Blain’s Morning Porridge – May 25 2021: Beware the Glamour of Tech
“The key to investment is not a grasp of rates, but a firm understanding of the “headology”of the crowd”
This morning: The great rotation from tech stocks into value stocks has been the dominant market theme this year. Tech stocks still have their moments – and there are clearly new technologies with the potential to completely change and improve the world. However, the glamour that surrounds tech stocks is also a danger, leading us down wrong and wasteful paths.. Who else remembers Betamax?
Apologies for a delayed and rushed Morning Porridge. I spent a large part of the morning trying to determine if the Morning Porridge’s database had been hacked – but it looks like this morning’s Phishing Attack was fairly random. Be Vigilant!
Yesterday’s stronger than expected US growth data – 6.4% in Q1 was enough to propel stocks higher. Confirmation of recovery, and therefore rising corporate profits! What can possibly go wrong… (Rhetorical question…) Bonds also benefited, which is absolutely not what one would expect in an economy increasingly beset by supply chain bottlenecks, rising labour costs and a resulting inflation threat – but makes perfect sense if you believe in fairies and that the FED will keep interest rates artificially low on the basis inflation will prove short term.
What’s really interesting about the stock market rise is the continuing “rotation” – out of new market and sectors like disruptive tech, new IT and software – into dull, boring and predictable old “Value” sectors like banking, mining and commodities. The divides between them are increasingly blurred anyway – We-Work was just a badly managed property firm passing itself off as disruptive tech.
Bloomberg reports we’re about to see the iShares MSCI USA Momentum Factor ETF (MTUM) rebalance its quant momentum play strategy with some remarkable switches in the $16 bln portfolio: Financials will rise from 1.6% to 33.4%, while Info Tech will tumble from 40% to 17%! Consumer discretionary and Health both tumble more than 8% in the portfolio. MTUM bets on cheap shares vs expensive shares by ranking them over 6-month and one-year horizons and rebalances semi-annually… so no surprises its exiting much of the really high value but flatlining tech names.
Whatever the momentum quant funds say, the reality is the US high-tech Nasdaq is still within a few points of its record level. What’s keeping tech stocks high is the ongoing narrative behind them: disruptive stocks fuel the Tech sector and are set to change the world utterly, and therefore you can’t not be involved. Its therefore interesting that really smart investors, and quant funds run by unfeeling algorithms, are the ones leading the exit. The ease with which that smart money has transited into value stocks suggests many things…. Including; All the glistens is not gold.
Every time tech wobbles there are increasing doubts about just what Tech indicies tell us. Are they really indicators of future value; the technologies that are going to dominate our future…. Or do they just lead us wrong paths? Is it possible we get caught up in very human enthusiasm for good tech stories well told, no matter how improbable they actually are?
For instance; I was reading about a direct Carbon Capture from the air project a new UK nuclear power station. It’s going to capture 1.5 tonnes of recyclable carbon. I did a double take…. Per second? Nope.. per year. That’s utterly insignificant – even using the pixels to write that probably caused more carbon emissions… yet news like that gets investors terribly, terribly excited.
It’s like the new Green Steel plant in Sweden that just about anyone famous north of the Baltic is awfully delighted to be investing in it. It will use hydrogen from renewable sources to manufacture steel in electric arc furnaces. By 2025 it might be producing 2% of European Steel… Yay… You can guarantee it will be so desirable everyone else in Yoorp will give up making nasty, dirty metallurgical coal spawned steel on the basis its nasty.. and we’ll import our steel from China instead…
But fear not about where all that green electricity is going to come from…
Er, maybe you should.. because the Blessed Elon Musk has told all the naughty dirty electric Bitcon miners they need to use green electric to hack their imaginary currency out the nowheresphere.. which means we will soon be covering the entire face of the planet in floating windfarms (each requiring 1000 tonnes of steel each and lots of copper and carbon emitting plastics and other bad stuff) to power the hunt for that last fictitious coin..
In the value sector of the market (remember; dull boring predictable stuff that actually works and makes money), one of the most obvious plays is energy – where its increasingly acknowledged we can’t reduce fossil fuels overnight. Coal will remain a significant power source for decades – whatever climate change activists believe. But, of course you can’t invest in Coal… that would be a mortal sin…
Anyway.. the future is bright.. They future is electric.
One area we’re seeing rising doubt is the lithium battery market. Not only are the Chinese trying to capture the whole market by buying up any likely producers, but Lithium is actually very old technology – 50 years old at least – and is beset with social and environmental issues in terms of the costs of mining it and difficulties in new supply and recycling. Despite these the whole EV revolution is based on Lithium, which spawns a host of secondary problems – like putting chargers in place that can work under increasingly creaky national grids. (Big news in UK is about 3000 odd new chargers being put in place – which solves little in terms of where does the power come from, how does it get there and how quickly.)
There are plenty of alternative and promising battery technologies – but none of them attract the attention that lithium does. Telsa has pretty much set the agenda by packaging its 50-year old batteries as the face of the future.. (and buying up companies trying to innovate better solutions..)
Aluminium Air Batteries have a much higher power density, (meaning superb range) but are complex to recharge (replacing anodes and cathodes). As a result it’s been largely ignored, but it could prove a winner if instead of going into a filler station to charge a battery, the battery was simply flipped out and replaced – the old one being sent away for refresh and recharge – exactly as Chinese auto firm was planning with lithium..
Or there is Carbon-Ion which is not yet been perfected to be energy-dense, but is absolutely clean and simple to recycle. Hydrogen fuel cell tech looks promising but would raise high costs in terms of storage and logistics – but all new tech takes time to introduce, innovate and then bring down the costs via adoption.
Other energy systems, like Electrofuels – using renewable energy to electrolyse water to produce hydrogen – seem like an enormous flaff. You have to produce hydrogen to combine it with carbon to form hydrocarbons like methane or methanol, to produce hi-grade fuels. They count as renewable if the carbon is recycled and recaptured. At the moment they requires a deal of energy to produce and produce less when used as a fuel substitute.
All of which leads me to VHS vs Betamax. When home video recording took off in the 198os there were two competing technologies.. The awful VHS and the superb quality Betamax. Problem was Sony would not share the secret sauce of Betamax, while JVC licenced VHS to everyone… None has ever heard of Betamax since…
The bottom line is Tech is about the future – the idea that new ideas like robotics, AI, autonomous driving, virtual reality etc, etc, will change our world is valid… but its not solid state. The trick behind Tech investing is picking winners, both long and short-term, and knowing when to exit. Tech evolves.. which is why so many tech firms vanish, and so many of these that succeed only do so by establishing such a deep moat they either dominate (and decrease innovation in) their space like Tesla, or become a completely unique cult space like Apple.
Not enough time for 5 things to read this morning…
Very out of time and back to the day job…
Bill Blain
Shard Capital