Hello reader, welcome to the latest issue of HX Weekly!

Each week we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news or timeless insights.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

Thoughts on the Market

Why Interest Rates Seldom Matter

This week, the meeting of the Federal Reserve under new Chairman Kevin Warsh dominated the headlines.

With him being new to the job, there has been increased focus by the media and financial press.

This meeting was also of special interest because the speculation was that we would see the first interest rate hike in three years.

Interest rates obviously have a big impact on the economy, but they are also very popular with the media.

This is because they are these “events” around which the media can organize and get your clicks.

They want to emphasize these events as much as possible to get your engagement. It doesn’t matter at all what is happening at the meeting or whether the action is important at all. It only matters that you watch, “The most important meeting in years!”

The result was as expected. The Fed raised rates by 0.25% (referred to on Wall Street as “25 basis points”) bringing the upper boundary of the Fed Funds target rate to 4.00%.

After the meeting, there was even more coverage parsing through every single word and gesture that Warsh had in the press conference.

The total amount of media coverage was on par with an NCAA Final Four basketball game!

Well, we are here to tell you that NONE of this matters…

In fact, for the majority of the time the level of interest rates doesn’t even matter.

How can this be true? Aren’t interest rates one of the most important factors in the economy?

They absolutely are!

The level of interest rates impacts business borrowing, the rate we get on our savings account, what we pay on our credit cards and, most importantly, the rate we pay on a mortgage for our home.

As investors, though, we only care when the level of interest rates, and their path, has an impact on the economy and earnings growth.

The question you should be asking yourself is does this level of interest rates change where we are (or are going) economically? Also, does the move in the current level of interest rates have an impact?

The simple answer is that the 25-basis point rate hike does not have an impact.

The reality for the markets is that interest rates only truly impact the economy in TWO scenarios.

The first is if rates are high on an absolute basis.

What do we consider high?

We think anything above 7.5% on the benchmark US Government 10-year bond qualifies.

Here is a chart of the yield on the 10-year going back five decades…

On the chart you can see that we have not been above that 7.5% level since the late 1980s.

The peak on this chart was during the high inflation period of the post-1970s when the Fed had to fight hard to stamp out inflation.

That sounds familiar to us all today, but the scale is a lot different.

Today we are talking about inflation of roughly +3.5% year-over-year in the most recent month and a little bit more than +4% average over the last five years. That isn’t fun but back in the late 1970s, the average was more than DOUBLE that amount.

Think about this – the difference on interest you pay on a $100,000 loan between 4% (where the 10-year was before the Iran war) and 5% (where it was yesterday) is only $1,000. Again, that isn’t great, but it is manageable.

If we were to go to 7.5%, though, the difference would be $3,500 and now it begins to have an impact.

This begs the question then, if interest rates have not been at those high absolute levels for 40 years, why do they still have ANY impact?

The answer is what matters most in interest rates – the rate of change.

Here is the SINGLE RULE that matters most for interest rates in the economy…

IF the Fed Funds rate is hiked by at least +1% (100 basis points) then we will have a recession.

Write it down on a post it and put it at the bottom of your computer screen.

Look at this chart of the upper bound of the Fed Funds rate going back to 1990…

The red arrows are every time the Fed hiked by at least 100 basis points.

Now look at this chart of the S&P 500 over the same period…

Note that this is a “logarithmic” chart to take out some of the noise.

Clearly you can see that every major, and sustained, downturn in the stock market has coincided with a raise of 100 basis points by the Fed.

Know what you do not see on that chart?

A material, and sustained, big sell off in the markets WITHOUT the fed raising rates by at least 100 basis points.

Maybe the future will be different, but I don’t think so.

This makes our job as investors a lot easier and boils down to one and only one question – do we think the Fed is about to raise the upper bound of it’s target rate by 100 basis points?

Obviously, doing this 25-basis point raise this week is a start in that process. You can’t raise by 100 basis points if you don’t start somewhere!

The good news is that we have a market that can help us figure out what they might do in the future.

It is called the Fed Funds Futures market.

Like any futures market, it can’t necessarily predict the “future” but it can be a good overall measure of sentiment and direction.

Here is a chart showing what it is predicting over the next 12 months…

Right now, it is showing that the Fed Funds rate will go to 4.60% or 85 basis points higher than where it started this week.

Not only is that not 100 basis points but given the uncertainty in the futures market, we would want to see that number hit at least 125 or 150 basis points higher than the initial 3.75% rate for us to be concerned. That would be 5% or 5.25%.

Even if the futures market were to hit that level, it doesn’t mean it WILL happen.

In any event, we are nowhere near levels where we are concerned…yet…

Like most factors in the stock market, the most important isn’t what you pay attention to but rather what you learn to ignore until it really counts.

Given all the talk of this week's Federal Reserve meeting, we wanted to share the best insight we have ever heard about these meetings from the legendary investor John Griffin of Blue Ridge Capital. His thoughts are just as true today as they were 25 years ago.

HX Weekly Redux

The Federal Reserve Solved!

Many of the readers here at HX Research know a lot about my history and background. 

My career has spanned three decades of professional investing.  Across that time, I have had the opportunity to work with and be influenced by some of the greatest investors of all-time.

In the past few days there has been a tremendous amount of focus on the actions of the Federal Reserve Bank.

Many of you know this but “The Fed” (mostly) controls the monetary policy in our country.  This means how much money is in the economy and how much it costs to access that money via interest rates.

We could write one hundred issues about the role The Fed plays in the economy and stock market but we think the anecdote we are going to talk about today will take care of it all in ONE issue of HX Daily.

Back in 2001, two partners and myself founded a hedge fund called Stadia Capital.  The three of us were very young (I was 29!) and we started with a tiny amount of investor capital.  $585,000 to be exact!

That is everything we could put together from our friends, family and ourselves.  (For the record – think I was able to put in $5000 – ha ha!)

While we didn’t have very much capital to start, we were blessed with some great relationships.  My partners and myself had made quite a few friends in our short time on Wall Street.  One group of contacts that were able to foster was within the group of managers that were (or had been) affiliated with famed hedge fund Tiger Fund Management.

At my old firm, we wrote often and fondly about Tiger and its founder Julian Robertson.  As we move through the rest of this year, we will share many of those pieces.

The wisdom – and its simplicity – of Julian and his disciples is rare and legendary.  It has also produced more wealth out of the investing business than probably any other “family line” out there.

One contact in this network we had built is a man named John Griffin.

Now many (most) of you have likely heard of Julian but far few of you have heard of John.  John was (and is) the best of the best!

He was an early alumni of Tiger and launched one of the very first (maybe even THE first) “Tiger Cub”.  In the next two decades he put together what is still one of the single best track records of investing out there.

The other incredible thing about John is that he is an absolute gentleman.

My partners had met him through our network and asked if he would give us advice about starting our new venture.  He didn’t hesitate for even a single moment!

First words out of his mouth were “Call me anytime guys and will help you as much as I can!”

For a group of rookies with no track record and no capital this was like having Michael Jordan say he would be happy to coach a bunch of eighth-graders at any time.

As I have said many, many times – I have been very blessed in this business.

We are going to write some more about John in the future and try to even get him on the HX Podcast.  Again, he is an absolute legend but also one that is incredibly skilled at distilling his wisdom.

Yesterday, though, we thought of John in the wake of the most recent Fed meeting.

To recap our version of what happened in that meeting…the Fed announced they were doing nothing.  Which was expected.

They also announced their views had not really changed.  Which was expected.

Finally, the Chairman of the Fed (Jerome Powell) got up and spoke and said basically…nothing new.  Which was expected.

Initially, the stock market didn’t do much but as Chairman Powell continued to speak it began to move higher.  Strongly.

This was great…until it wasn’t!

For reasons that no one really knows (nor will ever really know), in the last hour of the day the stock market gave up all of the gains.  It ended the up basically flat but the last hour loss was violent and fast.

There were quite a few commentators out there that noted that it was very rare to see THAT kind of sell-off so fast.  Many felt it must portend something bad for the stock market.

This brings us back to John…

We launched our fund Stadia in March 2001.  Although we started with almost no capital, we did good returns in a difficult stock market and grew.

THEN the events of September 11 hit!  Those were terrible times but our strategies have always been ones that were built for the worst and most difficult markets.

Our fund did very well.

A few months later, my partners and I had a meeting scheduled with John.

There was no particular agenda.  John didn’t spend much time thinking about the “macro” side of investing and was very focused on individual stocks.

We loved going over there and hearing what he and his team were working at the time.  They did incredible work. 

Would like to think the same could be said about our team.  John and his analysts appreciated our ideas and research.  It was a good mutually beneficial relationship.

Our fund was doing ok at the time but we were still in start-up phase and very stressed out.  We were young with this small fund and business and we felt every tick of the stock market.

Our meeting was for 2pm on that day. 

Earlier that morning the stock market was quite volatile.  It turns out – like this last Wednesday – that this was the day that the Fed was going to make its latest interest rate announcement and give their outlook.

My partners and myself were very nervous about all of it.

We didn’t have a particular view on what the Fed was going to say.  Nor did we have any stock positions (or the portfolio overall) that was particularly vulnerable to what was going to happen.

Despite all of this, I put a call into John and politely told him that we would like to move the meeting to another day.  Always like to be upfront and said we were nervous about the Fed meeting and thought it would be best to find another.

John – the consummate gentlemen – said “Of course, no problem guys.  Am always available.”

Then, however, he said something else.  Something so powerful that – as I said in the beginning – can distill a hundred (or a thousand) articles of Fed analysis into one simple view.

He said…

Mic drop…

Those words hit me like a thousand bricks all at once.  I hesitated for a few seconds (which is rare for me) and the in some stumbling manner said to John…”Umm, yes.  Ok – we will see you at 2pm.”

Of course, we did the meeting and continued to learn from John for many years.

That 10 second phrase, though, taught me everything I would need to know about the Fed for the two decades!

John was one of Tiger Management investing legend Julian Robertson's most successful protege. While we are sharing some of John's wisdom, we thought we should also share a note we wrote about Julian's legacy.

We hope you enjoy the note and have a great weekend!

Market Wizard’s Wisdom

Remembering Julian Robertson

Earlier this week, we published the famed Tiger Management Investment Frameworks for long and short-term investments. We published the first note on what would have been Tiger founder Julian Robertson's 92^nd birthday.

Today, we wanted to share some of Julian's story and what his legacy can mean for you as a regular investor.

For those unfamiliar with Robertson, he founded one of the most famous and successful hedge funds in history – Tiger Management.

After a few years in the Navy, Robertson moved to New York and joined storied brokerage firm Kidder, Peabody, and Company as a stockbroker – eventually becoming the head of the firm's asset management division.

In 1980, with $8 million from family and friends, he founded Tiger Management. The firm eventually peaked with $22 billion in assets and has one of the best track records in modern investing history.

Beyond the success of Tiger, Robertson is almost equally well known for the success of those who worked at the fund (dubbed "Tiger cubs") or others who were trained at the Tiger cubs' funds ("Tiger grand cubs"). These funds include Viking Global, Lone Pine, Maverick, and Tiger Global.

Combined, these funds now manage hundreds of billions and have probably created more value for investors than any other group in history.

I have a history with Julian and Tiger. My first buy-side job was at a firm called Atalanta Sosnoff Capital, which was in the same building as Tiger – we were just 42 floors below them. A few years later, I also interviewed for a job with Viking Global, but unfortunately, I did not get the job.

Many years later, though, I eventually worked for one of the Tiger grand cubs when I joined my old friend Rick Gerson at the founding of his firm Falcon Edge Capital. Rick had worked for the legendary John Griffin, one of the more famous and successful Tiger cubs of Blue Ridge Capital since its founding. Not to mention, he was also one hell of a human being!

At Falcon Edge, I had the opportunity to see the Tiger research process firsthand.

As we discussed earlier this week, that process revolved around the concept of value-added research ("VAR").

The idea was that investors shouldn't just rely on Wall Street's research or even what the company says, but they should find outside sources that create the most transparent picture of the company's fundamentals and competitive positioning.

This could involve speaking with customers, competitors, consultants – you name it.

It would be typical for us to speak with literally hundreds of non-Wall Street sources when developing a thesis on a significant position.

This research was coupled with trying to understand what was not widely understood by Wall Street. This was called "variant perception" and was always critical to an investment.

It was great to use outside sources to develop a clear picture of a company's positioning, but did we have an insight that was any different from what everyone else was thinking?

Another aspect of this process was that it was exhaustive and relentless!

This was no "checking the box" exercise... It was more like training as a professional athlete. As I mentioned, we would sometimes do hundreds of interviews, and our internal reports could run hundreds of pages.

Julian and his protégés have many other legacies we could discuss, but this exhaustive research process is the most powerful one and the one that I got to experience firsthand.

So, what does this mean for the regular investor?

Well, the first thing to consider is to remember that this is your competition.

These are very incentivized investment firms with lots of capital and the ability to do research at a level that an average investor would never come close to accomplishing.

This is why focusing on the big picture and long-term investing makes the most sense for individuals.

If you get the big picture right with a significant thesis, you don't need this degree of due diligence to support your thesis.

A long-term emphasis also allows you to look through some of the more minor details.

This is not to say that the Tiger firms don't also look at the big picture and the long term, but they have a much greater ability to optimize in the near term.

Individuals should be looking years out to maximize returns.

That said, understanding your investments is crucial to investment selection and having the conviction to stay invested during the most challenging times.

Do some work on what you own and make sure you understand your positions, as that ultimately leads to the best investment success.

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].