The Week That Was (October 10th-16th, 2021)
"The key to making money in stocks is not to get scared out of them" Peter Lynch
Time for a Year End Equity Rally?
I think so.
It’s all setting up rather well: cheap equities, low interest rates and a great earnings season ahead.
A leading indicator, the euro/yen cross, is supportive.
And investor surveys are as bearish as they were in October 2020, just before the US election - a bullish signal for me.
The equity market melt-up, I think, might be significant into year end.
What to trade?
It could be an “everything rally,” according to Tom Lee.
Soros’ Dawn Fitzpatrick likes the recovery stocks still - “people want experience, not products now.”
Did you see how much money Goldman Sachs is making?
Investment banking stocks do tend to do well at this time of year.
For me, I will stick with FAANG and SaaS names. I will write a love song about Hubspot one day.
No repeat of 2018, please!
This year has been like 2018, not 1973!
Strong dollar. Strong oil price. Sluggish industrial metal prices (iron ore, copper, palladium).
And Chairman Powell was under intense pressure all year to taper in 2018 too!
He listened to the pundits then and the S+P 500 closed down 6.24% for the year.
He does not want a repeat of that.
He might still taper but it will be carefully managed with the Treasury this time.
Winston Churchill: “For myself I am an optimist: It does not seem to be much use to be anything else”
John Kenneth Galbraith, the author of The Great Crash 1929, was a giant economist of the 20th Century, as well as being a very tall man. (Fun Fact: he was 6ft 9 inches)
By all accounts, he had a keen sense of his intellectual superiority and once surmised:
“we all agree pessimism is a mark of superior intellect.”
Being pessimistic has not helped you manage money over the last 13 years though.
Hedge fund titans from the 1990s such as Bridgewater, Brevan Howard and Oaktree have all had sub-par performance since 2009, because they were too bearish at pivotal moments in the market.
It’s not just those legends.
John Paulson predicted depression in 2009.
David Einhorn warned us about inflation in 2012.
And now Mohammad El-Erian tells us every day that stagflation is here.
Over the last 15 months, we’ve been told there would be a depression (March 2020), inflation (Q1 2021) and now stagflation.
That’s the craziest I’ve seen it.
I think retail investors are working out that the men in suits have no more idea than they do.
TS Elliot: This is the way the world ends. Not with a bang but a whimper
Talking heads always focus on the apocalyptic.
That’s probably nothing new.
Fear has always sold newspapers but because we live in an information age, it’s harder to get away from it these days.
It’s not helpful. It takes us away from discussing the issues of the day sensibly.
Problems tend to get solved. We tend to meander on as a human race. And things generally get better.
Take, for example, Tala. It raised $145 million to progress its technology solution for the unbanked this week.
https://www.cnbc.com/2021/10/14/tala-fintech-for-unbanked-raises-145-million-for-global-crypto.html
I remember this being a much talked about problem between 2015 and 2018 in the US.
There was clearly a problem and clearly an opportunity in fixing it.
It was in 2018 Jack Ma tried to buy Moneygram, which would have given him access to the unbanked demographic in the US.
Three years later, a technological solution has emerged to solve the problem. And it seems to be working.
Shouldn’t we be a bit more optimistic?
Good things are happening every day.
In 1930, John Maynard Keynes wrote we would solve the “economic problem” within 100 years of his paper. We have 9 years to go.
The Labor Issue in the US
If you attend a Thanksgiving Party in the US, chances are an old person in the family might tell you about the good old days after a few beers.
The days he talks of tend to be during the 1950s and 1960s.
It makes sense. It was a time of tremendous growth in the US.
It was also a time of bigger government than the US has now and it was a time of trade unions.
All that was dismantled by the Monetarists and the Supply Side guys aggressively from the 1970s. Unions became less and less relevant.
Labor took another beating with the introduction of China into the WTO, which allowed the labor arbitrage multinationals to shift work overseas.
It took a final beating from the tech oligarchs. Processes were streamlined. Less people were required.
Today, labor as a percentage of corporate profits is the lowest it has been.
And that might explain why the low end worker doesn’t fancy coming back to work. They’ve been getting the wrong end of the stick for 40 years.
No one wants to have overly powerful unions but things are at extreme levels currently.
There needs to be a shift.
We live in a Keynesian world now, whether we like it or not. The Democrats and many on the other side of the aisle are talking about education and infrastructure as an investment. As I’ve said before, that is a huge development.
John Kenneth Galbraith, a keen student of Keynes, argued that society couldn’t leave everything to the market. Laissez-faire policies work to an extent but it’s foolish to rely on economic forces completely.
Perhaps there is a need for a public agenda for labor too. Can labor be considered to be an asset rather than an expense line?
This might sound socialist (I am not a Socialist) but bear with me.
Deflationary forces have been with us since the early 1980s. There are many reasons for that but some of it is surely related to the average family not being able to earn a decent income? We will simply not have a general increase in prices (remember some inflation is a good thing) without sustainable wage growth. It’s not clear that’s happening yet despite all the noisy headlines.
As mentioned last week, Japan is a good case study for what Yellen/Powell/Biden are trying to do right now.
Interestingly, Prime Minister Abe had to intervene to pressure CEOs to hike wages (the unions there were too timid) to help end deflation. It was an important part of the strategy to jumpstart Japan again.
Signs are there that things are improving and some of it is being driven by corporates. Bank of America will raise hourly wages for bank tellers to 21 bucks.
But perhaps the tech giants could do more.
Amazon?
Less space travel/testosterone treatment; more focus on the people who make Internet 3.0 work?
Supply Issues Peaking
The anecdotes are everywhere.
An investment banker in HK can’t get a fitness watch from the US for 7 weeks.
A student can’t order his text books until next term.
If the 8th Wonder of the World was compound interest, just-in-time inventory was the 9th.
But just-in-time inventory has weaknesses, which are becoming all apparent now and is causing a long-overdue restructuring to the supply chain in the US (a long term positive?).
What’s happened has been similar to the impact of war on supply chains. Throughout US history, CPI has spiked each time the US has been involved in a major conflict.
Things will get better and the fantastic numbers from JB Hunt Transport Services on Friday underline how well companies in the space are responding.
Incidentally, its stock reached a 52 week high on Friday - is the market seeing through the problems?
Time to be optimistic?
Other Tidbits:
Facebook:
Sheryl Sandberg should go but perhaps Facebook’s issues underline the inherent flaws of the internet. It’s a deeply complicated issue to give justice to here but I would suggest reading:
https://stratechery.com/
Ben Thompson talks at length about Facebook’s issues.
https://www.profgalloway.com/carcinogens/
Scott Galloway highlights some of the issues of the digital ad industry.
The Attention Value Dilemma: the need for a new internet | by Mateen Chaudhry | Medium
The last article is awesome, I hear.
Uranium:
As discussed in previous newsletters, the roll out of nuclear will be as coordinated as the global move towards electric vehicles. Its time has arrived and why not? The technology is 1000 x better than the technology in the 1970s.
Importantly, the narrative is changing.
Led by France, 10 EU countries called on Brussels to label nuclear energy as a green source of energy this week. Even “green” Finland lobbied for nuclear as a sustainable resource.
Are we 6 months away from seeing something happen in Oz? I think so.
The best names are in North America but there are a lot of smaller names in Australia.
Returns should be good but Rick Rule makes the point that a stock like PDN AU Paladin is not a sub AUD10mn company anymore, as it was in the last bull market. Returns can still be robust but, perhaps, not explosive (pardon the pun) as they were before.
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. I added a cartoon image of me. It took a long time to work out the software!
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.