The Week That Was (22nd - 27th November, 2021)
"The establishment of a central bank is 90% of communizing a nation." Vladimir Lenin
Volatility is the fee you pay for wealth creation
Life has been tranquil over the last 18 months. The biggest down day for the S+P 500 has been about 5% (?). That’s not common.
The poor tape on Friday might unnerve investors but their resolve won’t be tested for long, I think. Markets tend to do quite well after VIX spikes like it did on Friday.
I continue to believe the market will be firm into January. This year has been like any other QE-fueled year that coincides with the first year of a Presidential term.
A few things conspired to cause all that red on Friday. Thanksgiving means trading desks are short-staffed. PB margin collateral guys can get nervous as they are on their own. And fund managers start to think about protecting their performance ahead of bonuses in Q1.
Covid was supposed to be in the rear-view mirror. The news out of South Africa tested that assumption, which might have caused some fund managers to act hastily. Perhaps more important was the move in the 10 year, which was big. I’m guessing it would have unnerved PB collateral desks – they might have asked their levered clients to unwind positions.
Things, I feel, will normalize reasonably quickly next week. The market trades at 20x-ish earnings. That’s not rich. And Vanguard index inflows won’t stop – too many people sold at the lows in 2020 and buying the dip has worked too many times for FOMO not to kick in. And of course, there’s the Fed!
Junk bond spreads are edging wider but that’s just going to be something to monitor for now. It is a lead indicator; it’s not a coincident one.
Tom Lee suggested buying the hotel and casino stocks on weakness. They might have decent upside potential short term but I still prefer to own the tech compounders on weakness (Apple etc). High free cash flow yield; buybacks and growth - what’s there not to like long term?
Buybacks and M+A
Two themes might also provide the market some support.
Buybacks announcements could increase. With interest rates so low, why wouldn’t a CFO copy what Apple, Autozone, Walmart and the like have been doing for years, instead of paying out a dividend?
On the M+A front last week, it wasn’t just KKR trying to make big acquisitions. Sweden’s Ericsson snapped up cloud firm, Vonage, for $USD6.2bn.
Will we see more acquisitions? I think so.
There are many listed SaaS companies at valuations sub USD$10bn that would make great targets for larger companies.
Growth Scare in Q1?
It was pleasing to see someone else talk about China’s slowing growth this week and how a slower China is probably going to be deflationary. Such dialogue has been conspicuous by its absence on Wall Street.
Of course, it wasn’t one of the “legendary” hedge fund managers or usual talking heads making the point. It was someone much more brave and prescient. It was Cathie Woods.
Cathie’s comparison of China in 2021 with Japan in 1989 is an interesting one. Books were written about Japan becoming the leading economy in the world a few years before its crash in 1989. Sound familiar?
Its economic successes had been outstanding since the 1960s and went into hyperdrive in the 1980s. Because of its success, Japan became the play book for other Asian nations wanting to grow fast, especially China.
The Plaza Accord of 1985 was a pivotal moment for Japan. The Plaza Accord was a joint–agreement between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French franc, the German Deutsche Mark, the Japanese yen and the British Pound sterling by intervening in currency markets. It has been blamed for the Japanese asset bubble in the late 1980s.
What is perhaps less understood in the West is how the Plaza Accord of 1985 was perceived by the mandarins in Asian governments. For them, The Plaza Accord was not a simple re-adjustment of the currency to make trade fairer. It was an act of financial sabotage by Western nations, who couldn’t cope with an ascending Asian nation. In this respect, Japan acted as an example of what can happen if you get too big for your boots or at least, that’s how it has been perceived in various corridors of power around Asia.
The fear of sabotage from outside forces runs deep in China for obvious reasons. They went though the “Century of Humiliation” and endured an aggressive occupation by the Japanese. Perhaps it’s because of this fear that the currency has never been freely floated, something that has never really happened for a major trading nation.
And it might go far in explaining some of China’s recent actions. Its urging to Didi to delist from the US on security grounds sounded rushed and nervy this week.
To be fair, the establishment of the Quadrilateral Alliance hasn’t helped China feel at ease. The US has India, Japan and Australia in its pack. China has Pakistan! And that alliance seems to be part of a bigger strategy by Biden to build a broader Western Alliance that was undermined by Trump’s recklessness and outbursts. It’s no wonder China and, to a certain extent, Russia, are acting more defensively.
President Xi knows he has to stabilize the situation at home, like any good Confucian leader. To be fair, an awful lot of good stuff has been achieved over the last 10 years. For example, the wealth poor divide has dramatically declined.
But now he has the unenviable task of deflating a bubble in a systematic way. That didn’t create too much social unrest in Japan, save a few skirmishes about increases in value added tax. But Japan is a very different country to China. It has every chance of causing social problems there.
This explains why it was important to get hold of potentially subversive individuals like Jack Ma. I’m not defending it. It is what it is. Consumer credit could easily have become the new opium. But its unclear whether he’s gone too far forcing kids away from such things as gaming, at a time when the metaverse is becoming a thing. Shenzhen has some of the best blockchain and crypto related technology in the world. That came from a bottoms up, entrepreneurial approach, not a top down one. The lockdowns on Covid look like an overreaction, too.
Unfortunately, we might have started seeing the impact of these moves on growth and consumption. Corporates aren’t reporting great sales data. We recently had Alibaba disappoint the market. It was Pinduoduo’s turn on Friday.
Could this all lead to a deflationary spiral?
If so, that would make Cathie very right: China in 2021 could indeed look like Japan in 1989.
Perhaps that’s why the US bond market still suggests inflation will be temporary. Zero growth out of China is going to have a big impact on the world!
Dollar Tree Raises its Prices to $1.25
The talking heads are making a HUGE deal out of this. But they paid no attention to what Walmart said about fighting inflation being part of their DNA. Which one is more relevant for the working poor of the US?
It’s Walmart.
Dollar Tree is a chain that sells cheap Chinese manufactured products to people, who are tired from their “shitty” jobs, usually trying to keep their kids entertained at an expense they can afford.
It represents everything negative about the last 30 years of deflation and will surely become less relevant as people’s wages improve and supply chains get re-organized.
Would such a chain have grown so fast during a prosperous economy like the US from 1957-67? Wouldn’t it better for the world if the US could get back to looking like that economy?
And doesn’t this just show that supply chain issues just hurt small margin, low end consumables the most. At the end of the day, expensive stuff can be sent in planes.
The market, if allowed, will solve these supply issues as new capacity will eventually be built. Short term inflation in 6-12 months will end up being too much product in stores. Same as it ever was?
Let’s ignore the talking heads, who probably have never even seen inside a Dollar Tree.
Is Janet Yellen the most influential person in the world?
How much time was wasted talking about Powell’s re-nomination? Was there any doubt as to how it was going to turn out?
Jerome Powell wasn’t actually Trump’s choice. He had been nominated by Obama before his term finished.
Yellen, despite having a successful first term as Fed Chair, was replaced because there were bigger plans for her. She was destined to join the Treasury long ago, I reckon. It was crucial for her to take the position at the Treasury as only then could the coordination between the Fed and the Treasury be certain. QE must be combined with public spending for the plan to work.
Jerome Powell, no doubt, spoke with Yellen frequently during the dark days of March 2020. They both understood what was needed to be done to avoid a horrible deflationary world.
Yellen and Powell both fear deflation and both fear going too early on raising rates, especially with so many people unemployed. They know what happened in Japan during the 1990s. They know what mistakes Draghi made in Europe. And Powell, himself, doesn’t want a repeat of Autumn 2018.
The plan has been set. And it’s a global plan.
The globalists of the 1920s would have loved it for sure.
Let’s stop pretending it ain’t so.
Jamie Dimon - who will he outlast?
Jamie is a bit loose. You wonder what he’s like with a few drinks in him.
You don’t see Brian Moynihan of Bank of America or Jane Fraser of Citigroup pontificate about bitcoin’s demise or question the longevity of the Chinese Communist Party. Maybe it’s his age. Maybe he has that delusional self-confidence Jack Welch had in his final years at GE.
Whatever it is, he should really stop making statements like he did this week. His comment about the Chinese Communist Party sounded like one of those jabs Ronald Reagan expertly delivered to the Soviets in the 1980s.
The trouble is Jamie is not the President. And he hasn’t got the panache of Reagan.
Wall Street seems happy with the idea that there will be a rate hike next year. But what if there isn’t one? What if rates stay at 0%? Will the banks start lending?
It’s unlikely. And that’s the problem.
For QE to work, the banks must lend. And the US banks are acting just like the European ones did and the Japanese ones before them. That leaves the Fed/Treasury with two options: 1. Bank reform of some kind. 2. Negative interest rates.
Banking reform is fiendishly difficult. Getting substantial reform through the interested parties in the Senate would take years, especially after all the back room deals to get the infrastructure bill through.
Negative rates, on the other hand, are a much easier lever to pull. And one which, I believe, will be tried within 12-18 months in the US and even in Australia.
Jamie Dimon will be long gone by then is my guess. He’ll have found his Jeff Immelt to take the heat from a falling JPM share price and be writing his book on “being awesome.”
Is SBI Holdings the only great challenger bank in the world?
Long before software meant it was possible for Monzo to exist, the supermarkets in the UK tried their hand at banking.
Sainsbury’s launched their bank initiative on the basis that banks were complacent, arrogant and greedy in the 1990s. Banks are still complacent, arrogant and greedy and both Sainsbury and Tesco have pulled up their stumps.
Today’s neobanks are cooler than the supermarkets, of course, and promise so much with their modern UX and fancy apps. They’ve also raised huge amounts of VC capital but it’s hard to find one that carries out the role society needs banks to fulfil. They need to provide loans and lots of them.
Why have they been so disappointing?
Unfortunately, banking isn’t cool. And the only way to make money is through charging overdraft fees (JP Morgan made over $1bn during the dark days of Covid) and through charging corporates and institutional clients for transactions. Take that away, and banking becomes a more or less free service. Then add the cost of being compliant, staying on top of regulation and managing risk and it becomes very hard to make any money.
The other issue is getting deposits. If you cannot get a customer to trust you with their wages and salary, you have not got a customer. If you are purely used for payments and transactions, you’re a commodity that has no ties. Last week, N26, the German neobank closed down in the US. It was just too hard.
Perhaps the secret is to actually work in finance before trying to upend it. And that is exactly what SBI seems to be doing.
This week SBI in Japan was in the news. It was making a bid for Shinsei Bank in Japan but Shinsei had planned to introduce a poison pill defence at blocking SBI’s $1.1bn bid. Importantly, the poison pill was dropped due in part due to government intervention.
This is huge news in itself (and warrants a whole analysis on why it makes Japan even more interesting as an investment destination at the moment) but it also helps SBI achieve their goal of becoming a new digital bank.
What’s different from other neobanks is SBI already has the largest online securities business in Japan, has an established non-bank lending business and has access, importantly, to all the Japanese regional bank deposits.
Just like credit unions in Australia, the regional banks in Japan have no digital strategy to “lend” their own deposits. SBI will provide that solution for them. The size of the deposit base at Japanese regional banks is HUGE.
When you add in the fact that SBI also owns B2C2, the crypto currency OTC broker, and has a partnership with Ripple, it makes the company seem worth investigating at least, no? That’s not bad for business run by an entrepreneurial 70 year old.
One to watch?
Price discovery thru markets, not VC Ponzi Schemes
The IPO of Paytm was a disaster despite ticking all the right boxes.
It’s a fintech. It’s based in India. It has good revenue growth.
It had one problem. Its valuation was just too high.
It underlines the problem of companies staying private for too long. The valuations get ridiculous and further and further away from reality as VCs pay way too much for paper.
The stock market IPO process is not perfect but the pricing of deals by institutional fund managers is a mechanism that works in bull markets and bear markets. It also means there is often plenty of secondary buying in the secondary market to support the share price. That wasn’t the case with Paytm.
For me, VCs wanting direct listings is a way for them to avoid dealing with reality. And try to get the best possible price in a bull market. Always follow the money, I say. The beanbags and frappacinos are just a distraction. But that’s a discussion for another newsletter.
As always, thanks for reading. If you like what you read, please share it with friends, colleagues and family. I am still in the building phase. As always, feel free to send me feedback. I can handle abuse.
Best regards
Mateen
DISCLAIMER: None of this is financial advice. The opinions expressed are purely my own opinions and it is imperative for you to do your own research. They do not represent the views of any company I am associated with.