings yields and the most potential for growth to become fat and popular.  These tend to be younger, smaller, less well-known companies today.
Over the past few years, we have seen yields from investment grade bonds continue to shrink (up until December 2021) as the bonds became more and more pricey. In late 2021, many were trading at steep premiums to the principal amount paid back at maturity.  More recently in response to inflationary pressures, prices have come down across the board in the bond market as interest rates ratcheted up.
Income oriented stock investments are also giving us higher dividend yields than we have seen in a long time in that they have underperformed the S&P 500 over the last decade. These yield-oriented investments have grown more attractive to investors in 2022 as “fat beef-cow” investments have turned sour.  The returns for the S&P Global Dividend Aristocrats Index year to date is negative at -6.9%, although the yield for this index is 2.9%.
Many investors tend to invest in popular sectors and industries at the top when they may be starting to fade and shun them at the bottom when things are improving.  Investing for yield works in that those with the highest yield tend to have recently gone through a difficult period, causing the cows to grow skinny.  A smart and courageous investor will look to buy “when there is blood in the streets.”
What we might want to consider is that many of the dividend yield-oriented “cows” are not quite as skinny as they were in 2020. Equity income has become more popular relative to growth investing in recent months.  Eventually the growth-oriented investments will get unpopular enough to provide more profits for investors than income-oriented investments. Much may depend upon inflation concerns and future bond yields.  When bond yields come back down and investors are encouraged to take more risk, the investment landscape may change, but for the time being, there seems to be a higher appetite for “milk” than what there is for “beef” in the markets.
It is worthy to note that while it is not clear when the current market selloff in the US will end, this will most likely be tied to Federal Reserve action, at least in the short run.  Other markets around the world also look to have bottomed earlier this year.  We consider Asian and Latin American countries to be more attractive areas currently (relative to the U.S) for both capital appreciation and income.
What are the U.S. government & FOMC’s options?
1) We continue to raise interest rates and increase the amount owed in interest on our new debt (as we retire old debt and spend more money).  This increases the budget deficit even further absent greater productivity or higher taxation.
2) We raise taxes to pay for increased spending and more expensive debt service.
3)  We cut spending on areas that reduce productivity and divert funds to areas that increase productivity in our economy.  This is my favorite option but does not seem to be in favor currently.
4)  We allow inflation to continue for a longer period, knowing it is the easiest way to reduce the size of the relative debt, it can be imposed upon the country without legislation (unlike higher taxes), and it is effective at redistributing wealth (for those who don’t know how to protect from this).
It seems our government will want to pursue options 2 and 4 as option 1 may prove too expensive and option 3 may not be popular enough.  Inflation may be more sticky than many currently believe, given the options available.
We have seen these inflationary periods in the past and can learn from history as to what will do well and what we want to watch for.  We can also invest outside of the U.S. where countries are coming out of recession and may be stimulating rather than tightening.
I sometimes hear from people who insist that we “do something” to help speed up the recovery.  If the wind is blowing in one direction, there is very little we can do to get the wind to blow differently.  We set our sails in a way to best benefit from current conditions. Until the wind changes, our sails remain set.
The reality is that “doing something” may cause unforced errors until conditions change.  Finding the “skinniest cows” relative to their anticipated future size remains our foremost activity. Inflation has changed the landscape somewhat, causing us to focus more on areas we feel will benefit from increased energy, metals, materials and components prices or at least have strong pricing power in the face of continued inflation over time.

Our recommendations for investors in 2022 continue to be:

  • Have a long-term financial plan and an appropriate investment strategy that supports that plan.
  • Make sure to have access to cash to meet your liquidity needs for12-18 months so you are not forced to panic or make emotional reactions to market pull backs like we have seen recently as well as late 2018, late 2015 to early 2016…or 2008 to early 2009.
  • Stay invested in sectors of the market which, during the current tightening phase of the economic cycle, have a higher probability of outperforming others.
  • Invest in other areas of the world where the economy is starting to improve, and the government is stimulating rather than tightening.

Taking on more risk to help speed a recovery only works when the markets have already bottomed and are in recovery mode.  Looking at probabilities to get a feel we are close to the bottom is not the same as knowing we have already hit the bottom.  I have never read or heard of anyone who can consistently call a market bottom.  If the current market environment is causing concern, increasing your financial education, and eventually taking on less risk may be a better alternative.   The best time to reduce your risk profile is when the market returns to an overly optimistic state, however.

                                                                                   As inflation impacts us, all things start to become skinnier.


Many are understandably concerned, especially considering this is the worst start to the year in bonds in over 200 years and the worst start in the stock market for anyone investing for less than 50 years.  We understand these concerns and we welcome the opportunity to sit down and go over current strategies and help provide clarity to those who are worried about their “skinny cows.”


                   The lesson is clear. Inflation devalues us all. – Margaret Thatcher


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