The Week That Was (24th - 30th October, 2021)
"Never miss an opportunity to shut up." Mark Twain
Stay long, my friend!
We will see the market rally into the second week of January.
Valuations are cheap.
Interest rates are low (and will STAY low!)
And earnings are robust.
Some of the earnings have been spectacular, haven’t they? (Microsoft and Atlassian).
Fed tapering?
Focus will be on whether the Fed tapers this week.
If it happens, it will be a non-event!
Tapering for the last twelve years has tended to result in lower inflation expectations and the peaking of long-term rates.
Aren’t we seeing the yield curve flatten out?
In the past, tapering has also tended to be positive for equities with growth stocks outperforming value.
Have a look at the 5-year forward inflation break evens, by the way. (It’s a real time measure of inflation expectations).
Didn’t Deutsche Bank recently say the break evens were going “to cross the Rubicon”?
I’m not sure that’s going to happen now.
They look to be peaking like they always do when tapering is around the corner.
Free cash flow yield, buybacks and growth – what is there not to like?
Tech will lead the market as inflation concerns ease.
Tech compounders like Microsoft and Apple are the new gold and should be in everyone’s portfolio.
“Growth at any cost” will also do well. As discussed last week, Tesla has won.
GM’s CEO sounds delusional here:
There are many SaaS plays that will make new highs too.
Hubspot? Bill.com?
M+A theme?
With interest rates so low, buybacks won’t be the only thing keeping corporate treasury departments busy.
There will also be renewed focus on M+A.
Remember GS’s investment banking revenue last quarter?
Potential acquisition targets are showing signs of life.
AMBA or FSLY?
Anything sub $10bn market cap, growing like weeds, and with a solid vertical SaaS model, would be a nice addition to a larger tech company, no?
Overseas?
Stick with the big stocks.
It’s interesting to see more foreign investment firms talk up Chinese internet stocks.
How quickly the pendulum swings in the investment game!
Japan also seems set for a rally.
Sony could lead the market there.
Its FCF yield will attract the US funds.
It would be a magical tech compounder if it monetized its catalogue better.
What not to own?
Take a step back and think thru what a slowing China means for overall prices (it was deflationary in 2011/2012) and for commodity prices, especially.
Steel prices are easing in China because of weaker demand.
Perhaps there’s a reason industrial metals have been rolling over since May.
I would not want to own commodities or materials.
I’d also be wary of value or small cap but for different reasons.
The Second Golden Age: Biden’s Infrastructure Bill.
The Golden Age went from 1948 to 1971.
It was marked by:
1. Demand side economics
2. Full employment policies
3. Wage led growth
4. Strong financial regulations
5. Balanced trade and
6. Shared prosperity.
Sound familiar?
That’s the narrative of Biden now.
We live in a Keynesian world!
Demand side policies (Keynes) will define the next 10 years.
The momentum is very strong.
Listen to Janet Yellen here:
Now listen to Biden here:
It’s not a US specific thing. It’s a global thing.
Didn’t the proposed tax on un-realized capital gains sound like something the Chinese government would propose?
Isn’t Cop24 aligned with what the globalists of the 1920s ultimately wanted?
It’s important to find themes that need global coordination to make them happen.
I think nuclear is in the early innings of a big rerating. There is no net zero without uranium.
The infrastructure bill will be a tailwind for the market
The infrastructure bill will be a historic piece of legislation. (I think it’s the first of many infrastructure bills!)
The Fed/Treasury fear deflation. They know the CPI doesn’t give anyone the full story.
Japan only got out of its deflationary funk when public spending was matched with QE and structural reform.
The US Senate needs to follow through.
They will.
You can imagine the deals being done in DC.
They would make Francis Underwood proud, I’m sure.
Billionaire Echo Chambers
By all accounts, Jack Dorsey is an incredibly smart man (high IQ) but he is also now incredibly wealthy.
When you become that wealthy, you tend to be surrounded by sycophants and the echo chamber becomes deafening.
It’s not positive. Think Elvis during the Vegas years.
Hyperinflation? Are you joking?
If he really believed that, why did he not 100% debt finance the Afterpay acquisition?
Like Jamie Dimon, he says one thing and does another.
(The banks are buying as many safe assets as they did in the 1930s btw. They fear deflation, not inflation. Jamie knows negative rates are coming. He will retire before that happens.)
The whole narrative that the US would see hyperinflation is just ridiculous. (Jack Dorsey should heed Mark Twain’s advice).
It’s the same as the “Equador has adopted bitcoin so that means it’s going global” nonsense.
In terms of institutions, wealth, military power, influence and practically anything else, the US is in a completely different league to countries like Argentina or the old Weimar Republic.
Let’s be real.
The US won’t see hyperinflation!
#whathappenedin1971
Jack Dorsey used to tweet, “what happened in 1971?”
It was a tweet worthy of a Zero Hedge reader.
It sounded profound but it wasn’t really.
Even a high school kid with access to google now knows it was the year Nixon got off the gold standard.
Much more interesting was what happened in 1965.
Inflation wasn’t really a problem in the US from 1929 until the mid-1960s, despite all the growth in the late 1950s and early 1960s.
CPI had its moments such as in 1947-48.
(The pundits panicked then, by the way, very much like they are doing today, but nothing concerning materialized).
There was no sustained and general movement in prices, the very definition of inflation.
In 1965, something changed.
CPI picked up slowly and progressively over the 5 years from 1965 until 1970. By 1970, it was at 6.9%.
It went on to reach a high of 14.76% in 1980.
What has it been for the last few months?
Maybe we need to get some perspective, especially given the supply shocks?
Don’t discount the chance of a 5-10 year recovery!
It’s well documented that Peter Volcker broke the monetary disease that is stagflation that plagued the US during the 1970s.
He did it by implementing stringent policies (very high interest rates), which had the effect of causing people to save, not consume.
The balance sheet of consumers was robust by 1980.
This dynamic is often missed by Reaganites, who claim it was only Reagan’s supply side changes that resulted in the boom that was seen in the US during the 1980s.
Today, consumers also have very good savings.
Hasn’t Covid had a similar impact as Volcker’s policies did?
Haven’t we seen a new reset?
Are we not setting up for 5-10 years of prosperity?
Why is it so hard to believe?
Deflationary forces remain though
To say Volker’s policies were the only reason inflation went down in the 1980s is not accurate.
Many factors played a role and they are even more of a factor in today’s economy.
Reagan won in 1980 and he pushed for a strong dollar policy, not a weak one pursued by Nixon, Ford and Carter. That helped control inflationary forces.
As I’m writing, the DXY is 94. That’s pretty strong.
The USD never seems to die.
In fact, there might be a shortage with all the EM USD debt being issued.
What happens to inflation if the DXY goes above 100?
Another dynamic in the 1980s was the increased participation of women in the workforce.
Biden has deliberately pushed for universal child-care in his mandate.
What happens to wages when more women can work?
Trade unions also became less and less influential in the 1980s, which was a factor in declining wages in the economy throughout the 1980s and 1990s.
Today unions play a role in wage negotiations in the odd industry but membership is materially lower today than it was in 1980.
Perhaps, more important than anything, efficiencies brought about by technology became a dominant force in the economy.
IBM launched the IBM PC in 1981. And in 1984, Apple launched the first commercially successful personal computer.
Digitalization is only going to accelerate around the world. Countries that are behind like Japan even have their own Digital Agencies now.
Satya Nadella made a point of stressing that digitalization was deflationary during the the Microsoft call this week.
If digitalization leads to much higher productivity in low end service jobs, the wage increases just won’t matter that much.
We might be entering a new Golden Age of rising living standards and greater productivity and growth.
You won’t hear that on any news channels. Good news doesn’t sell.
Don’t listen to tech entrepreneurs; listen to the bond market.
Finally, it’s important to note we have been here before.
Inflation is emotive and CPI data causes the public, the politicians and certain Fed officials to panic at times.
In the past, the sensible thing to do has been to look at the bond market and not listen to the talking heads.
Greenspan shouldn’t have raised rates 50 bps in 2000. He thought the economy was overheating. The bond market didn’t. A recession followed shortly. The bond market was right.
The bond market told us what we needed to know in 2008. Bernanke and most of the world didn’t listen.
My guess is the bond market will be soon telling us that inflation is not the risk; growth is.
Perhaps it is already trying to.
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.
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.