Blain’s Morning Porridge – Jan 10th 2022: “Greed is Good”, Tech and David Attenborough
Greed, in all of its forms, greed for life, for money, for love, knowledge, has marked the upward surge in mankind…
This morning: What can David Attenborough’s Green Planet teach us about Tech Stocks, why they are overvalued, and why rising rates suggest the game is over?
Let me promise this morning’s Porridge is not more of my trite meanderings on environmentalism, the evils of ESG and how we can mitigate climate change transformation. These all subjects dear to my heart, but this morning it’s all about Greed. Naked exploitable greed – the kind that fuels markets. Greed is to markets what water and Co2 are to plants – vital.
In Bonds there is truth. On Sunday evening, as I dwelt on the dangerous rise in bond yields last week – from 1.50 on Dec 31st to 1.77% on Friday on the US 10 year Treasury – I decided to watch the the luscious new David Attenborough mega-series “The Green Planet” on the BEEB last night. It was magnificent – well, he always is. I found myself pondering the remarkableness of plants last night. They fill every niche imaginable. Without plants we would be doomed.
It struck me plants are very much like entrepreneurs – filling every single space it’s possible to extract value from by exploiting perceived needs and filling them with products to create demand. Humans are so significant we should probably comprise an entirely separate kingdom in the Linnaean taxonomy of Life on Earth. Like plants we are a major force on the environment – but I promised no green meandering this morning.
What is it that makes human entrepreneurism so pervasive? It’s the urge to reproduce that dominates the plant kingdom. What dominates us? My thinking led me to the immortal question: Which came first – the chicken or the egg? Always a difficult one to answer. And then it struck me; the metaphorical answer is contained in the classic 1980’s film quote: “Greed is Good”.
By relating to the Greed imperative that drives humanity’s exploitation of the planet, I wonder if I might just have stumbled on to the answer to the great question of these markets: Why do tech stocks appear to stumble when bond yields rise? It’s all about financial ecosystems evolve and encourage greed to thrive, and how they rise and fall.
The reality is – if a market opportunity exists, the greed will ensure it is addressed. That doesn’t mean its sustainable.
To explain, let me start with the pages of the most important financial journal in the UK – Private Eye. It’s among our greatest national treasures; an independent satirical magazine that hoists the establishment on petards of their own making. It spends an inordinate amount of time pricking the establishment in the courts. Pick up the most recent copy and there are pages detailing the scams around the opportunities presented by the UK’s pandemic response.
I’m doing a lot of travelling and have been shocked by the PCR test regime. The testing firms I’ve dealt with 100% a bunch of cowboys dressing untrained minimum wage staff in medical uniforms to make 300% margins by overcharging on tests. Some quick digging revealed a surprising number of these new testing companies are owned by Conservative Councillors and are associated with MPs. Quel Surprise.
Private Eye reveals a whole raft of opportunistic firms making windfall profits by exploiting the pandemic. Some have been quadruple dipping; importing sub-standard surgical supplies from China, taking government grants to establish manufacturing in the UK, furloughing these staff in the UK, and then sacking them when the programme ended, having made massive profits on goods rejected as unfit for purpose – allegedly. In every case the winners of such behaviours have been the “owners” of the firms that “won” contracts – we would all like to know just how many were connected to the conservative party. In many cases they are walking away from their now unnecessary firms with substantial bonuses.
Just like algae blooms on the ocean, or weeds after desert rains, entrepreneurs will always emerge when opportunities present themselves. That is no bad thing – as long as they don’t crowd out more socially useful firms that would create more permanent and equitable business solutions. In the case of the pandemic, here in the UK it’s pretty clear a raft of opportunists have run off with the money, and I’ll bet the UK remains unprepared for the next pandemic when it inevitably strikes.
Let’s turn to how the greed dynamic applies to Tech stocks…
Regular readers will recall I’ve predicted ARK as one of the big corporate woe stories likely to dominate financial pages during 2022.
There is a great comment in the FT this morning on ARK: ARKK holdings executives offload $13.5 bln in stock. The numbers in the story are very instructive – if you read one thing this morning, this should be it. The gist of the article is Company Insiders (that’s C-Suite Executives and others who actually know what’s going on within the 55 “disruptive Tech firms” owned by ARKK) sold $13.5 bln of company stock in the last 6 months of 2021 and bought a mere $11 million. Sellers within these companies outweighed buyers by a factor of 1350 to 1!
As Morningstar comments the scale of insider selling “would seem to indicate that Cathie [Woods, CEO of ARK] and team have more conviction in these firms than the people running them.” Typically insiders sell stocks when they are high and buy when they are low – but all the stocks in ARK’s portfolio are down over the last 7 months, suggesting insiders are still selling even as the prices tumbles, begging the question: what do they know that we don’t?
The reality is ARK, and the whole disruptive tech “bloom” highlights entreprenuers taking advantage of an opportunity. That “opportunity-ecosystem” in disruptive tech was created by:
- The favourable financing conditions created ultra-low interest rates and abundant capital chasing any opportunities.
- Low bond yields forcing “investor tourism” in search of returns.
- The post Global Financial Crisis creating a groundswell against banking and a belief non-bank investors can do it better.
- Rising credulity for new investors that entrepreneurs can create everything they promise – disabused in recent weeks by the Theranos trial.
- Low long-term inflation and zero wage inflation.
The result was the tech boom. As the FT article points out – ARK and other investors funded the R&D that took small unprofitable companies and made them large unprofitable, but very valuable, companies. Over 30 months from Jan 2021 Ark invested $17 bln in its portfolio companies, allowing these firms to borrow more (on the back of the credibility ARK gave them), and invest $47 bln on R&D.
Yet these same companies also paid out £23 bln in stock-based pay in the same period! Simply put – ARK enabled its founders to extact all the value from the opportunities they addressed and cash out at “absurd valuations”!
When rain or cheap capital falls on a desert or a parched market – what happens? A lot of weeds sprout. A couple of plants might survive in the cut-throat search for nutrients as well.
Anyway – back to my original question: Why do bond yields matter when it comes to Tech stocks. Because in bond yields there is truth. Over the past week the 10-year US treasury has risen to 1.77% – the worst week for bonds since the Pandemic begun. The expectations of Fed tightening and rate normalisation are clearly changing the expectations of investors.
Tech entreprenuers – who I am sure are not entirely driven by naked greed – but would quite like Elizabeth Holme’s trappings of power and influence – can see the long-term signals. So can investors. Despite all the R&D money firms are investing in building new ways of ordering a taxi or delivering groceries, maybe rising rates means investors will go fundamental on them, and start buying bonds and companies that produce real, actual profits again.. In which case, its time to sell – especially when investors are starting to believe the same things!
When interest rates are normal it opens investors eyes – allowing them to properly value risks and returns. When interest rates are distorted, that’s when distorted risks look more attractive than they really are. Low interest rates are beer goggles – they make the world look a better place than it is. That’s a great opportunity for some.
For non-probitable, disruptive Tech, it feels like normalising rates is just another nail in the proverbial coffin. When the market spots the insider selling, and joins up the dots on rising rates and what that means for the abundance of capital required to enable large unprofitable firms to become huge yet still unprofitable corporations… well… go figure what happens next.
Five Things to Read This Morning
Out of time, and back to the day job!
Strategist – Shard Capital