Jobs, Security, and Growth (JSG) Investing
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Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode features Dan Katz and Stephen Miran of Amberwave Partners. Dan and Stephen have very interesting backgrounds. Stephen contributed to implementing the CARES Act Programs. Dan was a member of the National Security Loan Program Credit Committee, as well as the Airline Loan Program Credit Committee. Together, those committees oversaw more than $20 billion of emergency loans. They joined me to talk about their firm Amberwave Partners and their concept of JSG investing. That stands for Job, Security, and Growth investing. I enjoyed this conversation very much and believe you will as well. I think that you should pump some US National Anthem music for this one. But all kidding aside, I really did enjoy this very much and think that they have some unique things to say. So, I appreciate them coming on the show.
This episode is sponsored by Bastiat Partners, a boutique investment bank. Bastiat's founder and managing member is Nader Afshar, a fan of the pod. When he reached out to me, I wasn't sure whether I wanted to be sponsored by an investment bank that I'd never heard of. A few conversations and a couple of due diligence calls later and I'm happy to be associated with Bastiat Partners. Nader's described as a connector, high integrity, a low-key version of Byron Trott, and a rare investment banker that focuses on the alignment of interests and incentives. I appreciate him allowing me to do some due diligence on him and his firm and I appreciate Bastiat's support. As always, none of this is financial advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own due diligence.
All right, everyone. Thrilled to be joined by Dan Katz and Steve Miran today from Amberwave. Guys, do you want to-- I don't know who wants to start, but rather than me do the intro, because I don't want to mess it up. Do you want to tell your firm name, and your backgrounds, and how you came to your investment philosophy? I know that that's a lot, but let's keep that as tight as possible and then, we'll start the conversation. Because I find what you guys do very interesting.
Stephen: Great. So, thanks so much for having us. We're super excited to be here. The three of us the co-founders of Amberwave Partners really met at the Treasury Department in 2020, when we all found ourselves together at the Treasury to help implement the fiscal policies that really shored up the economy, and prevented a depression, and got the initiative economy roaring back to life during the COVID pandemic. It was an honor of a lifetime to be able to help out like that and we're super proud of the work that we did. When we came out of Treasury, we thought we've all been in finance for years before that. I was a portfolio manager at a hedge fund, Dan was a banker at Goldman, our third partner, Tom was in private equity for many years. We thought rather than going back to what we were doing before, "Hey, wouldn't it be fun to do something totally new and totally exciting, very different."
We looked around to the financial universe, noticed that one of the biggest changes in the last 10 years was the rise of impact investing, particularly ESG investing, which stands for environmental, social, and governance-based Investing. This was massively popular. There was enormous demand for products like this. We looked around at the range of products that are out there and lots of folks doing ESG stuff, but many of them are doing stuff that's very similar to each other. We thought, it's really great that people are doing impact investing. We don't see the values that we think are the most important values out there represented. We want to try and do something new. We came up with what we call JSG Investing, which stands for Jobs, Security and Growth. What we do is we try and direct capital to companies that are having in our opinion, the most positive impact on the country by creating jobs, so that people can have thriving lives, and careers, and communities all across the country contributing to security broadly construed that includes supply chain security, cybersecurity, information security, national security, all those things, and contribute to economic growth. Because economic growth is really how everybody can benefit and lift up into prosperity into the future and create the basis for broad-based prosperity and flourishing of a country as a whole. So, that's what we decided was super important to us and we want to create an entirely new way of impact investing and that's what we've set about to do.
Bill: Dan, do you have anything to add? That was fine.
Dan: Yeah, now, the one thing I would add just to slightly elaborate on Steve's great points is that, really, when we think about the DNA of our firm, we're really trying to do two things. One is to put at the heart of our firm, some of the judgments around public policy that we have experience implementing as economic officials in government, and then, we know work and lead to better outcomes in American communities. But just as importantly, we're trying to instill within the Job, Security and Growth, the JSG investing style, the importance of returns for investors. We don't think you have to choose between doing well and making an impact in your community. We think there's very substantial evidence actually that shows that the kinds of factors we're looking for in companies will also tend to be associated companies that outperform over time.
Companies that have healthy labor practices tend to outperform in our view, because they're able to have more productive workforces, they're able to attract more talent, they're able to grow and scale more quickly. Companies that have supply chains that are more US centric, that are rebuilding their manufacturing and sourcing here are going to be less exposed to geopolitical shocks, whether that's from a pandemic, or whether that's from Russia invasion of Ukraine, or any other neighbor. So, we actually think that this strategy is both vital to returns and to impact.
Bill: When you're analyzing the JSG characteristics, is it fair to say that it's from a US centric lens or does it include Canada? Is it just US centric?
Stephen: Absolutely, it's just US centric. In fact, the letters USA are in the name of the takeover ETF, which is IUSA. We are focused on the impact on American communities. We want to create jobs in communities all across the country and enforce the security of folks all across this country. We think that people in Canada should be pursuing similar products and people in Europe should be pursuing similar products. But the three of us are Americans and we want to do try and help people all across the country.
Bill: Yeah.
Dan: One thing I'd add is, on the international dimension, Steve's exactly right that we're focused on investing in US companies, rewarding companies for investing back in the US. But when we evaluate, for example, the impact of a company on US security and the security of our supply chains, we do look at different sources of foreign feedstocks differently. A company that sources its inputs from Canada or from Mexico is going to score a little bit higher than a company that sources inputs from Russia, or from or from China, or from Southeast Asia, because those supply chains are much more vulnerable to disruption. So, we do distinguish amongst the markets internationally and our scoring process, but it's all focused on impact here in the US.
Bill: That makes sense to me, especially given what's going on in the world right now. One thing that I was hoping that you could help me understand is, if you don't mind talking about current events a little bit, what exactly goes on when we sanction a country like we did to Russia and how does that--? Part one of the question is, what's the mechanism to do it? Part two is, I don't know how to contextualize what we've done to Russia relative to what we've done to people or countries historically. How big of a deal is this? It may be a silly question, but it's the one I have.
Dan: it's certainly not a silly question, because it's fundamental to understanding what's been happening in markets over the last few weeks. Maybe, I think it's just helpful for a lot of folks out there to step back to the basics and really look at what a sanction is and what the transmission mechanism are. Sanctions are a tool that governments can use when they want to achieve an objective. The primary objective is putting pressure on an adversary somehow. When you read about blockades in history, naval blockades in Greece in the 4th century BC, those are a form of sanction. Now, we have much more sophisticated tools that operate through highly complex transmission mechanisms in the financial sector, but it's still fundamentally the same idea. You're trying to make it difficult for an adversary to do business in order to a change in their behavior.
The US or any international jurisdiction, when we announce a sanction, what that means is that the US or any other jurisdiction has actually changed their law to prohibit, people are subject to their jurisdiction from doing certain activity with the foreign government. Because we have a highly interconnected, highly developed financial system now, the tool has moved from a naval blockade to a financial blockade of types. The thing that's often forgotten in that development from naval blockades to financial blockades is it now, actually the private sector is the mechanism through which economic pressure is delivered. Because it's ultimately the private sector that implements sanctions. Over the last three weeks, as we've seen sanctions ratchet up, but I'm happy to cover the impacts and contextualize just how significant it is. Really what we've seen is that the private sector has had a hard time getting their head around what is prohibited now, what may be prohibited in the future, what may be allowed, but present reputational risk. That's why we've seen so much uncertainty in things like Russian oil sales that are explicitly carved out of the sanctions.
The government's explicitly want to allow. You still see in private market, participants step away from doing that business, because they're worried about reputational risk and they're worried that governments are going to turn around in the future and change things. Really, the sanctions mechanism is immensely complicated and involves this dance between governments and the private sector, which is actually not that much different how many other markets operate. It's fascinating to watch this market-based cooperation mechanism generate financial impacts on adversaries that sometimes are exactly what governments wanted to achieve and other times are different.
Bill: Yeah. It's been interesting from my perspective or whatever. This is way outside of what I normally pay attention to. But to see a company like BP, just say, "Okay, we're going to divest of our stake." To come out and preannounce that and not-- If you say something like that, presumably, you're selling to a buyer that knows that you're a forced seller. It's as if the economics of getting rid of it almost didn't even matter. But I presume the internal conversation is, "Well, the political goodwill that we will accumulate by selling this exceeds whatever cost we're going to write it down." So, it's been a wild thing for me to watch.
Dan: Yeah, it's a great point. That's a very strange dynamic. It's created just to push it a little bit further. Think about if BP or some other Western firm is going to divest themselves of their interest in certain Russian energy products and the most likely sellers just to hand the shares back to the Russian firm, which is actually a massive windfall for the company. [laughs]
Bill: Yeah. In a perverse way. It puts wealth back in your "enemy's pocket."
Dan: Exactly. Look, we have seen governments in the West, try to be thoughtful about the way that they're encouraging divestment. Built into some of the orders to divest and sanctions related prohibitions or prohibitions on selling of sanctioned assets to sanctioned parties. Selling back to the target because you don't want to create windfalls. But this is a highly cut. The Russian, just a backup. You asked a little bit about where this fits into the overall scale of sanctions and how significant of the actions that are taken. The actions that were taken themselves, the legal sanctions that were taken are not unprecedented. These kinds of measures have been taken against other jurisdictions, other countries, and actually, more aggressive measures have been taken. What is completely unprecedented is how interconnected the target is to the global financial system.
The Central Bank of Russia had over $600 billion USD equivalent in reserves prior to the freeze on Russian Central Bank reserves that was announced about two and a half weeks ago. The entire Iranian economy, which is probably the other most sanctioned, which probably represents the height of aggressiveness of sanctions was only $550 billion when Treasury started moving very, very aggressively against the Iranian economy, the Iranian Central Bank, the Iranian oil sales in 2012. The scale is just vastly, vastly different. Russia is vastly more interconnected into the global financial system, which is precisely why when you roll out the sanctions, you're going to encounter just enormous amounts of permutations of various financial structures and it's very difficult to understand exactly how the sanctions will fit in in all cases, which is why you end up with some of these paradoxes like the one that you pointed out where you may end up, if you're not careful delivering a windfall to the person that you're trying to generate pressure on.
Stephen: These worries, these wonders spread throughout the entire financial system, as well as folks aren't sure who's going to be stuck with obligations that aren't money good. You do you see some signs of funding stress poke up here and there in financial markets as people are unsure about their counterparties making short-term payments. That's the type of thing that happened in 2008 during the financial crisis. There's $170 billion of foreign exposure to Russian assets, equities, and bonds. You can't just excise that from the global financial system with zero consequences. So, everyone's trying to figure out exactly what those consequences are. So far, it seems like it's not too bad, but you are seeing a little bit of pressure here or there.
Bill: Yeah. I think where you're also seeing pressure is in the commodity markets and it's very hard for me to understand how fungible commodities are when the West is blocking Russia from doing anything. I'm not being specific or precise, but this is how I think about it. How many of those commodities just go to China and India? In theory, you could just move something to a different jurisdiction and then, the aggregate supply doesn't increase or decrease, but it seems as though the logistics and the supply chains are completely messed up from a commodity standpoint, and they already were pretty tight as it was. So, this is creating quite a confounding series of events.
Stephen: Absolutely. Commodity prices are really the one way that Putin has to strike back. We can control the banking system in ways that hurt him, in ways Dan was describing a couple minutes ago. Driving commodity prices higher are his way to strike back to put pressure on Western governments and that's his only real meaningful tool.
Dan: Yeah, and just to give you our house view on what you've seen in the commodity markets over the last couple of weeks. It's really been a complex story. Immediately, following the invasion you saw a huge run up in a variety of markets, some were technical driven, obviously, there's been a lot of attention on the nickel market, for example, which is a one off. Esoteric issue driven by short squeeze, but the oil markets pretty deep than liquid market and there may be some technical factors driving the price rise we saw. But primarily, it was a worry about the status of future supply.
Over the last week, you've seen a dramatic reduction in oil prices, which to us is driven by two things. One, certainly, it's going to be driven by questions about Chinese demand for the next year and extending up further as a result of some of the real, very serious questions that are getting asked about how sustainable their zero COVID policy is going to be, particularly, as we see infections on the rise both in the Mainland and certainly, in Hong Kong, which has been very, very severely impacted. If you remove a large chunk of Chinese demand for the market, even if it's difficult for Russia to supply the market, well, maybe the markets not so tight after all.
But the other very strange phenomenon is that, Western governments as I mentioned earlier have been very explicit that the sanctions do not apply to oil. The US has stands alone and having announced a ban on US oil imports, but the US very specifically still allows US financial institutions to finance foreign purchases of Russian oil products.
Bill: Interesting.
Dan: Government should have not tried to impose an embargo on Russian oil and keep Russian oil off the market. But what you've seen is that, the market itself has said, "You know what, there's a lot of reputational risk to be seen funding Russia's invasion of Ukraine." By the way, governments may change their mind in the future. You saw this a little bit with the US oil ban. What has essentially happened is that the Biden administration exempted US purchases of Russian oil and refined products and then, Congress moved to act. The market actually was right about this. Market anticipated that Congress was going to act. So, they had already stopped purchases prior to the action being announced.
The real question for the oil markets, we think is going to be how long this self-sanctioning mechanism can last? Because the longer it lasts, the more difficult it's going to be to maintain. For now, there's some question about demand in certain markets. Particularly China, there are inventories, even though they were fairly low coming into this crisis. There is a little bit of give in the market. But if this persists much longer and there's no change in Russia's aggression against the Ukraine, now, we're going to get into a situation where if the self-sanctioning persists. You're going to see the market tighten even further, likely going to see prices go up, and then, there are only two options. One, you can bring more supply to the market, which can happen quickly or two, you're going to need to ration and reduce demand.
Stephen: All this really for us underlines the importance of why it's important to pay attention to your supply chain exposure and why we put so much effort into looking at the supply chains of the companies we invest in. Because when something like this happens, one of the best performers in our portfolio since the Russian invasion began has been a company called Mosaic and they're a fertilizer producer, and they source all of their inputs in North America, and they own or control all their subsidiaries. Russia is one of the top producers of inputs into fertilizer, which of course is absolutely essential to keeping the world fed. It's super important to be aware of the supply chain exposures you have, because obviously, Russia doesn't invade the Ukraine every day. But it seems every year, there're several geopolitical volatility events, where something happens to disrupt supply chains and it's a significant driver of outperformance and it has been a significant driver of-- The Russia invasion has been a significant driver outperformance for our fund.
Bill: Yeah, well, especially, Mosaic is what potash primarily or something and that has just ripped. So I would imagine that's a nice position to have. Is CF industry something you guys own, too?
Dan: and Stephen: Yeah.
Bill: So, that's interesting. You're looking at what are base materials that supply-- In these two examples, I think you're looking at what are base materials that support our food infrastructure and make America self-sustaining potentially in this area.
Stephen: Exactly. When we're looking at materials companies, we're looking at food companies, whether it's in a consumer sector, or in a material sector, or industrials, no matter what it is. We're looking at where are their inputs coming from. Are they reliant on Russia for their nitrogen or are they actually sourcing that nitrogen in the US and Canada? Because obviously, there's a big difference between the two of them in terms of geopolitical resilience.
Bill: Hmm.
Dan: Yeah, and just to maybe give you a bit more context of the interplay between this Job, Security and Growth, these JSG factors and our investing strategy. For us, JSG is really akin to ESG. It's an investment philosophy, but you can have different strategies within that philosophy that are designed to achieve different outcomes. In our existing fund, the IUSA ETF, the strategy there is to provide a product that broadly represents the market in the sense that it has the same or similar sector weightings that the S&P 500 or any broad market measure is going to have. But within sectors to pick the top performers on Job, Security and Growth as a way to isolate for Job, Security, and Growth outperformance rather than being overexposed to energy, or materials, or any other particular sector.
When we think about IUSA, really what we're trying to engineer for is JSG Alpha. That's what we've seen in the context of the geopolitical uncertainties since we launched the fund. In late January, we've seen about 200 basis points of Alpha generated and we're recording this on March 17th. So, that's about what we'd expect in terms of the JSG Alpha. But obviously, if we owned 100% energy, we would be way, way over performing that, but that's not the function of the IUSA product.
Bill: Okay, so, to just repeat what you said to me back to you, you're trying not to pivot too much from sector weightings, but you're trying to identify the strongest US focus JSG companies within each sector.
Dan: Yeah, that's for the IUSA ETF.
Bill: Okay.
Dan: We may have subsequent products and other strategies in the future that will maybe look like sector focus funds, where you choose only the best Job, Security and Growth performers within a sector. But for IUSA, we're really trying to provide a diversified large cap replacement that's focused on JSG Alpha.
Bill: Within the jobs portion of this, do you distinguish between a company that creates thousand jobs, but they're not particularly high skilled versus a company that maybe does 20 jobs, but they are high skilled then how do you weight those factors?
Stephen: Yeah, absolutely, that is 100% stuff that we look at. Ideally, what we want to see is, we want to see job creation across the skill spectrum. Obviously, all else equal, high-paying jobs are better than low-paying jobs. But we also want to make sure that there are opportunities for entry level employees for people to create an American Dream straight out of high school, straight into college and then, opportunities for training and advancement along the career ladder. We want to see people stay in firms for long periods of time, and get promoted internally, and make careers and lives for themselves and their families. We don't want to see churn of entry level workers, where you're just hiring and firing unskilled labor without ever giving them skills.
We look at all those things and there's no formal weighting mechanism thinking one high-paying job is worth X low-paying jobs. Because what we're looking at is a more holistic approach to the company's treatment of its workers and provision of employment opportunities for everyone.
Dan: The perspective that we're coming at when we look at the job score is really the perspective of the holistic health of the labor market. That's certainly what we always try to focus on during our government service and other contributions to public policy is making sure that there's broad-based prosperity, because you don't want to see gains accruing just to one particular social group, one particular geographic area on the coast. What you really want to see is gains across the sector and particularly for those who need the most help. When we look at companies on the job factors as Steve said, we're really looking for a diverse array of positions being created. In particular in areas that may be economically left behind or for populations that have had relatively less economic opportunities. So, big bonus points if you're creating jobs in rural communities for folks with just a high school degree, same thing with respect to the intercities, so, a job like that is probably going to mean more in our scoring than just another software engineer in Silicon Valley or New York.
Bill: Yeah, I like that, because I think maybe my tone may have-- I'm not sure that it conveyed what I was thinking in my head. I actually think right now with all the inflation, I would probably over weight raises to the lower income segment of the population and weight higher some of the more creation of lower paying jobs than I would necessarily taking care of those that have been winning for lack of a better term for a long time. That's my bias right now.
Stephen: Absolutely. When you think about who needs help, it's exactly those folks that you're describing. When I think about what would I think of as a successful product, look, ESG is tens of trillions of dollar industry ecosystem. We'd love JSG to get to a size like that where it can have impact. For this to be a successful product and to scale to the point, where you can have that type of impact, I would love for JSG to lower the cost of capital for companies creating jobs in the US as opposed to taking your capital, and shipping it abroad, and creating jobs in China, or Malaysia, or Canada, or Mexico, or anywhere else.
Think about the archetypal factory town, where the factory shut down and now, the main source of economic life in the community is gone for decades. It would be so wonderful to be able to lower the cost of capital for creating jobs so that more companies will revive those factory towns and invest in communities that don't have that economic lifeblood and where frankly it is now very cheap to produce and very cheap to do stuff. That's what the long-term goal is going to be.
Bill: You know where I think JSG and ESG could probably marry is in the idea of providing child care, and I was at a charity event last night and somebody said, "How do you help somebody-- family that's struggling?" Right now, that's my answer just because I think it's got to be so, so difficult to raise a child and be able to have two people have a job. So, I don't know.
Stephen: Absolutely, absolutely. Look, I think there's actually a significant amount of overlap between JSG and ESG. We don't call ourselves an ESG fund, but they're certainly ESG folks who love our product and who love what we do. Childcare is an important part of how you're treating your workers and it is important part of your workers being able to start their own families and live the American dream. 100%, that is something that we care about.
Bill: Yeah, I think my opinion on ESG is that, it's just been used for marketing. But I think that when done right, I bet that there is a ton of overlap. I sometimes wonder if ESG and I don't know this, but does ESG exclude someone like Northrop Grumman and if so, do they actually understand what makes America secure? I would argue, probably not, if they're making those kinds of exclusions, but that's my own opinion. You guys don't need to comment or feel free either way. I don't want to put you in a weird spot.
Dan: Actually, I would like to comment. Actually, I'd like to push back a bit on your point that ESG has really just been for marketing purposes.
Bill: Feel free.
Dan: If ESG really was just a marketing spin and had no impact, then, you would find it much easier for shale companies to attract financing right now. But the reality is that, the fossil fuel industry has been hugely impacted in terms of their access to capital as a result of the proliferation of ESG through the public markets and even the private markets now. You've seen a number of very, very large asset managers make pledges that they're not going to invest in fossil fuels as part of their flagship buyout funds. ESG, from my perspective actually has had a big impact on the market. Now, I think there is a marketing issue, which is that I think ESG, sometimes over promises.
Impact investing, incorporating your judgments into allocation decisions is never going to solve all of the world's problems. I think sometimes some folks in the ESG ecosystem gotten a little bit ahead of their skis and imply that this is a solution to climate change to solving all the world's problems. But it's not and it never will be. What it can be is make a difference at the margin. If the impact is better than the counterfactual, if you didn't have ESG, then, it is making a meaningful contribution. It's just important to line up the marketing with the actual impact.
Bill: Yeah, I don't actually disagree that it's had an impact. I'm just not sure that I necessarily agree with some of the externalities, but whatever.
Stephen: And for sure, there are times when ESG doesn't deliver on its promises to investors and investor portfolios. You've seen that this year as all these ESG portfolios that have excluded sectors like energy, like defense have really, really lagged the rest of the market in some senses and times, because they haven't had exposure to some of the hottest sectors. That's failing their investors. That's significant part of the reason why when we created IUSA, we decided that we weren't going to play with sector weights, because we didn't want to run the risk that we deliver significant underperformance to our investors by ignoring parts of the economy.
Think about the IT sector. The IT sector, it's hard to find mega cap software companies that score fabulously on JSG criteria. Obviously, you can't cut out exposure to mega cap IT sector, sorry, mega cap software-- [crosstalk]
Bill: Do you mind-- Why do they score poorly? I don't mean to cut you off, but I know why you can't keep them out. You could do taking a ton of performance out of the index, but why do they score poorly?
Stephen: Well, not necessarily taking performance out. Because there are times when they underperform like they have in the last few days. But leaving yourself vulnerable to significant performance divergences, which is just what we think our investors wouldn't want in our first product. In terms of why we leave them out, it'd be job numbers. It would be security numbers. When you're looking in the IT sector and you're thinking about, "Okay, I care about security," well, there are companies that focus explicitly on security companies like Motorola. Motorola, their security firm isn't the S&P 500 insecurity.
A company like and I guess, this is communication services, not IT, but a company like Facebook. Meta, it's really hard to make an argument that that contributes to security in any real sense, whether it's supply chain security, national security, security of communities. It's really tough to make an argument that a company like that should have a strong JSG representation. Because you're unable to give high scores to these companies as a whole, but you still have to include some representation, you wind up taking the best of the sector and that leads to IUSA essentially having a beta of just about one to the S&P 500 like 1.005, I think last time I looked, which means that all the outperformance is just pure Alpha, which of course, you would expect in a product that matched the sector exposure to the S&P 500 almost exactly.
But back to ESG, yes, there have been significant times when ESG has not lived up to its promises on performance. That should have made to an extent be the marketing effect. We've also seen a significant greenwashing concern. There was the Deutsche Bank scandal earlier this year or was it late last year in which it turned out that they were advertising, they were taking all these ESG actions and it turned out that they weren't. They were just saying ESG and climate everywhere in their literature, but not actually putting their money where their mouth is. There're concerns about greenwashing and ESG in terms of are these guys actually doing what they say they're doing. We think JSG really provides a solution to that.
At the end of the day, concerns of greenwashing is about are concerns about impact measurability. They're about does the product that I'm buying or that I'm investing in really tie back at the end of the day to really moving the needle on any of the ESG issues that I really care about. Is it really moving the needle on climate change. Did climate change alter its course whatsoever, because I bought an ESG product or was climate change totally unaffected by my ESG actions? That's a significant question. With JSG, you don't have that impact measurability problem, because we're counting the jobs that you create. We're counting the jobs that are created in companies in the portfolio and every time there's a news release about job creation or job destruction, we're reading it. We're incorporating that into our scorings. Every time a company is releasing data on what it's doing with its employees, we're reading that. We're incorporating it into our scorings. The fact that people have jobs now that didn't have jobs last week, or last year, or two years ago, that we feel a concrete improvement in people's lives in a way that you don't really have with the impact measurability problems that people have in the ESG space.
Bill: Do you mind defining greenwashing, just so, we all are on the same page?
Dan: Sure. I can take that. Yeah, so, greenwashing is a real term of art that you see thrown about in the ESG space and just to break it down at a fundamental level what it means-- is that it means when someone is advertising a product as green or as having some environmental impact, but there's really no way to substantiate that the fund or the product is actually having environmental impact. You see this a lot in certain ESG indexes that market themselves as green, or as ESG, or as consistent with the Paris Accords, but then, hold a whole host of fossil fuel firms in the index, and it's a phenomenon that you see in the ESG space from time to time.
Can we also just return quickly to a point, Bill that you raised that I thought was really interesting was this issue of the externalities associated with ESG and what the impact of those externalities is? When we take a step back and we looked at the impact investing market, what you see is that ESG is really dominant. ESG is primarily driven by a relatively narrow set of issues that are really oriented around the environment more than anything else. Because ESG has become a catch all for all impacts, all things investors should care about that aren't traditional financial metrics. In our view, what you see is an imbalance on a bunch of other real critical impacts that investors should be thinking about.
If all investors are focused on as the environment, you're going to create externalities when you say, "Have Exxon divest from certain of its fossil fuel interests," that may have a climate impact. But what about the jobs that are left behind, what about the American communities that are dependent upon some of these traditional industries? What does it do for US energy security and/or geopolitical vulnerability to Russian economic coercion? What does that mean for the future path of inflation and how American consumers are going to be able to feed their families and continue to maintain standard of living things in the face of what have been declining real wages as a result of the inflation problem we have?
Really, what we're just trying to do is to add some additional perspective into the market to exist alongside of ESG. The people should consider alongside environmental, social, and government's decisions in order to create more optimal outcomes for American communities, rather than just focusing myopically on ESG.
Bill: Within the growth context, I'm going to ask a broad question and I hope it's okay. I don't want to put you guys in tough spot, but I'm thinking about a company that is investing a lot-- Let's take Amazon, for example. Definitively not playing a margin game, growing, always hiring, always reinvesting arguably trades at a valuation that appears optically high relative to current free cash flow, because there's so much investment versus a company that's maybe cheaper, but isn't growing as much. How do you make those tradeoffs in a financial product?
Stephen: Yeah, so, that's a great question and bottom line is that, Amazon is in our portfolio. Amazon does make the cut on JSG criteria. Again, as we said, before we're taking the top 20% of scores in each sector and Amazon scores quite highly on jobs. They score quite highly on their supply chain management. Their contribution to supply chain management and AWS creating an environment in which other companies can create website presences and really create digital economy. Amazon does make the cut in a way that a company like Facebook, like, we were saying before wouldn't even know it's another of these tech mega caps.
The one area, sorry, one of the significant areas and you raise the G factor economic growth that Amazon gets dinged on is its treatment of somewhat anti-competitive practices that it has, when it tries to squeeze small business. On the one hand, it creates a platform for small businesses to exist, and sale, and resale goods that those small businesses would not necessarily have access to without Amazon, although in a sense, there are other platforms that do that too, but maybe not as big. But at the same time, Amazon does squeeze those small businesses. It does engage in some anti-competitive practices here and there in the way that it does business. So, it gets dinged on those things. But by and large, Amazon has just been flying colors when it comes to jobs.
Bill: It got us all through the pandemic, too. So, shoutout to them.
Stephen: [laughs] There is that.
Bill: Yeah. How quantitative are some of these factors versus qualitative? It's such a hard decision, I would think with some of the nuance.
Dan: It really depends on the individual factor in question. You can actually go to our website, amberwavepartners.com or the fund website, jsgfunds.com and you can see right there in our prospectus for USA and also in our website, the specific rubric we use when applying the job score, the security score, and the growth score, each of them is a multifactorial analysis that's designed to provide really a holistic picture of the company's contribution to US Job, Security and Growth. Some of the factors are very quantitative. For example, in the jobs factor, one of the things we look at is the percentage of job growth for a country, both international or sorry-- for a company both internationally and in the US over a long period of time. So, that's quantitative in nature.
But other factors, the impact of those jobs in the overall labor market draw on a mix of quantitative and qualitative factors. One thing that informs our decision is relative growths, relative unemployment rates across the US, so where are jobs needed, relative growth in real wages depending on community in the US and across different segments of the society. We take that quantitative picture and try to map on the company's labor practices into that to come up with a judgement about how critical the jobs that company is creating is to the overall labor market. So, it's very varied between quantitative and qualitative analysis, but we draw upon both in order to provide what we think is a holistic perspective of a company's contribution on Job, Security, or Growth.
Stephen: Another thing that's quite quantitative in what we do is looking at one of the most important things that we look at is this ratio of revenues in the US to employment in the US. That really gives you a sense of whether the company is really creating opportunity in the US for people to have good lives. If all of your revenues are in the US, but you really don't have any workers here, obviously, if every firm did that, you wouldn't be able to afford anything ever again, and the economy would just collapse. So, that's going to lead to a lower score. If you have a ton of employees in the US, but you're actually an export powerhouse, that's great. You're creating jobs. That's wonderful. We like to see that.
We can look at things like that to get a quantitative sense. But for the more qualitative things, it's really a relative sense against the other guys in the sector. Because like we said before, we're taking the top companies in every sector, the top 20% of scores in every sector. The absolute score in essence isn't really that relevant. It's just about whether you made the cut off into the portfolio or not. You're looking at these companies relative to each other, instead of just trying to give them a ranking. So, the ranking is ultimately, the really important thing and the absolute score itself is less important.
Bill: Do balance sheets factor into any of this? I wouldn't think that they necessarily directly do, but I'm just thinking a lower leverage profile is arguably more secure, because it's more resilient than a higher leverage profile, but I don't know if that actually trickles all the way down to what you're doing or not.
Dan: Yeah, what I'd say is, it's tangentially related, but capital structure is not necessarily the driver of our analysis. For example, a firm has high debt low that's going to make it difficult for them to grow moving forward, because most of their free cash flow will need to be dedicated towards servicing debt. It's going to be difficult for them to score highly on some of our other metrics.
Bill: Yeah.
Dan: I'd say is there's an indirect effect, but it's not an explicit criterion. The other thing I'd say is that for the firm's that we're looking at least in IUSA, they're all S&P 500 constituents. You tend to see relatively conservatively managed balance sheets. If we were focused on the high yield market, maybe we would more explicitly incorporate it into our decision making.
Bill: I was just thinking that a moderate leverage profile, there's probably more job security at that firm is where my head is going, but I can understand why it's not directly related.
Dan: No, I think that's a really interesting and -
Bill: It's a great product [crosstalk]
Dan: -look, it also depends highly based on industry, big part of our portfolio, because we're trying to match the broad market is financials. So, obviously, you need to think about leverage very differently in that context.
Bill: Yeah. What's your stance on energy is maybe a better way to ask the question? Where does US shale factor in from a JSG standpoint?
Dan: From a JSG perspective, we're really fond of all of the above energy strategies. We're supportive of renewables. We think they're important technologies that are going to help the environment and power the global economy and the US economy in particular over time. But there has to be a place in the overall energy mix for baseload power and just to step back what baseload power is, is power that's available at any time. Because the sun's not always shining and the wind's not always blowing, and that's got to be provided by fossil fuels or by nuclear. Baseload sources of power are things that we try to look for when we identify firms in the energy sector, firms in the utility sector that are more JSG friendly. Because we think it's important not just for US jobs, but also energy security to have the availability of reliable fossil fuel sources.
Bill: Yeah, that makes sense to me. Do you guys mind talking a little bit about your time in Treasury? Can we talk about that?
Stephen: Of course.
Bill: All right.
Stephen: Our favorite subject.
Dan: Our favorite subject. You never asked us about that.
Bill: Well, no, I want to, I really like your product and I hope that I want to go back to it, but it fascinating to me to think about what your life must have been in February and March of 2020. I guess, what was negotiating the airline package? What the heck happened in your life when the world stopped? Was it frantic, was it calm? What was that experience for you guys, if you don't mind? Just riffing on it.
Dan: I maybe I can tackle that and I'm sure Steve's got a different perspective and he'll be able to add a ton. I think in some respects, our experience, my experience certainly wasn't that different than everyone else's. The speed with which all this came on was just the most astonishing thing about it, because I was in international affairs at Treasury, one of my jobs was flying around the world, meeting with finance ministers, and central bank governors, and whatnot. I was literally on a trip to Europe and the Middle East at the end of February, and when we arrived in Italy, which was the first stop on, I think it was February 21st or February 22nd, our Italian interlocutors were a little freaked out, because they were just said that outside of Milan, the first COVID case had been reported. We're like, "Huh, that's an interesting data point."
Then, we flew on to Amsterdam for meeting of the Financial Stability Board, central bank governors, finance ministers, all around the world. COVID was a big topic of discussion what the economic impacts were going to be, but it was by no means the only. Then, we flew to Israel, which was already in lockdown and then, we flew back to Europe, to Brussels to attend a FinTech conference. Everyone there was still shaking hands, occasionally, someone would try to do an elbow bump. It was very much, business was normal as recently as early March. Then, when we landed, that's when the markets really started to go haywire and anyone, who was active in the markets at that time will just remember an incredibly dramatic period, and that's really what our lives were for the next few months. We quickly in my case, morphed from some of the international work that I had been doing to being redeployed, trying to work all hands-on deck to save the US economy.
The speed with which we pivoted and the speed with which we delivered really an unprecedented fiscal support package is just stunning. The CARES Act, which was $2.4 trillion came together in basically 10 days and it's a real credit to Secretary Mnuchin, who was really extraordinary in this period that he camped out on Capitol Hill and basically, didn't leave until the bill got done. But then once the bill got done on March 26th, we had to pivot towards implementation. The airline context with which I worked on-- Congress provided this big pot of money for us, but there were relatively few guidelines on how we could go spend it. There was enormous amount of discretion, and thought, and negotiation with the airlines, with industry associations taking into account. Input from Congress and elsewhere to be able to roll out a rescue package that we ultimately announced on, I believe, was April 8th, so, about just even less than two weeks' time, we came up with the entire structure for what was a $94 billion rescue package for the aviation industry and for the national security industry, which is just unprecedented in the speed that are rolled out on.
I do want to emphasize that, again I'm sure Steve will cover it in his discussion of his experiences. The singular imperative in responding to COVID was moving quickly. Because you went from an economy that was humming, economy that was put on life support overnight, essentially. Every day that businesses were closed, we had locked down, stay at home orders was a day where productive capacity in the economy was being destroyed. The speed of getting money into people's pockets was really the most important factor in crafting. The response in the government is not ex-ante set up to move that quickly. So, a lot of what we had to do was to get creative to figure out just how we can move as quickly as possible to avoid productive capacity and the economy being damaged.
Stephen: Yeah, what Dan said is absolutely right about the importance of speed. The goal was to prevent a depression, prevent a second version of the great depression, where everyone defaults and every business has to shut down, and fire all of its employees, and all of those relationships, which create a business. Its supplier relationships, its customer relationships, its lender relationships, its borrower relationships, prevent all those relationships from falling apart. Because if those relationships are all broken, it's a bit Humpty Dumpty. You can't just put it back together, again. Whereas if you can just put things in the freezer for a few weeks, two weeks to flatten the curve was the thinking, just put things in the freezer for two weeks or two and a half months as it turned out to be in the Paycheck Protection Program, you could just take it out, and defrost it, and turn the switch back on, and get the economy going again.
The goal was to get as much money out of the government into the economy as quickly as possible to prevent as many defaults and permanent closures as possible, which meant, get the money through whatever creative means you can. Now, the typical way the government gets out money is through what you would call stimulus checks, which at the end of the day are structured as tax refunds. That means they go through the IRS, the Internal Revenue Service. The IRS was busy with the stimulus checks with the economic impact payments. It was not able to take up the work of getting money to small businesses. We had to structure the Paycheck Protection Program as going through the existing banking system.
Bill: Ah, Interesting.
Stephen: You've only got so many sets of pipes and you need to use them all. The IRS pipes were full of stimulus checks of the economic impact payments, banking system relationships are already set up with small businesses, you could get the money through there and get it up and running quickly, and so, that's what we did. There's was a lot of criticism of the Paycheck Protection Program after the fact. There were cases of fraud, there were loans that shouldn't have been made, but the imperative was to get the money out the door as quickly as possible. Had you stopped and designed a more fraud proof program, and potentially gotten the money out in whatever way you want to get it out, whether it's to reduce fraud or whether it's to favor certain groups in the country over other groups in the country. Every variation on the rules would have cost time.
Bill: Yeah, there was no time.
Stephen: There was no time. We took a lot of criticism over that and I feel that a lot of it was unfair, because the goal was prevent permanent closures, permanent defaults, permanent layoffs, prevent a depression. Designing the perfect program would have added weeks or months to the process, which of course, you didn't have the luxury of. You didn't have the luxury of that at all. So, speed was absolutely 100% of the essence.
Bill: What do you say to people that say, like, "Oh, well, what about moral hazard and didn't you just bail all these airlines out? American was over levered. Why not just let them fail?" What's the response to that?
Stephen: I would say the economic argument about moral hazard hinges on whether or not you think the change in affairs is permanent or transitory. At the time, the economics apparatus of the US government, by which the Treasury Department took guidance from the public health community. The public health community was telling everybody few weeks to flatten the curve. If we all just stay home, this will be gone pretty quickly. If you view the shock, ex-ante, as only lasting a few weeks or most a few months, moral hazard isn't really a strong argument, because you think the world will return to normal after just a few months. That was the public health establishment view in March of 2020.
Dan: The other thing I'd say is that, moral hazard is a concern when a particular event is foreseeable versus in the COVID context, what we're talking about here is a once in a century natural disaster. It wasn't anything that businesses, especially not the airline industry could have ever been conceivably built to withstand. The appropriate government response from my perspective and certainly what we tried to implant was to preserve productive capacity in the economy. Because if you allowed the airlines to fail, if you allowed all the workers to be laid off and not stay current on their certifications, putting Humpty-Dumpty back together again as Steve said, it would have incurred much, much much greater costs on the economy than just trying to freeze these companies in place. Keep that productive capacity online, keep workers attached to their healthcare, keep the deployment relationships, so that when you emerge on the other side, you were able to have a much more efficient recovery.
I still think that fundamental design was sound. I think there are legitimate questions across the range of government programs as to how long that support was kept up including in the airline context, which-- Let's not forget. The airlines received another $15 billion at the beginning of last year in March 2021 as part of the so-called American rescue plan that's contributed so much the inflation that we've seen in the economy over the last year. But ex-ante in March of 2020, which was when you had the heat of the panic, I think there was a very strong rationale to say, the moral hazard argument is important, but it doesn't control in this situation.
Stephen: Yeah, there's a very strong contrast with 2008. In 2008, banks had made bad loans of their own volition. They'd made too many loans to customers that had no income, no jobs, no assets, and then taking enormous amounts of leverage on top of these loans. The preventing moral hazard argument was quite strong in 2008 and we only dipped our toes into it once with Lehman and even, I guess, [unintelligible [01:00:39] too. Even those were arguable, because we ultimately lost stomach and decided we didn't care about moral hazard anyway with tarp and major bailouts facilitated by the Obama administration. The moral hazard argument was much more problematic in 2008 and we didn't have the stomach to go through with it then. The moral hazard argument, I think was not really at all applicable at the time that the CARES Act was being passed.
Bill: Well, I followed airlines going into that, it's something that I know a little bit about. My point when I would discuss it with people is I said, there are a lot of union jobs. I think a lot of the airlines carry less leverage than headlines may lead people to think. Delta is objectively capitalized in an appropriate way for an airline, Alaska was objectively appropriately capitalized. You start to get in a scenario where you lose all those union jobs. To your point on the certifications, the FAA is not easy to deal with. Then, what happens if Spirit AeroSystems starts to go down and what happens if Hexcel starts-- The supply chain to me, I was always thinking, if this thing breaks, I don't know how you put Humpty-Dumpty back together again and it's just an unfortunate situation. Situation where you try to limit the pain, but the pain is going to be there no matter what.
Dan: Yeah, it's exactly right. The supply chain point is one that I think is underappreciated. What a lot of people may not realize is that, A, condition of receiving money under the payroll support program, which is the way that we got money out to the airline industry was that, airlines had to comply with a minimum level of service, which was determined by the Department of Transportation to ensure that supplies, that people were continue to be able to flow across all of our communities with a particular focus on rural communities, where air travel may be the primary way with which goods and services reach those communities. So, that was absolutely a factor in our thinking. There was a need to preserve the strategic industry.
Bill: Yeah.
Stephen: You're right about dealing with the FAA. Think about the government approvals and regulatory apparatus that you have to navigate to set up an airline, to permission airline to actually do business. Now, imagine that you lost half or two-thirds of the airline industry in the country or three quarters of the airline industry in the country. Setting that back up again from a regulatory perspective, years.
Bill: Yeah, I think some people like to say, "Well, the debt holders would have just taken over and what does it really matter?" I think that that's a lot easier to say in a textbook than reality.
Dan: I agree with that, although, I will give people who advance that argument credit. The airline industry has demonstrated that people are willing to continue to fly on airlines that are going through a bankruptcy process. Most of the US carriers have gone through bankruptcy at some point, either they or their predecessor firms. The difference here I'd say a couple. Number one, airlines are able historically to continue flying through bankruptcy and generating cash flow, because there is demand for seats on airplanes. In this context, there was no demand out there. What you saw is that in a period of basically six weeks, the airlines went from record revenues, record passenger numbers to record lows. Not just zero revenue, negative revenue in some cases as a result of all the rebates that were happening. There are just no businesses that are designed and run on capital structures that that can possibly withstand that kind of a shock to the system.
An orderly restructuring in bankruptcy, I think was basically off the table. In addition to that, that process would take time. Even the GM and Chrysler bankruptcies in 2009, which were some of the most rapid restructurings of major firms in American history, still took months and months and months, and that process could not play out on any realistic timeline in 2020 against a backdrop of the most severe economic crisis that the country has ever faced. There was just too much going on for that process to happen in an orderly way and there's no cash flow associated with the operations to support bankruptcy process.
The last thing I say is the government is good at some things, but running airlines is not one of them. Putting the government in charge of operating airlines, much like the government essentially operated GM and Chrysler during 2009. The most severe crisis in an industry's history is a really bad idea and who knows what perverse outcomes it could have led to had the government actually stepped in and overseen some restructuring of the industry during that period, I think it would have been a disaster for taxpayers and it would have been a disaster for the US economy.
Bill: Steve, you had something to add?
Stephen: No, I was just going to say that, the difficulty of engaging in a bankruptcy process during COVID would have been accelerated by the fact that bankruptcy courts were often closed.
Bill: Yeah, and the amount of people that would have filed in an alternative scenario, it's like, [crosstalk] flood the system with bankruptcy proceedings.
Stephen: Yes. You talk about clogging the pipes, that was a serious concern. As it happened, we actually didn't see spikes in bankruptcy, because of all the actions that the government undertook to prevent that from happening. Small business bankruptcies went down, because of the Paycheck Protection Program. Large company bankruptcies went down, because of what the Federal Reserve was doing in credit markets and in bond markets.
Bill: Okay, so, now, we've gotten through March, why have some of these actions, whether it's the Fed balance sheet or whether it's the bill that Dan referenced earlier, why is it taking so long to wean ourselves off of some of the stimulus and some of the support?
Stephen: Well, I think a lot of it has to do with what Dan mentioned before with the American Recovery Plan Act from just about a year ago, which I think was-- How do I say it? Absolutely, unnecessary. When this plan was signed and enacted into law by President Biden, vaccines were here. You think about fiscal stimulus being appropriate only when monetary policy has already done everything that it can and then, appropriate in a counter cyclical manner. When the economy is going down, and there's a giant output gap, and it won't heal by itself, and it needs the fiscal authority to step in and spend in order to get the economy back on its feet. The ARP was the opposite. Vaccines were here, things were beginning to reopen a year ago this time. The economy was coming back to life. There wasn't even any concern about Delta or anything, then or a little on Omicron.
This was fiscal stimulus at exactly the wrong time in the economic cycle. Counter cyclical policy is supposed to lean against the wind and this was leaning directly into the wind. That's why we have a lot of the inflationary problems that we have today. Obviously, it's not responsible for all of the inflationary problems, but it was a significant contributor at a time when there were several other significant contributors and it's creating an environment that should has had, I would say, a toxic combination of inflation from domestic and international sources.
Dan: The one thing I'd add is, unfortunately, there is a political overlay to all of this. If you look at what was done in 2020, when Steve and I had the honor of serving, every single COVID response, Bill, whether it was the CARES Act or whether it was the final piece of legislation that we're involved in, which was the year end bill in 2020 was done on a bipartisan basis. These are bills that passed the Senate 99 to zero in some cases. The American rescue plan however, it was a pure party line vote, which I think indicates that it may not have been what was widely recognized as necessary fiscal policy at the time, but instead was part of a broader political calculus with the changing of the guard and Washington. It's unfortunate that we ended up in that position, because you certainly want to see most economic policy done on a bipartisan basis. I think the whole country has been paying the cost of that largely in the form of inflation over the last year.
Bill: Sometimes, when I see those partisan votes, I wish that we could do a blind vote, where everybody thought they were the swing vote. Then, I think you would actually get to a true outcome. But that's idealism, I suppose.
Stephen: That'd be funny to watch.
Bill: Yeah, right. [chuckles]
Stephen: Even the bipartisan infrastructure framework that was passed last year, even that's going to contribute to inflation, because it's arriving at the wrong moment in time. That's what should have been passed before ARP for sure, not after ARP. But if you think about infrastructure spending, the country needs infrastructure spending dearly. There are places in the country, where infrastructure is falling apart, and traffic is horrendous, and you need to create transit options for people to move around the country or else you can't really keep the economy functioning. That's absolutely necessary. But nevertheless, in the long term, maybe it can be disinflationary as it reduces wait time and increases the ease with which people and goods move around the country.
But in the short term at least for the first few years, it's going to throw more inflationary fuel on the fire at exactly the wrong moment. Think about road construction. I wrote about this in the Wall Street Journal last year. When construction happens, after construction is done, everything flows much better, traffic goes down, you can think of traffic as inflation. It's increasing the cost of going someplace. After construction, traffic goes down, everything functions more smoothly, it's disinflationary. But we know traffic construction can take years to occur. I live in New York City, the East River Drive near where I live has been under construction for four or five years, I think at this point and there's still no end in sight. While the construction is happening, traffic is much worse. When they shut down one lane while they're building additional lanes, traffic backs up. Building of new infrastructure tends to disrupt the usage of old infrastructure during the building process. That can throw fuel on the inflationary fire. Even though, the bipartisan infrastructure framework is going to be disinflationary on a 10-year horizon, on a two or three-year horizon and don't forget, the spending is starting in size later this year on a two or three-year horizon, it's just going to be even more inflationary.
Bill: At exactly the time where we have commodity shortages.
Stephen: At exactly the time, when you have commodity shortages and at exactly a time when the-- Essentially, what you're doing is you're forcing the Fed to hike even more to offset it. This notion of monetary offset of what the fiscal authority is doing, the Fed is targeting a particular inflation rate. The more the fiscal authority drives that inflation rate up or down, the more it forces the Fed to try and counteract it. The Fed will have to hike more than it otherwise would have because of this.
Bill: It's very confounding how the Fed can get any control of the current inflationary environment without hiking enough to really put the brakes on the economy, because to me, it seems a supply side issue between supply chains and commodity shortages. Now, maybe that's because the demand is too high, I'm not sure. But, boy, what a problem it seems we're facing.
Stephen: Absolutely. The Fed has really, tragically painted itself into a corner, where there's no good options. The policy error was really done a year ago, the tightening should have begun a year ago, not now, and they should not have been doing QE until March. They didn't start tapering QE until November or something. The idea that in September of 2021, you needed the same exact policy settings that you needed in April 2020, as though the economy hadn't changed is just insane. I'm sorry, but that's just bizarre.
Bill: Yes, why does that happen? There're smart people over there. Why do they continue to do what they've been doing?
Stephen: I think it's a little bit of a French influence. They're fighting the last war. The joke about the French is they are always fighting the last war. The previous, last 10 years, 15 years, recoveries from recessions had been slow. They'd been difficult and they'd been disinflationary. Those were very different types of recoveries. The previous two recessions, 2008 and 2000 were caused by the collapse of asset bubbles. Those were really what economists called Balance Sheet Recessions, where there was too much debt in the economy, which had misaligned balance sheets. People with bad balance sheets spent years saving too much money sorry-- saving lots of money to pay down their debts.
Bill: But this we actually came out and everybody's, well, not everybody, but the consumer balance sheet was recapped positively.
Stephen: Exactly. After 2000, it was corporate balance sheets, after 2008, it was consumer balance sheets, household balance sheets. But in 2021, this wasn't caused by an asset bubble collapse, which left people with bad balance sheets. It was caused by a natural disaster. The natural disaster went away and we recapped everybody much more than anybody lost through fiscal. The idea that this recovery was going to be a slow, and horrible, and disinflationary as the last one is just rooted in a naive recency bias. I think that's the problem that the Fed ran into not really understanding that every recession is different and the policy mix you need for every recession should also be different. The idea that in September of 2021, policy was on the exact same settings as it was in the summer of 2020 when the economy was so much different, the unemployment was so much different, the public health situation was so much different is just frankly, I think, just nuts.
Whether it was a supply side issue, yes, the supply side has contributed, but I do think it's really important to draw a distinction between the commodity shock and the supply chain disruptions, I think, because they're quite different. The commodity shock is more of what economists would traditionally think of as a supply side disruption that you should look through, that a monetary authority should look through, because it's transitory and whatever. So that's much more recent. The oil price really going bonkers. The supply chain disruptions, what they do is rather than shift the supply curve of the economy inward, they just serve to make it more vertical. If you picture a supply and demand chart in your head, a more vertical supply chain means any increases in demand just result in inflation.
Bill: Yes, so, said differently, the supply-- How am I trying to say this? I think I know what you're saying. It seems the quantity supplied right now is artificially low. The supply chain theoretically hasn't changed, but there's practical constraints to it and then demand has actually shifted up. So, you've got a price explosion to get to equilibrium.
Stephen: Exactly. You're at max capacity, no matter what you do, you just can't produce more.
Bill: Yeah.
Stephen: The widget factory is working at full capacity. There is no ability to produce additional widgets. Any additional dollar of demand, therefore, cannot show up in more widgets produced, it can only show up in the price of widgets.
Bill: Going back to JSG, do we need to have a more rope? Do we need duplicative supply chains? Do we need a more robust work around in case the supply chain gets cogged up?
Stephen: Well, we need more resilient supply chains for sure, 100%. That means supply chains that have less exposure to the potential to get all tangled up, like, involvement in parts of Eastern Europe that Vladimir Putin might want to fence off and add to Russia at any moment in time. It means more safety and exposure to China, because China could wake up tomorrow and decide there some internal argument in the Communist Party and your key supplier of parts has fallen victim to some internal Chinese political squabble or trade war tensions could escalate. It means more exposure either to the US or to stable countries, stable and friendly countries that are near the US.
Bill: Yeah.
Stephen: On top of that, it means less of a just in time management of inventories. The just in time inventory chain worked marvelously in a world with no shocks and endlessly increasing capacity. But what we've learned is that it's just not robust, it's not resilient. Supply chains, they need to have maybe some redundancies built in, but certainly, steps need to be taken to make things more secure.
Bill: Dan, you have anything to add?
Dan: No, I can agree. The whole paradigm needs to shift from just in time to just in case. We believe that over time, companies that adopt that model are actually going to optimize over a long enough time horizon for the security of their supply chain, and therefore, the financial performance of the business. Because just in time may work as long as there's no geopolitical shock, but there will be. Over a long enough time horizon, if you're an investor with long time horizon like we are, you really need to incorporate that thinking into your business model.
Stephen: We're really in the early innings of the reshoring movements. There's just so many reasons for companies to be doing that, and the companies that are specializing it, and getting a head start, we think are going to deliver significant performance in coming years.
Bill: Yeah, I think we're in the top of the first inning, right?
Stephen: Absolutely.
Bill: I think it's just been a crazy couple of years to live through and to have-- Again, I don't pay much attention mostly, because I'm not very intelligent when it comes to geopolitics. But to see how the West aligned, when Russia attacked Ukraine to see how the West got united. On the back of COVID, with all these supply chain issues, I can't stop thinking about like, "How much risk is in the supply chain system right now and how that needs to be taken out of this?" We need to reduce that risk every day we can, I think or maybe I'm wrong.
Dan: No, we agree with you. That risk in the Russia, Ukraine context is much more limited than the risk is in East Asia. If you take the semiconductor industry, for example, this is maybe you see it most acutely. Our entire economy is essentially dependent on TSMC's ability to continue to operate and supply iPhones and various other semiconductors across our economy. There's also a real concentration risk to Samsung in South Korea. The neighborhood is not that friendly, particularly, as you see revisionist China looking to impose its own view of what the world order is likely to look like. Just to frame up where we are in this reshoring process, as you said, Bill, we're really only in the top of the first inning, because the announcement that one of our portfolio companies, Intel made a couple of weeks ago about investing in this new campus of fabrication and design facilities for semiconductors in Ohio, is wonderful, but it's going to take years.
The TSMC factory and the Samsung facilities that are being built in the southeast right now, excuse me-- In Southwest in Texas and Arizona are wonderful. But it's going to be many years before for those foundries are active. We're only at the very beginning of the process. In the interim, it's critical that we continue that diversification, but also defend the current supplies that we have in the market, because what we've seen in the auto industry, for example, the industries can be very, very, very sensitive to shocks and semiconductor supplies.
Stephen: The narrowing of the American technological edge over China, and other adversarial countries, and the hollowing out of the American industrial base, that happened over decades.
Bill: Yeah.
Stephen: It really was a slow process from the fall of the iron curtain on to China entering into the WTO. All the way until COVID, when suddenly, we couldn't attach plastic loops to pieces of cloth to make masks and we had to import them from China.
Bill: Yeah.
Stephen: That's crazy. Rebuilding that technological base, rebuilding that industrial plant isn't going to happen in six months. It was multi decades to get to where we are now and it's going to be multi decades to get back on top. So, we think that the companies that we're choosing are going to benefit from really multi decade secular trends in these areas.
Dan: Yeah. When we think about the role in the health of the overall US economy and the growth factor in JSG, one way to think about this is in the context of spillover effects, because innovation happens where production happens.
Bill: Yeah.
Dan: It's so critical for the US to have this manufacturing base, so that we can continue to be on the technological edge over a multi decade period.
Bill: A 100%. This is funny. I was watching, it might have been on Discovery Channel I don't know. But they were talking about how expertise is in geographies and the case study that they were looking into was glassblowing in Venice, Italy. The way that expertise from the people that are using their hands gets transferred up to whatever it is. I think, well, if we're not close to making anything, how are we-- Okay, we have the brain and we're sending the blueprints over, there's almost a disconnect that I think creates this risk of getting bypassed. I don't know.
Stephen: Totally. Couldn't agree more. In order to figure out how to make things better, you have to be making them to begin with. You need to have your hands in the dirt and to have real experience about how things work in the field. It's the difference between the map and the territory.
Bill: Yeah.
Stephen: It's one thing to sit around planning a battle, or a travel line, or something like that using a map, but guess what, there's bumps in the road and that you didn't expect there to be, because they weren't on the map, but they are there in the real world that you live in. In order to really have a technological advantage and maintain technological supremacy of the United States and industrial strength of the United States, you need to be innovating. You just cannot innovate if you're not making anything.
Otherwise, you wind up with a company like Facebook, employing the best minds in the country. Given the choice between a country in which the best minds were creating social networking tools, or a country in which the best minds were curing cancer, or building robots that take care of your grandparents or whatever it is. I would rather choose the country that has the best minds making stuff, instead of building-- what at the end of the day are great social tools, but in my opinion have limited physical impact on human welfare.
Dan: At least, positive physical impact on human welfare.
Bill: Yeah. I've used Twitter to educate myself on a lot of things. I think that there's merit in what they do. But at the end of the day, it's a media company and to think that the best and brightest or whatever go into work in media is a terrifying thought.
Stephen: Absolutely. The media companies and the social companies, the products are valuable. They have functions in society. At the end of the day, I'd rather have a society with these products than without these products. But I'd still rather have the best minds curing cancer.
Bill: Yeah, no doubt. No doubt.
Stephen: Yeah.
Bill: What Palmer Luckey is doing-- Isn't that the guy that started Oculus?
Stephen: Yeah.
Bill: Yeah. What he's doing in defense is pretty cool. There was just an article on him and wired.
Stephen: Yeah, totally.
Bill: I don't have any problem with the bright minds doing stuff like that. That makes me feel more secure.
Stephen: Yeah.
Bill: Well, do you guys want to talk about anything else? I've loved this episode. I might have to play like My Country, "Tis of Thee" as the intro music or something from it.
Stephen: [laughs] Well, we're just trying to make it a better country for everyone who lives here. We think it's great that corporate social responsibility has expanded in recent years to encompass ideas like the environment. But we think at the end of the day, corporate social responsibility, your number one responsibility is to make the country live in a better place for everyone who lives here and that includes jobs, it includes security, it includes growth. We encourage people to visit our website, amberwavepartners.com or the fund website, jsgfunds.com. Learn more, feel free to get in touch with us. If you have a financial advisor, tell your financial advisor about JSG Investing. Because we're in it to improve life for everybody. In order to do that, we need to make JSG investing work.
Bill: Dan, I'll let you wrap up, but one thing that I wanted to circle back to is something that you said about investing in rural communities. Because I don't know how many people get in the car and drive anymore, but I drove from Chicago to Denver, and I drove from Chicago to Florida, and it's sad. You see these towns that things used to go through or they used to make things. It's devastated. I was talking to my wife. I said, "What's the probability that this town has an outlook that's better in five years than even this one?" I am hopeful that onshoring and the funds like yours, incentivizing the right behavior may give those people a shot again, because they deserve it.
Dan: We're certainly hopeful as well that the trend can turn around. Just to back up and identify the driver, there's a reasonable economic argument. If all you're looking at is utility, or productivity, or other measures of output that trade displacements, you're buying things cheaper from China or some other market, labor that previously produced that will be reallocated elsewhere in the economy. On net, everyone's going to be better off as a result of the greater productivity and the cheaper cost of goods. But that has a very, very narrow-- That economic is a very, very narrow one and what it doesn't take account of is that, people don't work for the economy, the economy works for people. What you saw as a result of some of that thinking was that certain segments of society, the burden fell on them disproportionately as what the industries that previously produced livelihoods for many American communities moved elsewhere. Guess what? There wasn't enough help for those communities.
What we've seen is in economic theory, that wasn't even a positive, because of the supply chain vulnerabilities are created, because of the harms to US energy independence, in other forms of economic independence. Really what we need to see is a broad rethink of the philosophy that led to that process and the capital markets have a role to play. ESG has had a dramatic impact on the availability of financing for the energy industry, for example. And JSG is just starting. IUSA or our ETF is just starting out. We only launched in January. But over time, we want to grow this into an ecosystem that can help bring some balance back into the capital markets to make sure that we're remembering broad-based impacts on American communities from corporate action.
Bill: Well, I'm rooting for you guys. I thank you for stopping by the show and if you ever have some big thoughts on the Fed, or Treasury, or anything that you want us to share, open invite to come back on. So, thank you guys and I look forward to watching your progress, man, both of you. I really am hoping for good things for you because I think it'd be good for our country.
Stephen: Great. Well, thanks for having us on. It's been such fun to talk with you.
Dan: Take care, Bill. Thanks again.
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