MCD - Horizon Kinetics Q4 2023 Commentary

2024-01-27 10:30:00 ET

Summary

• Horizon Kinetics LLC, founded in 1994, is an independently owned and operated investment adviser. With a long-term absolute return mindset, and based on first-hand research, our portfolios tend to be concentrated and avoid tracking or mimicking any benchmark or index.
• This commentary covers the sweep of history or the era-change.
• Then we have a comprehensive discussion about the going forward era.
• We also discuss the implications for portfolios and recent portfolio changes.

Prefatory Remarks

A change of pace. This Commentary will largely be in conversational form, fewer numbers and statistics. Sort of because of the year-end wrap-up factor, to review what we've reviewed. Like the seminar sandwich formula: First, tell the audience what you'll be telling them; then tell them the actual thing; then tell them what you told them. But that's not entirely why.

Last year - the past several years, really - we've laid out in some detail what seems like a big bag full of developing systemic risks. Among them, but not the only ones:

The expanding national budget deficit. The rising debt/GDP ratio that is funding those deficits. The looming ballooning (forgive the rhyme) interest expense burden as the low-coupon Federal debt gets refinanced at current rates. The excess currency creation that is part and parcel of that debt funding, and which will keep expanding so long as the debt keeps rising faster than the economy can, and which spells debasement and loss of purchasing power. The excessive equity market valuations, which-absent any other re-valuation triggers-are sustainable only by the Federal Reserve's artificially low interest rate policy. And, The increasingly extreme concentrations and market structure distortions driven by indexation's growing dominance.

It is a big bag full, and it only includes domestic structural risks. It shouldn't escape mention that in order to make that list less laborious to read, it didn't include the terms "record" or "historically unprecedented" that should have attached to each item.

The intent of those reviews was to describe these systemic risks as they developed. Systemic means that most of the market is impacted, including the cascading effect of one industry or sector upon another, a breadth of risk that can overwhelm diversification as a risk control tool. The idea was that if forewarned is forearmed, one could pre-position a portfolio - seek out and employ the rather few non-mainstream types of businesses and assets that can thrive in an inflationary environment if and when the comfortable and familiar investment applecart gets upended. It must be that such investment instruments are relatively few and non-mainstream-there's no other way, definitionally, to be where "the market" isn't.

Of course, things have yet to 'break'- nothing's crashed or burned. That's simply the way of markets. Once everyone else sees what you see, the price of what you want to own has already become exorbitant. Like waiting until the evening news reports that invading troops are massed at the border before trying to buy a seat on a train or plane. Or deciding to buy a Bitcoin ETF in January 2024, now that, well, everybody 'sees it'. In the latter instance, though, with the difference that there are ever stronger reasons to believe that Bitcoin ( BTC-USD ) is still at the initial phase of its ultimate total market value as a new asset class....

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