Blain’s Morning Porridge 17th July 2024: Growth Tech or Small Stocks? Beware short-term moves, but Big Tech has changed.
“Perhaps I should not have been a fisherman, he thought. But that was the thing that I was born for.”
The investment options are changing – is it time to “rotate” into a broad-based economic recovery around underpriced small stocks by selling over-priced Tech? Or is something more fundamental at play in Big Tech?
Are we out to catch Sardines or Marlin?
Markets are a bit like fishing. You can follow the fleet and go invest in a tracker fund. You will likely catch sardines – good, healthy and full of very nutritious Omega Oils. Or you can go big-game fishing – trying to land a Sailfish or Marlin which are rare, expensive but win lots of kudos. (Yep… it’s an Ernest Hemingway quote this morning…)
I am often struck by the way markets move akin to a shoal of bait-fish; apparently at random, but designed by evolution to keep the shoal together to confuse predators. The downside is the shoal fits nicely into the ravening maw of the largest nets. (Apparently herring communicate the swift movements of the shoal by “farting” their directional intentions at each other – learn something new in the Porridge every day!)
Which brings us the current theme de-jour: the “Epic Rotation”, (according to BBerg), from growth stocks to small stocks.
The small-cap Russel 2000 had looked ignored and undervalued compared to this year’s ongoing rally in Mega-caps. Not any more: it is up 12% in five days, driven by the expectations of rate-cuts, falling inflation, avoiding recession, economic recovery plus a host of other micro-reasons that might or might not mean anything at all… Read the story and it’s a mass of very considered opinions, hopes, insights and fears that collectively mean it might go up, or it might go down.
On the other hand, this morning’s published interview with Donald Trump on Bloomberg might slow the rate-cut fuelled rally – he warned Jay Powell not to cut rates ahead of the November Election if he wants to finish his term. You can read the interview here: The Donal Trump Interview Transcript – Fact Checked.
Markets really do live in La-La Land: On one hand we hope for rate cuts because fighting inflation has triggered a recession risk. On the other, we believe stock markets are going to strengthen on a broad-based economic recovery – triggered by rate cuts. Oh dear… we put too much faith in what the Fed may or may not do, rather than what the economy is actually doing – that is the really interesting long-term issue to consider.
When the going gets tough, market participants increasingly seek validation and are driven by their biases to believe in what they have gambled on – as if clinging to a belief in something makes it real.
One example of belief bias, and hopes trumping reality in terms of catching that Marlin, is Cathie Wood of Ark. Since inception her funds have lost $14 bln, and she was recently described by Morningstar as top of the shareholder wealth destruction table. Not a problem – she tweeted recently: “Our trading related capital tax losses should offset trading-related capital tax gains for years, and are an underappreciated asset associated with our strategies.” Really? She has deleted the tweet.
It’s all a bit extraordinary.. and a bit daft. But hey-ho… on we go..
ARK investor or not there are multiple lessons to be learnt, but a key one is to be very, very careful of reading too much into short-term market movements – never forget the market is not intelligent. The market is just a voting machine representing the views of its participants on a weighted basis. The market is not clever – as Ms. Woods shows it reflects the biases and stupidity of those of play it.
If there really is a great rotation underway from the Mega Tech Growth Stocks into the broader small stock universe – then it does represent something fundamental about a switch from the dull, insipid kind of growth (albeit at full employment) we’ve seen since 2008 towards something that looks more broad-based “Boom” time – percolating into the economy to boost small stocks.
Careful what you wish for. Boom time infers boom and bust time – a more volatile economy with greater growth but more swings, roundabouts, unemployment and inflation.
We should be honest about the success of growth stocks – through the distorted low return environment of the QE era, stocks with real or imagined upside were pounced upon, their successes magnified while downside was glossed over, driving stock markets into the extreme PE ratios we see today. That was a much a factor of artificially low rates as their business successes.
At its simplest: tech growth-stocks represent hopes for the future based on the emergence and monetisation of critical new technologies. The success of Apple, Microsoft, Google, Meta et al – firms that created new niches for their tech vision, evolved and grown into today’s mega growth stocks – demonstrates it’s a valid investment thesis.
It’s a route to success markets expect to keep repeating – for decades we’ve seen successive waves of the next new, new thing driving tech speculation: From the dot.com bubble to digitisation, the internet of things, B2B, SaaS, the Metaverse, and now the vastly over-inflated promises of AI. Next in line will be “Tokenisation”, and just like Blockchain I’m not convinced I quite understand what it’s trying to solve.
To be fair, many of the successive waves of Tech Growth stocks make good money but most are ultimately shown to have overpromised and underdelivered. Some fantabulous speculative investments appear to have worked (for the time being) – the Tesla stocks. But many themes and strategies have not: SPACS, NFTs, ARK Invest, Softbank (well, some parts came good).
However, one thing that does interest me is how the Tech Sector itself is evolving – and the implications that has for the future of Big Tech innovation.
Back in the day, Tech was seen as disruptive, a force for change, peopled by folk with mission statements to make the world a better place and “do no evil” (ahem..) It worked – you could start a business in the garage and if it worked, you become among the richest people in the world.
Now we have a situation that has changed dramatically. Big Tech is now increasingly subject to regulation and oversight – at risk of anti-trust action. The Democrats are not making friends at the top end of Tech. While many still think Tech is a liberal success story, increasingly it’s turned negative.
A key part of this is how the VC ecosystem that funds Tech appears to be changing – it is evolving into something less enamoured of the “disruptive”, and becoming more entrenched and concentrated in big firms. These big VC firms are so big they decide – not the market – which firms thrive or dive.
Tech lords, including the VC princes, are now the most powerful drivers in the Tech economy. The world’s richest man, Elon Musk, has read the mood, and has announced he is bankrolling Trump’s election effort to the tune of $45 mm per month. Peter Theil’s protégé JD Vance is Trump’s Vice-Presidential candidate – despite the earlier spats between Theil and Trump – what deal was done? Across the Tech sector, the VC firms have come out strongly in favour of Trump – Marc Andreessen and Ben Horrowitz are donating because they like Trump’s acceptance of Crypto. Horrowitz said on a podcast: “[for] little tech, we think Donald Trump is actually the right choice.”
Maybe Big Tech supporting Trum is a good thing – that very clever entrepreneurs and financiers support Trump demonstrates how he has evolved, but it also highlights where true power resides. Money speaks. (Let’s not forget how Mark Zuckerberg et al have funded Biden.)
Effectively the gate-keepers on new Big Tech are the VC funds. For new tech to emerge it has to be anti-conservative, disruptive with the aim of changing the world. How will that gel with the Techno-Libertarians now funding Trump? Interesting question I think – and worth asking although I am sure it will get me a basket of hate-mail.
Out of time and back to the Day Job…
Bill Blain
CEO and Founder,
Wind Shift Capital
