Blain’s Morning Porridge – Jan 12 2021: Accepting the inevitable rise of markets
“And the beat goes on, moving strong and on…”
Apologies for lack of porridge yesterday. Let me present my most pathetic excuse yet: I’ve taken an office in the village while we’re doing up the house and are living in rented accommodation. Most morning’s I walk, and yesterday… I left my glasses at home, meaning I had to go all the way back.. and pretty much missed much of the early morning. Silly stuff happens.. often to me…
Back in the real world: it’s been an “interesting” start to 2021. Bad stuff happens in markets.
Lesson from the first week is we should drop any assumptions 2021 is going to get any easier, less shocking or more rewarding than 2020. The virus is getting worse before it gets better. Business destroying renewed lockdowns have been imposed. 250,000 SMEs are apparently on the verge of collapse. The US reports a second tumble in employment. Vaccination programmes around the globe are failing to impress. And then there were the extraordinary ongoing political theatre in Washington – and before we think populism is just a US problem, the rise of the Alt-Right is very real across Europe, and could have significant implications for future stability.
For years I’ve been writing about the oft malign and pernicious influence of politics on markets. Maybe it’s the virus that’s making so many people so angry, or maybe it’s something else… like the way social media has magnified division, reinforced bias confirmations and indoctrinated millions even more effectively and faster than communism or religious fundamentalists ever did. The current stramash in the US illustrates division and highlights the difficulties reconciling such angry, divided polarisation – which bodes bad for future stability and resilience.
It’s a basic investment rule: Don’t invest any money on unstable nations where the rule of law is compromised, and elections look doubtful. (For clarity – what is disturbing about the US is not that elections were fraudulent – they certainly weren’t – but that so many people are willing to believe they were. The difference is simple: In the past politicians were embarrassed to be caught lying. Now they don’t care. When trust breaks down.. society will follow.
The rise of political demagogs needs a catalyst. Trump found his in the syncronicity of MAGA with his supporters. Others found theirs in collapsing inflation-addled disorder. Others in poverty, social injustice and inequality. Perhaps the Coronavirus could be another? It looks certain to last longer and dig deeper into economies as the virus mutates and it becomes apparent vax programmes aren’t the immediate sugar-lump solution we were told they would be.
As Covid disappointment and depression grows, just how much longer can society maintain its stability? This Pandemic Age will last longer than we thought and require greater sacrifices – which is why people get frustrated and angry. Most of us accept being part of a collective community creates obligations of care and consideration. However, the Alt-Right Libertarian Jihadi’s get very noisy and selfish about their individual liberties. How happy they would be waking up to an Imperial Trump dynasty is another matter…
For all the negativity markets continue to lap it all up. There was a minor blip y’day, but stock markets look set to keep hitting record valuations. Many respected market figures are sagely warning of asset bubbles, speculative madness, and bizarre unexplainable valuations. As record prices no longer surprise us, they are right to be concerned. We are into a very dangerous phase is ecstatic markets fuelled on the back of abundant easy money.
I’ve written often enough about the empty hollow shell of entrapment that is Bitcoin. I now admit Tesla is a valid business – but worth about 10% of its current bubble valuation. I’ve warned of bubbles developing in renewable power – fuelled by speculation, expectations government policies will drive investment and unrealistic hopes about how effect they will be. New bubbles seem to be growing in “hopeful” new tech sectors like Green Hydrogen and automation.
The latest iteration of the speculative bubble are SPACs – effectively these are private equity funds buying highly speculative ventures and leveraging them up to generate returns. Did you spot what is missing from the equation? Any consideration of the actual business outcomes for the underlying idea, its long-term deliverability and profitability. There is a huge gap between investing in private equity where the concept and deliverables are proven and it’s a matter of turning round the business and numbers, and investing in venture capitalism where the risks are not financial, but fundamental – like will this thing work and is there any market for it.
Clue: there is not a global market for 108 new electric vehicle manufacturers to each sell 5 million cars in 5 years time. And if you read the auto-trade press you will see the majority of EVs on sale and new product launches are now from the established automakers.. The rise in Tesla’s stock price last week made Musk the richest person on this planet, and was greater than the market cap of Volkswagen.. VW only made 140k EVs compared to Telsa’s 499.9k in 2020, but will be producing 3 million EVs within 5 years at 8 global factories.. while Tesla continues to promise us it will make more cars and make them autonomous… tomorrow.
Look at the list of highly speculative electric vehicle makers, automous driving tech, pet food (always a good hint of crisis to come) and “business purpose “as-yet-unknown”” firms coming via SPACs – and walk away.
It all looks terribly speculative, frothy and ripe to pop…
Except.. the reality is even more brutal: It’s all unlikely to go bang… We know interest rates aren’t going up anytime for the next three years – no matter what the numbers say, or whatever markets fear. Central banks couldn’t say it any clearer – they will hold rate down lower and longer. They will continue to repress rates to stimulate the recovery, but also to maintain confidence – the last thing they can afford is a market crisis triggered by asset prices popping in the midst of pandemic in such murky political waters.
The pain – and it is a very real pain – is that every single one of my market-sensitive neurons is screaming at me: THIS IS INSANE. THIS IS A BUBBLE. SELL SELL SELL!
But that would be madness.
Instead, my latest rebalancing of the Blain PA Fund weighs Equities higher and switches out of bonds. I’m maintaining a sizable portion in Gold – for the meantime. It’s a struggle in my head to buy stocks at these levels, but I’m thinking the obvious risks will make me more careful. I’ve come to accept the level of absolute low rates knocks conventional investment planning and rules out the room. Investment objectives are now about optimising “relative returns” and “relative opportunities”, relative to zero rates.
Everything important in global investment starts in the bond market. And it’s where the fundamental damage has been done. The average credit quality of the corporate bond market has basically tumbled from AA to BBB- in the space of just a few years – dramatically increasing risk, but looking more and more attractive relative to sovereign bonds due to relative rates. The yield on sovereign “risk-free-rate” bonds is negative, so forget about concepts such as the 60/40 bond/equity allocation to generate returns.
The hunt for returns – any returns – is the critical driver. In this market, the rates/return equation absolutely favours equities over bonds, and will continue to do so for the medium term, which is likely be a tomorrow that never comes till well after 2024. When equity returns are so cosmetically attractive and central banks are unlikely to allow a crash, then why not continue to “fill yet boots”… The Dave Portnoy RobinHoods get it.. apparently professional investors don’t.
That’s because professional investors suffer from the dread disease of Experience – struggling to accept the curious new reality of markets going up and up for ever… 31 years ago I got involved in one of the greatest assets bubbles ever. I was selling bonds linked to the Nikkei 225 and the expectation was the Japanese stock market could only go higher. It peaked at 38957 on Dec 29th 1989. It tumbled 40% in the next few months, but took nearly 20 years to bottom at 7055 in March 2009 – a 82% reversion. Ouch. Most major market asset bubbles pops result in a something like a corrective 75% mean reversion – which would still leave Tesla mispriced.
Of course… as was pointed out last year… I am apparently he worst market strategist on the planet because I’ve been negative Tesla and negative Bitcoin. Yes. And I’m still negative other really stupid overvalued nonsense. But I’m pretty sure about these two: normally I don’t post any of my trades, but here is one I’m going to take a close look at: a three times levered Tesla Short: 3STS from Granite. Might be a bit of fun….
There is much noise about how terrible it is to ban Donald Trump from Twitter and Facebook. I even listened to an earnest discussion on how it was suicide for Twitter’s stock price. I can imagine how it might have been if Trump’s coup has succeeded. It would have been Trump closing Twitter, and any other hostile media followed by the “rendition” of anyone else that upset him. That’s exactly how any “proper” dictator like his good-buddy Putin, or China’s Xi would have handled it – and entirely in line with the history of how to install a fascist state from the 1920s and 30s.
Ok, that’s a bit extreme… but I’m disappointed at the ongoing resistance of US Republicans to punish Trump. As the vengeful Democrats plan a second impeachment, the GOP are urging calm. Nonsense. Surely its critical for the future of democracy that those of try to take power or deny the transfer of power via insurrection are punished and are seen to be punished. Its important Trump is tried, revealed and punished through trial – and that justice is seen to be transparent. Yet the GOP are hesitant.. scared to confront Trump’s supporters with truth.
Funny old world…
Five Things to Read this Morning
CapEX – Will the Green Economy Trigger the Next Crash?
FT – The Future of private business in China
Bberg – UK Businesses Drowning in Red Tape under Brexit Border Rules
WSJ – Markets Rally Highlights Bets on Recovery
Torygraph – Democracy in Peril
Out of time and back to the day job