"Foot Finds Can"
by Bill Bonner
BALTIMORE, MARYLAND – "The press is reporting this morning that the foot is finally making contact with the can. Here’s Bloomberg: "Senate Closes in on Deal to Pull US Back From Brink of Default." Is that great news, or what? The spending, borrowing, printing, bribing, squandering, corrupting, twisting, distorting, cheating, fouling, and destroying can go on. Hallelujah.
And this week, we’ve been looking at the effect this program has on investors – university endowments, for example. America’s leading colleges are probably the least curious institutions in the country. They are convinced that they have The Truth – diversity, anti-racism, climate control, equality… and ESG (environmental, social, corporate governance) investing. No need to look any further. And so, when their own endowments earn preposterous returns, no one asks any questions.
Or, if… in a fit of admiration… Duke alumni dare to wonder: “Uh… how did you make 10 times more than GDP growth?”… they get the anodyne answers: “Super-smart managers… and alternative investments.” Not quite.
No Genius: As we reported yesterday, Duke was an outlier in 2021, with a 56% return… while the economy is growing at about 5%. On average, university endowments didn’t earn 10 times more than GDP growth… only about half that much. And not with “alternative” investments or genius managers. Here’s the lowdown from InsideHigherED: "College and university endowments posted their strongest annual performance in 35 years, according to new data from Wilshire Trust Universe Comparison Service reported by Bloomberg.
The median return before fees was 27 percent in the 2021 fiscal year, which ended on June 30. By comparison, U.S. college and university endowments saw a 2.6 percent median return in fiscal year 2020 and a 6 percent median return in fiscal year 2019. College endowments of at least $500 million – of which there are about 200 – reported a median return of 34 percent in fiscal 2021, higher than the overall average."
There’s no reason to think college endowments will be any better than anyone else at choosing the year’s hot sector or hot stock. And they are so large, they are very unlikely to outperform… as a group.
The Nasdaq rose from 9,875 at the end of June 2020 to 14,500 at the end of June 2021 (a fiscal year for the endowments). That’s a 47% increase, considerably more than the median endowment fund return of 27%. The Dow, meanwhile, went from 25,600 to 34,300. That’s a 34% increase. And the S&P 500 went from 3,050 to 4,300 – a 40% increase. In other words, with a median gain of 27%, the endowment managers underperformed. No “alternatives” or geniuses were needed.
Rigged Game: But wait… This is where it gets interesting. How could the entire capital market grow so much faster than the economy that supports it? In a healthy economy, one company may do better… another may do worse. But one’s sales are another’s profits. One’s costs are another’s revenues. One month may be strong. Another may be weak. Profits may accumulate in a boom year… but dissipate in the next bust. Overall, they can’t do much better than the economy itself – because they are the economy.
Let’s say we have a banana stand. And let’s say we make a profit of $1,000 a year. We could sell our banana stand to someone for… say… $10,000. The buyer would be getting it at a price-to-earnings (P/E) ratio of 10. Very reasonable. And he could expect to get a 10% annual return on his investment. The next year, he might see his returns go up to $1,050 – a 5% increase. Then, he could expect to sell the enterprise to someone else for, maybe, $10,500 – a 5% increase. Not a 30% increase.
So, if these endowment funds were investing in America’s capital structure… in the banana stands that produce goods and provide services… they should expect growth equal to GDP… and no more. And yet, last year, they and other investors did at least five times better.
The question won’t be raised at meetings of university endowment boards… nor in the U.S. Treasury Department… nor at the Federal Reserve… nor in the financial press. So we’ll raise it here: How come? And here we propose an answer: They are not really “investing” at all. They are just gambling… “taking” not “making,” in a zero-sum game… and counting on the Fed to rig it for them.
Who’s the Loser? But this hypothesis only introduces more puzzlement. If they are winning so much… who is losing? Who’s on the other side of the trade? Obviously, they can’t be taking their winnings from each other, because we’re talking about the median return for the whole group. And the economy itself didn’t produce the extra wealth; it grew only by about 5%, while the funds added 27%.
So who’s the pigeon? And wait a cotton-pickin’ minute. Aren’t these the same universities that are committed to ESG – environmental, social, corporate governance – and are willing to sacrifice some investment returns in order to promote their political agenda? And now, they’re gaining wealth five times faster than the common working man’s wage increases.
Oh dear, Dear Reader… have you jumped ahead of us again? Is it possible that they are taking the money from the downtrodden masses, making fools of the very people they pretend to care so much about? Let’s look at it tomorrow and try to figure out what is going on."
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