Don’t Fight The Fed?

There is an old market rule – don’t fight the Fed. Jay Powell has been crystal clear: rates are staying lower for longer. But the ongoing sell-off in Treasuries, and rising global bond yields, paints an interesting story of a market unconvinced rates can be held down

Blain’s Morning Porridge – Feb 26 2021:  Don’t Fight The Fed??

“The wilder and more ridiculous something is, however, the firmer and more solid the evidence will have to be.”

There is an old market rule – don’t fight the Fed. Jay Powell has been crystal clear: rates are staying lower for longer. But the ongoing sell-off in Treasuries, and rising global bond yields, paints an interesting story of a market unconvinced rates can be held down, and therefore the cosy rationale behind the current stock market is over. Unconvinced is not the same as certain.

Does the rise in the bond yields and the resulting wobble in stocks, represent something fundamental? Or will we see another bouncing case of Mad March Madness?

Last year, stocks cratered on Coronavirus fears, but quickly found a bottom buoyed by swift government stimulus and increased central bank bond QE buying. These promises were a trampoline that bounced last year’s stratospheric market rally to improbable record-breaking levels even as global economies continue to flatline.

Since March – 12 months ago – there has been that shadow of doubt overhanging the rally. The market has been struggling to convince itself its justified. Was it simply fuelled by cheap money? Relative value? Broken risk pricing? Has it fully priced in recovery?  What are the threats? Inflation is the obvious one: all that new money on the back of unrestrained government injections and spending promises – it has to go somewhere if it isn’t sloshing round financial asset markets.

My opening quote this morning is Asimov: asking what evidence is there to justify sky-high prices?

Some folk think domestic savers – who have repressed their spending – are all set to plough their Covid pots into financial assets. Or maybe not. It’s more likely they are going to price compete for luxury holidays, new homes, new clothes and new everything as economies reopen. And what will the legions of new day-trading Reddit investors do when they discover stocks can down as well as up?

The sector suffering most doubt is Tech. Why? Ask any Tech fan-boy and they will tell you the tech fundamentals remain sound – based on disruption and new things. The market’s horizons expand on tech innovation, and the speed of adoption is accelerating due to Covid and climate change – they say. Therefore, this is time to buy any Tech when the opportunities present themselves. That seems to be the bet many asset managers heavily invested in Tech are taking.

Call it disruption – or all it something else… The market is awash with tale about how really smart firms like ARK, and its uber-clever market maven CEO Cathie Wood has been buying the dip in Tesla. Well, if she’s knows it’s going higher – who’s to disagree? (US Readers: mild sarcasm alert.)

(The other side of the ARK coin is the stories in places like Zerohedge, suggesting Ark has been dumping high quality stocks to cover ETF redemptions, while a number of problem stocks like Workhorse and 3D Systems are eating into its valuations. Buying Tesla as it slides could prove a pretty desperate gamble to keep the price up and avoid a cascade of ETF sellers. Catching a falling knife can get messy.)

To understand the current market crumble you need to start by taking the 5 mile high view: on a relative basis stocks look less valuable, dividend yields are in line with bonds – and no one wants to take more risk to be paid the same. It feels like stocks are already fully pricing in global recovery (look at the recent recovery stories in airlines, cruise, and hotel stocks), and the rotation into value sectors including, perversely, oil and financials is underway.

But it also feels there is something of an Emperor’s New Clothes moment in Tech underway. Just because a firm announces its going to sell hundreds of flying taxis in the 5 years does not make it a fact or worth billions. The crash in the Lucid SPAC vehicle immediately after the merger announcement highlights the questions about whether an EV maker that hasn’t sold a car is worth $24 bln (1/3rd the value of GM)?

Buying fantastical new stocks can pay off. Tesla shows that. But they also have to deliver. How long have we been waiting for a truly Autonomous car? (Personally I have my doubts – if we can’t make trains run on time on a straight line because of signalling problems, then how do you get cars to miss each other, and where are Flying Taxis going to land without hitting each other?)

I have an insatiable appetite for good science fiction – because its fiction. The American’s all believe the Jetsons is the blueprint for the future – which is absolute nonsense. I was brought up on a diet of good, practical British futurism: Thunderbirds, Captain Scarlet and Joe 90. The brilliant “UFO” envisaged a Moonbase in 1980.

I still like to imagine a fantastical future – which was planted in my head by my grandad who was editor of DC Thomson’s Comic business in Dundee. I learnt to read from a 30 year high pile of Eagle, Victor and Hotspurs kept up in the attic (and the Waverly novels of Sir Walter Scott). To me, the 2030s are still going to be about well pressed kids in 1950 school uniforms jet packing into school, and Dan Dare and the Royal Space Force keeping the universe safe from the Mekon and Donald Trump. Sadly.. these things are even less likely than Lucid selling cars by 2025.

The big picture is faith in these tech stocks. Many will fail. But many will succeed. What you need to do is work out which and what are they worth. Let me start by saying I am convinced Tesla will be a success and is here for the long-term. But I reckon it’s a worth a fraction of where Cathie Wood and the fan-boys perceive it.

This is where you have to step down from the 5 mile view, and look at the individual stories. Cathie’s top pick (aka the one that has so inflated her funds) is Tesla: what’s changed? Well, nothing. The fact is it still ain’t making money selling cars – it’s meagre profits remain entirely due to sales of regulatory credits. Like every other car maket it faces competition; it’s just cut its already wafer-thin margins, announcing a cut in the price of its base model (which it then pulled it from the sales website). Like every other car maker its having to close production lines because of the global chip shortage. And exactly I predicted in January, the threat to Tesla is competition as the existing car giants switch to EVs and new entrants like Lucid all expect to sell millions of cars and eat Tesla’s lunch.

The fact Tesla is barely 23% down from of its high in January might even be good as a chance to still exit. What’s it really worth.. ?

Now for something completely different… 

Every so often something fascinating comes along – and quite often it’s from the remarkable Rob West, the head of Thunder Said Energy.

Rob is one of the most interesting and informative analysts in the energy sector. Usually he’s breaking down patent applications, doing difficult sums to work out the actual real (rather than imagined) costs of renewable power, or uncovering how difficult and expensive EVs will become unless new forms of capacitance are innovated. Thanks to Rob I now donate £20 to tree planting charities whenever I fill up the diesel. It will do far more for the climate than buying a Tesla.

He’s made the connection that the various efficiencies and inefficiencies of power and energy, their degree of “green”, and respective contributions to solving global climate change are extremely complex and nigh impossible to measure. He tries to avoid the simple “electrify everything” mantra, dismissing it as overly simplistic. He advocates economy-wide CO2 pricing – incentivising everyone from process engineers to domestic cooks to become more efficient and lower CO2 emissions by taxing CO2.

And that’s where it hurts. Yesterday Rob produced a piece looking at the efficiency of home-cooking. His findings were a bit of a shocker. She-who-is-Mrs-Blain and I are doing up Blain Manor –constructing our forever home down in our beloved Hamble-le-Rice, far away from children and nearer to our boats. I’ve spent weeks checking insulation ratings, choosing the right windows, examining air and ground pump technologies, and reading everything about solar power and battery solutions. Even though our house will be rendered and clad in wood, it’s going to be as green as we can make it…

But yesterday Rob revealed the efficiencies of various forms of domestic home cooking: “Induction cookers are technically the best technology, but are 2x more expensive all-in. Gas is cheapest and will often be less carbon-intensive than electric.” Dang. We’ve just shelled out the Gross National Product of medium-sized Peripheral member of the EU on a state-of-the-art induction hob. I did say I liked cooking with gas… but was overruled.

I particularly liked Rob’s comment on how to measure the effectiveness of cooking methods: one technical paper measured the energy requirements to boil 200g of potatoes, in 200ml of water and a 700g stainless steel pan, obtaining CO2 and cost profiles.  The goal is to produce cooked potatoes, but what you get is hot pans and hot water (which will ultimately be poured down the sink).

“Since the potatoes comprise just 20% of the mass of the system being heated, the efficiency of this potato cooking process cannot be more than 20%. We estimate 9% efficiency in the gas cooker, 14-16% in the electric cooker, and c10% in the induction cooker (although this was not a fair test, as the induction cooker was run at a higher overall heat rate, saving time, but using more power).” He wrote.

We can save the planet by putting a lid on the pan, or by using a smaller pan, or pre-boiled water from the kettle. Pressure cookers would help – but frankly, when you’ve sold your kidneys on a new kitchen who’s going to spoil the look doing that? Did you know a rice cooker uses 77% less energy than a pot? It’s the way you cook rather than how you serve it that’s going to save the planet.

(I better not mention to Rob that my favourite way to cook is on my Big Green Egg and my top dish is the paella I make in it, basically boiling away lots of steam from very wide open shallow pan… I worry I am latterly chopping down a rainforest with every bite… but it truly is delicious..)

Five things to read this morning

BBerg – France and Germany Have No More Vaccine Excuses

FT – “Digital Big Bang” needed if UK Fintech to compete, says review

FT – Carbon bulls will not wait on the EU

WSJ – Charlie Munger Renews RobinHood Criticism, Likens App To Racetrack Betting

CityAM – Soho House mulls $3 bln New York Listing in IPO Boom

Out of time, and have a great weekend!

Bill Blain

Shard Capital