Blain’s Morning Porridge – July 14th 2022: Inflation hits new high, Fed to hike 100 bp, Growth Stocks Rally!
“Who chooseth me shall gain what all men desire…..”
This morning: Despite US inflation hitting a 40 year high, US growth stocks rallied – reflecting the belief inflation and recession will be short and sharp. It’s a fair bet – but go back into growth stocks eyes-wide-open, and don’t be fooled by the most dangerous myth surrounding Tech – Personalities!
Let me start with some Porridge Housekeeping. No porridge for 2 weeks. I am off on holiday till the end of July. She-who-is-Mrs-Blain, puppy and I and will be sailing round the Channel Islands in Batfish V, our yacht.
If anyone based on the Islands fancies a catch up – let me know on Billblain@morningporridge.com.
If the world looks to be imploding, or markets are crashing I will try to post a comment, but the idea is to do the square root of Diddley Squat from a work or intellectual perspective. There will be lots of sail-trimming, rum-drinking and keel-hauling… plus teaching Dee-Jay, our Cockapoo, to sail. Photos will be posted.
Inflation, stocks and the dangers of “poisonality”
Yesterday’s US CPI came in stronger than expected at 9.1%. Inflation has consistently risen harder and faster than market consensus through this year. I was still a student when inflation was last this high! Market reaction was a sell-off and rising expectations among some frenetic Fed Watchers of a 100 bp hike later this month, followed by 75 bp in September. End of the World stuff…
Then we saw growth stocks start to tick back up! The thinking behind the rotation back into promising Tech is growth stocks could outperform bonds during a short period of likely stagflation. The view is inflation will spike, but soon, and a recession will be fairly shallow in the US. The US jobs market is hanging strong.
From a risk-taking perspective there is some logic to the rotation proposition this is a stock positive market: growth stocks might not be very profitable today, but we expect them to very profitable in the future when conditions have recovered, and we are back on a steady growth path. Buy ‘em while they still cheap!
In contrast – if I buy bonds today I know I will take a hit from rising rates and inflation, but I will get my money back! My principal will remain safe – just worth less!
It’s the old “bird in the hand is worth two in the bush” argument.
In some cases, betting on stock upside it will prove a great, brave, intelligent bet. In others it will be.. “what do you mean you sold the cow for a couple of beans?”
My world view at present is a short sharp US inflationary recession, stagflation in the UK, deep stagflation in Europe, crisis in EM and waves of geopolitical uncertainty. I try to invest accordingly. At the moment the Blain “Gone Sailing Fund” is Gold, Bonds, Fundamental Stocks, a smattering of very clever Growth Stocks, and a couple of alternative real asset investments. Its not particularly clever, but I sleep at night as I’m a great believer in the “things are never as bad as they seem, but never as good as you hope” reality that the sun usually comes up in the morning.
The global economy will adapt, there will be mess to clean up.. and the world will keep spinning… leaving us all the current problems like global climate change still to address..
I have got something of a reputation among readers and in our office for being anti-growth and innovation. Over the years I have shot down a number of disruptive tech stocks – and drawn some lessons on why they fail. Its usually not about numbers, but behaviours and personalities. I’ve invested heavily in new tech where I see clear upside. I am not anti-innovatory tech – I am just pragmatic.
We are blessed with a number of very bright and highly engaging young fund managers with Shard who throw their ideas against myself and some of my other “older if not particularly wiser” colleagues in the office. At the moment we are playing with the concept of a Shard Litebite Podcast (If I was a Techie, we would say “Beta” stage). Later today we should release one we just recorded on SPACs – following Bill Ackman handing back $4 bln from his Tontine SPAC. Please give it a listen, and let us know what you think.
During my discussions with clients and our own internal teams, I’ve consistently argued for common sense and logic. For instance:
- Purpose and utility – Explain me one thing this can do better that isn’t illegal and I will consider it.
- Price – Show me how this company that hasn’t made any money and is now in a highly competitive space is going to make money, and I will consider it.
- Tech Advantage – Elucidate me on why an office rental company is disruptive technology and how that’s going to make money, and I will consider it.
- Promises – Show me how this company’s tech will work when everyone else says it can’t be done, and I will consider it.
- Governance – Why should I believe these guys and their repeated promises of jam and profits tomorrow.
Back in 2021 the CEO of Domino’s Pizza, Ritch Allison, made a great comment: “In 60 years, we never made a dollar delivering pizza. We make money on the product, but we don’t make money on the delivery. So, we’re just not sure how others do it.”
Allison was talking about the food delivery business. I have absolutely no problem with the concept – I rely on it when I’m in Dubai! But I would never invest. Great tech, great idea, but show me the money. Oh, there isn’t any.
The clearest issue I’ve identified since I first started dabbling in Tech Growth Stocks is the one of Personality.
Back in the 1990s I was a Steve Jobs fan. I was an Apple addict. When Job’s died tragically young I rebelled – reckoning without his vision the company would absolutely fail to retain its inventive, innovative, marketing and design edge. How wrong I was. It became a utility! Fortunately, I saw the error of my way and came to realise the Apple Tech Ecosystem and marketing prowess made it a classic long-term hold. (For the record – I do not own Apple stock because of a conflict of interest regard my wife’s employment.)
I believe Jobs was a one off. A unique personality. So are many other princes and princesses of the Tech world. But they ain’t Jobs. For years I was the only person in our office calling down We-Work and the outlandish claims of its founder Adam Neuman. I followed the rise and dramatic fall of Theranos and its founder, Elizabeth Holmes, with much suspicion. Anyone claiming to democratise health, save the world, etc.. garnered my attention and usually a hostile Morning Porridge. Cathie Wood of ARKK was just so nice and lovely I was immediately on alert – and didn’t buy a word of her valuations process and thinking – at best it was shallow.
Of course; the personality I rant against most is Elon Musk. Outrageous and out there! He is in the papers for all the right and wrong reasons. His stalking of Twitter and now his attempt to walk away is just another episode of his bullying and abusive relationship with markets. But, hey, we created and enabled him by buying into his promises and statements, allowing his abuse of people and process and actively encouraging him to repeatedly test and shatter the boundaries of market practice and regulation. As I have said many times the market is not clever, it is just a voting machine measuring the stupidity of participants.
Tesla makes decent Electric Cars. So do many other companies. Tesla trades at a PE of 100 times earnings, about 10 times where larger more profitable car companies trade. Telsa is worth $740 billion. I reckon that should be less than $100bln – and it would still be a good company.
Why is Telsa worth so much? Because of all the data its being collecting for the last 10years? Because of its tech – which everyone else has? Because of its’ fleet of imaginary robo-taxis and autonomous full-self driving?
I’ve been saying Telsageddon has been coming for years. Its valuation is largely based on the poisonality of Elon Musk.
Yesterday the head of Tesla’s autopilot team didn’t return from a three month sabbatical, and has left the company. Over 200 staff employed on the Autopilot team have been fired. Telsa’s self driving claims are under investigation by the National Highway Traffic Safety Administration. Over 200 crashes involving Teslas are being examined for system failures. Tesla is still selling its “Beta” Full Self Driving package for $12k.
Telsa’s self-drive is stuck at level 2. Other car companies have got to level 3 – and admit it could take years and lots of cooperation to get anywhere close to fully autonomous self-drive. Musk was on the wires saying… “I think we are actually quite close to achieving self-driving…” He’s been promising it for years.. just like Elizabeth Holmes promised her pinprick blood tests would be. She will go to jail for putting patient lives at risk when she is sentenced later this year.
Draw you own conclusions on Musk.
No Time For Five Things..
Strategist – Shard Capital