A price is just a price… it’s a relative thing.”
Only a few days to go on this year’s charity appeal. Tomorrow morning Nicky (She-who-is-Mrs-Blain) and I set off on our final 20km hike in aid of this year’s charity appeal – raising money for Walking With The Wounded, helping ex-military with mental health issues. We are Team Morning Porridge! Please read about the charity and make a donation.
How Bonkers is this world? The ECB, IPOs and finally accepting ESG has some good points to make – with caveats!
If there is a single theme to sum up what a nonsense year 2020 has been, it’s the British couple who are both over 100, been married 77 years, and haven’t been allowed to see each other for 10 months because of the pandemic. Who do the authorities think they are helping? What kind of society are we for letting it happen?
Or there is the ECB swinging another €500 bln at the Euro-bond market in the expectation it will drive a European recovery next year. Some might wonder if doing the same thing again and again is a sign to be concerned. They’ve been doing for years – ie pumping money into financial assets rather than the real economy – hoping it will trigger recovery. Nope. It won’t. All its done is institutionalise the European bond markets, kill private financing, distort markets and ultimately it will fundamentally destabilise society through inequality. Another EU big bazooka and inflation tumbles. Brilliant. Definitionally stupid.
The Brightside in Europe is they are finally ungluing the gummed up fiscal policy levers by approving the Recovery Fund.. which will deliver money via grants and loans.. But only to countries that suck up to Brussels. Next Year? Brilliant.
But if you really want to worry about how euphoric markets are, think about this week’s US IPO market. Toppy or what? I want to know what the retail market is collectively smoking – and please please can I have some?
It’s been truly extraordinary. DoorDash, a food delivery company that’s never made a penny profit is worth $70bln? It exists in a no-barriers-to-entry, highly price competitive, and ultimate risk sector – where if Micky D makes a bad burger they get the blame. It’s also a concept that’s shifting on the value curve. Money ain’t made on deliveries, but in the manufacture of meals: you probably aren’t getting your Kentucky Fried Rat from the Colonel, but from some Dark Kitchen on an industrial site. Costs are slashed, but they can still charge extra by slapping a posh restaurant’s name on a 50 pence burger from Iceland.
Yesterday’s Airbnb IPO was just completely hat-stand.
This was a company IPO that analysts were struggling to justify a $40 dollar price last week, and it finally opened at $163 y’day. It’s a very, very mildly profitable company, but is its really worth more than the global hotel industry or a multiple of the package sector? As some wag noted it values each Airbnb property around $13k, so all any competitor needs to do is clone the software and marketing, then pay Airbnb owners $10K to switch to their new firm to become instant billionaires.
What’s driving all these extraordinary prices is a combination of multiple factors, a conjunction of hatstand market madness, plus a complete and utter suspension of disbelief by an incredulous market of retail marks – the ultimate Jubbs, the greater fools. The big banks and funds will be delighted to take the IPO allocations and run.
Let me try to explain: Every single day I come up with lots and lots of very clever ideas. My biggest failure has been failing to effectively monetise them. Every so often someone does monetise a clever idea and makes Quintillions. But most clever ideas are not SMART Ideas. Smart Ideas are the ones that really change the world. Sometimes it take a long time to discover a Smart Idea was actually just a clever one…. Usually accompanied by the sound of a bubble popping.
Ultimately, every investor wants to invest in something that is a monopoly and will reap monopoly profits. So they buy into things like Standard Oil, Microsoft, Apple, and Facebook and pretenders like Tesla, Snowflake, AirBnb and the petfood delivery company that is now worth more than the land value of the Emperor’s Palace in Tokyo. Some are safe monopolies – like no one else can make an iPhone. Some are risk-monopolies where regulation to break oil giants, control social media and calls to break up Facebook or deter Amazon are tangible risks. The pretenders might have first mover advantage, but they are vulnerable to competition as they progress.
If you are Elon Musk you can make lots of noise about the company and extend the illusion it’s a monopoly by controlling the narrative – its not a car company, it’s an energy, self-driving, taxi monopoly. Eventually it bursts. (Credit where credit is due. Even though the spaceship crashed earlier this week, SpaceX is brilliant. It could have become a valid monopoly/duopoly in space launch if Musk hadn’t decided to use it to create his Starlink satellite internet monopoly – which will compete with every other provider of same.)
At the moment the market is being deluged by the money governments and central banks have injected in to stimulate recovery. Oh, you thought that money was being used to create jobs and companies? Wrong. All that free money is pushing up financial asset prices, making the rich richer. Everyone wants to be rich, so everyone (bear with me here) is investing in stocks – which pushes them yet higher confirming what these new investors believe.. stocks can only go higher.
Remember Blain’s Market Mantra No 1: The Market Has But One Objective: To Inflict The Maximum Amount of Pain on the Maximum Number of Participants.
I read that internet purchases increased by some 63% in the US over the course of the pandemic. Many stocks are rising on the basis the pandemic has accelerated the transition to new tech, like internet shopping, and other tech. Or it could be these things happened because of the virus offering no alternative. When it’s done we’re going to want to spend a Saturday in the shopping mall or high street, or going to luxury hotels (rather than dodgy Airbnb where the owner is filming you in the shower… just saying. It happens.)
The Pandemic was a massive unpredictable shock. The markets have been fuelled by the massive predictable response. The next massive unpredictable shock is what happens when it all reopens and unwinds? Maybe not what you expect.
Meanwhile… back in La La ESG Land
As readers will be aware I am an avid consumer of anything on the topic of ESG (Environment, Governance and Social) investment… mainly so I can question the assumptions that underly them. It’s long been my opinion Common Sense beats rules-based investments every time. Rules are like taxes – they tend to be “optimised”. Usually badly.
Earlier this week, I stumbled upon an extraordinary piece of ESG frippery. I shall not name them, but a German ratings firm has shocked the global financial community after its’ exhaustive research concluded: France’s CAC40 Index scores slightly better than Germany’s DAX 30 when the average environmental impact of its component stocks is calculated. A fractional difference but a difference!
Therefore.. As ESG credentials (rather than old fashioned returns or fundamentals) are now top of the list of investment parameters, I suppose we should immediately dump Germany, and buy France till our noses bleed! (Probably not… while being aware of the environment is a plus, other factors also matter.)
Nicht alles verloren ist for Germany though… Apparently French firms might be greener, but German firm perform better when it comes to Governance and Social issues. The agency says ESG acts like an early warning system for portfolio managers, showing future regulatory risks and associated costs … Hmm? Just like they did for Wirecard and VW’s bogus pollution reporting…? The careful application of common sense would have been better.
The rest of the report droned on about stuff that didn’t really register, till I nearly flatlined when I got to stuff about Sustainable Finance Disclosure Regulations. It’s all so depressing. Finance used to be fun. Can anyone explain what this actually means: “The ESG impact score is based on calculating the cost of the externalities of a company’s activities including its supply chain – using well-established, publicly available macro-economic data describing the interdependence of sectors and geographies – for every euro of revenue the company generates.”
If I had the energy, I could go back, reread the sentence a couple of times and work out what it might mean. But its Friday. Forget it. Life is too short.
However – and this is a big moment because I am about to accept that ESG matters – ESG, corporate social responsibility and sustainability are critical investment components. Maximising shareholder value and returns is one aspect, but to get the potential buyers over the investment line we do need to demonstrate the environmental, social and governance issues around the deal business, structure and management are identified, addressed, solid – and ultimately sustainable.
I am going to add ESG to my fundamentals list. The buy decision on any ticket should include just how the management are addressing their business in terms of climate concerns, what are the social implications of the business and how management is incentivised and accountable. Calling it ESG is fine – even if you have to slap a label on it.
Until there is a clear definition about what qualifies as “green” or “social” it makes sense to use frameworks like the Sustainability Acccounting Standards Board (SASB) to outline the ESG risks. At the moment there are green bonds, social bonds, sustainability bonds and a host of competing principals and guidelines. It’s tough out there..
Five Things To Read This Morning:
BBerg – EU Approves $2.2 Trillion Stimulus Plan paid for by the Germans backed by Joint Debt
Garuniad – Car Battery firms scraps plan to build UK’s first Gigafactory in Wales
FT – Disney Forecasts tripling of new subscribers to streaming service
BBerg – When Elliot Talks, Masayoshi Son and Softbank Listen
WSJ – China ramps up control of private sector
Have yourself a great weekend. We will be off doing our third 20KM charity hike (round the River Test, Danebury and Stockbridge), and I confidently expect to be opening with the failure of Brexit talks on Monday morning…
Go on, make a donation to Walking Home For Christmas
A price is just a price… it’s a relative thing.”