Gravitas Spark CrowdFunding

Tag: finance

  • Ten Rising Valuations

    On the odd occasion over the past week, I will admit to a tinge of regret over the timing of a 100-day alcohol-free challenge. It doesn’t last long. A quick glance at any news footage swiftly calibrates my thoughts as to the true challenges in our utterly transformed Covid-19 world.

    The human, economic and social losses are already dreadful and we have no idea when our lives might return to a more normal rhythm. The not knowing is tough. However, that day will come and a very sobering ten days has prompted a search for positive thoughts. Ironically, as financial markets fall in value there are welcome signs of other socio-economic essentials gaining in value. Here’s our top ten:

    1. Value of Science: Science and facts have recovered their essential role in decisions of critical importance. In this era of social media dependency there has been an alarming consequence of individuals “choosing” their own sources of information. Widescale disdain for science and subjective selection of “facts” has facilitated a dangerous conflation of opinion and fact. Unfortunately, it has taken more than 10,000 deaths, horrific ICU scenes and a global economic shut down to disabuse the “just a flu” view. The facts and real doctors have overwhelmed the spin doctors. Now the hope going forward is that expertise is once again valued rather than sneered upon.
    2. Value of Leadership: It is unfortunate that Ireland’s two most important trading partners are burdened with dysfunctional political environments and chronic fact-free leadership. The “herd immunity” gymnastics of Boris Johnson and Dominic Cummings have cost the UK precious days of Covid-19 containment. There is a real danger of needless additional loss of life and a painful realisation that a leader’s casual acquaintance with the truth in a crisis is extremely damaging. Indeed, the consequences of Donald Trump’s daily delusions could be even more catastrophic for US citizens. In contrast, the informed and realistic public messaging from Merkel, Macron and Varadkar has illustrated what leadership can be, but laid bare the risks of entrusting power in the hands of mendacious journalists and reality TV stars.
    3. Value of Planet Earth: We haven’t figured out anywhere else to inhabit. One would be hopeful that mass exposure to the threat of a global socio-economic collapse will focus minds on preventing similar threats in the future. Climate change is a scientifically documented threat to all inhabitants of our planet despite what Donald Trump and other fossil fuel champions might opine. So, expect the ESG revolution to gather further momentum.
    4. Value of Work: We have often written about the dangers of extreme income inequality which now rivals levels last seen in the 1930s. This crisis has surely revealed the true value of essential skills in the likes of healthcare, logistics, education and food supply. The irony of “unskilled workers” now being described as essential to the UK economy skirts over the fact that many of these workers are also immigrants. Perhaps the next round of pay negotiations will be more rewarding and supported by a more appreciative society. Furthermore, governments are also now being introduced to the instant evaporation of incomes from the gig economy and zero-hour contracts. Post Covid-19, expect companies who avail of state bailouts to receive serious scrutiny of their commitments to their workers, even if they don’t want them badged as employees.
    5. Value of Technology: As families, businesses and communities adjust to huge change many will be introduced for the first time to the solutions technology can provide. How many families were thankful of the online children’s PE class hosted by Joe Wicks yesterday morning? About 800,000 families apparently. Take your pick from tele-conferencing, online order/deliveries, entertainment streaming, telemedical apps and educational videos as 20% of the planet’s population is in lock-down. Life will never be the same again for many as they discover new services and more rewarding uses of their time. All powered by technology.
    6. Value of Education: As people experience a curtailment of their social lives and an exhaustion of Netflix, Instagram and Tik-Tok entertainment this is a timely opportunity to reflect and stretch the mind. In a sense, we have been forced to confront our own mortality and the safety of those we love. But also, we might reflect on the potential ‘mortality’ of a business or career. This feels like the moment when continuous learning and upskilling goes mainstream. Educational platforms like Coursera, LinkedIn Learning, EdX and Udemy can expect significant growth in the coming months.
    7. Value of Community: Who would have thought the UK Conservative Party would go full metal jacket socialist while the Labour Party ripped itself apart for a post-Corbyn coronation! On a more serious note, don’t be surprised to see the traditional and much-maligned European model of state/social support being the winner in a post Covid-19 world. Some communities will fare better than others in this crisis and it will depend on how all tiers of each society share the challenge and support the vulnerable. Reports of a spike in ammunition and gun sales in the US are not a particularly auspicious start to the challenges fast approaching that society. On a more positive note this is the first time the world is united against a common enemy since WW2. Community solidarity can achieve many things from innovation to workforce inclusivity. Even empathy.
    8. Value of History: Voltaire said, “History never repeats itself; man always does.” After the 2008-2009 credit crisis there has been frustration in many countries that previous bad actors in corporate, media and political life were able to re-invent themselves and airbrush history. Surely in a digital world we can do better this time. Exhibit A in the nausea stakes is White House economics advisor, Larry Kudlow, revisiting our screens to reassure and spout the same utter nonsense he floated on CNBC in 2008. This writer’s earnest wish is that all passive enablers and promoters of Trumpian and Boris falsehoods will be exiled from ‘expert’ panels, company boards, legislative bodies and TV screens forever. Covid-19 will have many innocent victims but history must convict the guilty few charlatans swiftly.
    9. Value of Mental Health: Social isolation will be a new experience for many. They will learn new coping mechanisms and swiftly understand the challenges of the lack of social interaction. For a significant percentage of society mental health is an every day, every year challenge. There is a genuine possibility this crisis will massively increase awareness, prompt good habits and deepen the understanding and importance of mental health.
    10. Value of Kindness: Already this crisis has revealed uplifting stories of outstanding kindness. What is less well documented is the positive feedback loop created by little acts of kindness. Just reaching out to 5 people a day and asking how they are doing is a good habit and strengthens the resilience of both parties during this period of quiet isolation. The same could be said in business. Those franchises that continue to communicate well to staff, suppliers, community and customers through this period will emerge from the crisis stronger versus less thoughtful competitors. It should also become apparent that deliberate misinformation or callous messaging could be fatal for business too. Fancy a pint in Wetherspoons any time in the next decade?

    The months ahead will be tough. Hopefully, the values listed above continue to rise and society re-sets in a positive way. Honesty will probably save many lives and prompts one final thought. In some ways the Chernobyl nuclear meltdown was a greater threat to the planet but we just didn’t know about it at the time. The HBO series documenting these terrifying events had a wonderful line from the nuclear scientist, Valery Legasov – “Every lie we tell incurs a debt to the truth. Sooner or later that debt is paid.”

    Now it’s our turn. Covid-19 truths and debts are coming due.

  • Interesting Corporate Activity Despite Covid-19 Fear Fest

    Pandemics are scary and the loss of life is a genuine tragedy. On a more positive note, the decisive actions of authorities in the likes of South Korea, Hong Kong and Singapore will hopefully provide a public health management template for Ireland and its European neighbours. Containment is key and discipline critical. Contagion can also be an unexpected risk in finance and is usually caused by rogue activity. Step forward Mohammed Bin Bonesaw.

    Not content with the murder of a US-based journalist, the Crown Prince of subtle appears to have set his sights on dismembering Texas and North Dakota from the election coffers of the GOP. Currently, markets are experiencing full-blown panic as Saudi and Russian leaders decided at the weekend that a deliberate oil pricing implosion was just what the world needed. Presumably, Agent Orange in the White House might have a different view after a few calls from Wall Street and Houston have set him straight.

    Good news at the gas pumps maybe, but not so good for oil companies and their creditors, the banks and junk bondholders. Once again the global banking system is about to be challenged. It is not news to readers here that financial services companies are already under pressure. The challenge for them is the adoption of technology to survive competition from nimble new entrants and existing players who execute digital transitions swiftly. Not unlike the Covid-19 crisis, swift decisive action rather than words is required.

    The good news is that recent headlines would suggest that there has been an acceleration of corporate activity which provides hard evidence of a renewed urgency in financial services. Take your pick from the following.

    A global crisis like Covid-19 will remain primarily a challenge for humanity with tragic losses. However, it will hopefully run its course like every other pandemic in human history. As financial observers, it will be instructive to see which sectors took decisive strategic action in a period of huge business uncertainty. It is not unreasonable to suggest that the necessity for certain sectors like financial services to act right now tells a bigger story than mere fear. Some business models have no choice; the failure to act will be fatal.

     

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  • The Price Of Certainty

    I attended a meeting last year which was memorable for only one reason. Certainty. The pretext for the meeting was the potential use of innovative data analytics to monitor modeling risks in the field of aircraft leasing. The aircraft leasing industry is rightly considered a genuine Irish success story that has ridden many challenges. So, I was a tiny bit struck by the confidence of the lead analyst in that 2019 meeting declaring his absolute confidence that its sovereign customers were unlikely to ever default and therefore he didn’t need any additional macro analytics on government credit or currencies. His certainty was based on a conviction that the last thing any government would want was a suspension of air travel to and from its national territory. Ehh, hold my Corona….

    All financial models try to account for risk but there are occasional “black swans” which can blindside the brightest. That’s why most investors look for some valuation comfort or a margin of risk. We do not mean to pick on aircraft leasing per se but it has certainly triggered a wry recollection while the Coronavirus threatens to shut China’s airspace from the rest of the world. Yep, the world’s second-largest economy is on lock-down and oil consumption is already estimated to have fallen by a quarter.

    Ecowarriors will be thrilled; OPEC and central bankers are extremely anxious. This virus can’t even be considered a “black swan” given previous SARS outbreaks in 2002-2003 so let’s hope aircraft leasing models have factored in significant economic damage at the sovereign level. It’s not necessarily China we are talking about. It will be poorer Asian and Latin American nations dependent on Chinese trade. This is already causing the Brazilian real and other emerging market currencies to hit new lows. Meanwhile, “certainty” is evident elsewhere across a number of financial markets. Here are a few high profile examples:

    • Apple is now worth more than Germany’s entire stock market. It is incredible that the future of Apple (all equities discount the future) outstrips the entire corporate prospects of the leading exporting nation on the planet.
    • Bonds continue to hit new valuation highs as yields go lower. Again, a multi-year perspective would hesitate in declaring inflation effectively dead. Black swans and all that…..
    • US stock markets continue to roar to new valuation highs oblivious to the fact that China is a vastly more significant player in the global economy than it was during SARS time when the S&P 500 dropped 16% in a 5 month period.

     

    Returning to aircraft leasing one can’t help noticing that other trends are less than helpful. Take your pick from climate change, carbon/gas emissions targets, ESG investing criteria and populist (anti-globalism) electoral trends. In some ways the Coronavirus is already a global carbon tax, killing off 3 million barrels of oil demand in a matter of weeks. It’s possible the first significant financial impact of the Coronavirus will be a commodity or oil-producing nation defaulting on debt payments. This will test my aircraft leasing friend’s assumptions.

    It is true that a country would be loath to destroy its credit rating in the aerospace market. However, Greece is the word these days for credit doomsdayers. Remember how Greece was “certain” to take decades to return to the bond market. Take a sip of that Corona and note that Greek 10 year bond yields have traded as low as 1.15% in recent days. That’s a 0.45% cheaper rate of borrowing than the U.S. of A!

    The price of certainty can sometimes be rather embarrassing and painful…

     

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  • Corona Contagion Or Brexit Lesson?

    There used to be an old trading rule of thumb that if British Airways financial performance started to suffer then it was sensible to sell the shares of global investment banks like Goldman Sachs, Morgan Stanley and Credit Suisse. The trader thinking was that a drop in profitable business bookings on BA signaled a downturn in international financial activity. Today’s news that BA is suspending flights to and from China did prompt some similar thoughts. Clearly, the Corona Virus is a medical story first as medical authorities struggle to contain the outbreak. The good news is Australian scientists have made some progress in recreating the virus and ultimately finding a vaccine. The bad news is possibly more financial.

    Despite the best efforts of Donald Trump, Boris Johnson and other stable geniuses to mislead on trade, the global economy is incredibly connected these days. Just-in-time supply chain management allows companies to efficiently manufacture goods and sell to consumers at ever-cheaper prices. As we digest Apple’s astounding quarterly results from last night, we couldn’t help noting that AirPods alone are on course to exceed $20 billion of sales. This product only launched 4 years ago and is on the cusp of matching the annual global revenues of  Starbucks by 2021. Mind-blowing.

    Apple is Exhibit A in incredible manufacturing/supply chain management;  through 2019 Apple was shipping more than 500,000 iPhones and 150,000 AirPods on a DAILY basis. However, it needs air freight to move high-value parts and finished products around the globe. The BA news today will focus minds. Airfreight moves $6 trillion of goods globally each year which is more than a third of global trade by value. In our previous piece “Charting A Dose Of Flu” we flagged that the real worry for financial authorities is a global halt of the cross border movement of people and goods. One can be hopeful that the medical outcome will be managed but the economic damage could be significant for companies in 2020. Here’s a few headlines which caught the eye:

    Financial markets yesterday recovered from Monday’s swoon but it is difficult to see how the Coronavirus will not inflict financial pain on companies and that is before we start to read headlines about supply chain interruptions for manufacturers all over the world. Bosch has already warned about problems brewing in its own operations which employ 400,000 people globally with 60 factories in China alone. They probably know what they are talking about.

    The above information is just that. It is not a call to panic. Markets encounter external shocks all the time. On the contrary, a little deflation of markets is healthy and allows investors to avail of cheaper opportunities. Perhaps, the more significant lesson is for the anti-globalist delusionists occupying political leadership positions. Disruption to global trade or trade agreements can be incredibly painful. So, take that as our 50 pence worth for Boris and the Big Ben clappers. Sadly, the commemorative tea towels for January 31st won’t be sufficient to clear up the Brexit mess.

  • An All Cash Strategy Is A Very Big Bet

    Winter League tennis is hardly in the glamour league of January sporting events but it still can deliver learning lessons. As my doubles partner whispered to me at the weekend that his back was crocked, we had a rueful giggle recalling the Mike Tyson quote that “Everyone has a plan until they get punched in the mouth”. Indeed, investors might be feeling the same this week as markets take fright at the potential economic impact of a Chinese Coronavirus. The excellent financial commentator, Bill Blain, at The Morning Porridge calls the unexpected punches “no-see-ums”. Of course, regular readers will be less surprised at developments given our words of caution last week in “Charting A Dose of Flu”.

    We’d rather move on and tackle another area of concern. It is striking to us that total Irish household deposits (cash) in the banking system now exceeds €110 billion. That number increased by circa €7 billion alone through 2019 despite every asset class on the planet posting significant gains thanks to the global central banks’ QE methadone clinic. Of course, it is wise to have a healthy skepticism when the crowd gets giddy. Keeping some cash on hand is always prudent. But €110 billion? Over the years when I have been in wealth advisory mode I have often heard individuals claim an agnostic attitude to financial markets and a preference for cash safety by avoiding “any bets”. Sadly, that is a dangerously inaccurate perception of one’s own safety strategy. The truth is holding too much cash is an extremely strong “bet” in its own right. We can think of two “punches” which could throw that safety plan into disarray.

    Firstly, in a low inflation world, holding cash is less punitive because the purchasing power of savers is largely unaffected. One might quibble with that “low inflation” view when you look at health, housing education and insurance costs but let’s just focus on traditional inflation reports. It is true to say at this moment inflation is very subdued in developed markets but inflation is one of those things that can suddenly appear without much advance notice. Hence, our curiosity was tweaked to see an FT report on consumer price inflation in emerging markets hitting a six-year high in recent weeks. Here’s the chart of a significant inflation spike:

    This spike is driven mainly by food inflation which we warned of earlier in 2019 as African Swine Fever decimated the Chinese hog population. However, Coronaviruses and climate change are examples of other potential disruptions to the food supply for a rapidly growing Asian middle class.

    Perhaps inflation spikes will be just a temporary thing, but the meeting of a low-interest rate world and a digital world is also worth thinking about as a second threat to cash savers. Bluntly, banks are losing money by holding deposits for private depositors. Corporates are already being charged for the safe custody of cash in Europe as negative interest rates wreak havoc with traditional deposit/lending banking models. Furthermore, the use of physical cash in payment transactions is more costly than digital equivalents.

    Be prepared for cash payments to incur additional charges and look no further than Sweden for a glimpse of the future. Barely 1% of the value of all payments in Sweden are made using coins or notes. In fact, Sweden is forecast to become an entirely cashless society by 2030. It seems inevitable that banks and governments will encourage/incentivize the use of cash deposits through taxes and fees. Suddenly that “cash safety plan” feels like a very big bet that things are just going to carry on as before. While it is difficult to forecast the future it is safe to say the future and the value of cash are less certain.  As we always say, a strategy allocated to just one asset class, even cash, is a very risky one.

    A balanced investment strategy across residences, property, pensions, cash, alternative assets, wine, fine art and even funding exciting start-ups has its merits. For those interested in looking for cash alternatives it might be worth looking at our recent piece “Good Portfolio Habits Pay Off” to prompt some thought! So, ship those Boris Brexit souvenir 50p’s in. They could be both financial and comedy collectors’ memorabilia items over time. Embrace change. It is happening and we must remember another boxing legend’s words…

    “A man who views the world the same at 50 as he did at 20 has wasted 30 years of his life”  – Muhammad Ali

  • Charting A Dose Of Flu For The Markets

    The old adage that financial markets climb a wall of worry is very well known. However, human beings are particularly poor at identifying in advance exactly which specific worry or risk might spook the markets. Furthermore, the army of 2020 hindsight ‘gurus’ providing post-factum analysis has never been shy of rationalising a market swoon despite this same analysis providing zero commercial value. Risk is a fact of life in capital markets and market fluctuations come and go.

    Indeed, my former colleagues still tease me about a previous analytical role of mine in the early Noughties by mimicking my high pitched squealing about the potential impact of Bird Flu. Not surprisingly I have been on the receiving end of a few playful calls already about the Coronavirus outbreak in Wuhan. Unperturbed by this ribbing, I am going to go out on a limb here and state that markets are at an interesting inflection point where heightened levels of market exuberance are coinciding with the limited risk muscle memory of previous mystery virus outbreaks in China. Here’s a quick reminder of the impact of the SARS outbreak in 2002-2003 and a number of current exuberant data points plus charts.

    First, let’s remind ourselves of the SARS effect on markets in 2003. From November 2002 when the first SARS case was identified in Southern China to March 2003 the S&P 500 index of the largest US stocks fell by 16%. I recall a senior trader at a large Swiss Bank telling me about very anxious risk management meetings and the less-well-known critical significance of the potential global halt of cross border movement of people and goods. Let’s just say the economic worst-case scenarios were not pretty. Ok, that’s the scary reminder bit. What about the exuberance we referenced earlier? Take your pick from the following data points and charts.

    Markets are rising on a daily basis but in terms of volatility, things have been “quiet”,  i.e. the number of individual big day moves has been non-existent for a long period now. Stocks rarely go this long without a big move. The chart below illustrates where the current period ranks in the league tables of complacency.

    Individual stocks showing parabolic moves can also be a “tell” of exuberance so we are quite intrigued by Tesla’s recent moves. Its market capitalisation (value) now exceeds that of the entire US auto sector (GM, Ford etc). This prospect was written up in this column previously as a potential 2020 uber-surprise; little did we think it would happen within the first three weeks of the year. It’s possible there is a single stock story there but a quick look at the 5 largest stocks in the US also raises a few eyebrows. The concentration of capital in the US market’s 5 largest companies is at a twenty-year high per this Bloomberg chart below.

    It’s not just the mega-cap end of the market. The overall market is cruising to record valuation levels as a multiple of future earnings (P/E) for this business cycle. The chart below shows a pronounced spike in recent months courtesy of the excellent Daily Shot blog/newsletter.

    It is fair to say that if the newsflow on the Coronavirus outbreak continues to escalate the chances of investors sitting on 30-40% gains over the past 12 months taking some money off the table is pretty high. On a more positive note, corrections are healthy and the overall picture of the global economy and financial conditions is pretty robust. There is still a wall of central bank monetary support, historically low costs of capital and signs of a pick up in the global manufacturing sector.  Temporary shocks also present cheaper opportunities to revisit great stories missed in the big moves over the past year.  So, it might be time to be greedy when others fearful as Warren would say.

    In the meantime, I will brace myself for ridicule and a round of Coronas on me in a few weeks at a local hostelry with former colleagues. As the great traders know, it’s best to stay humble and liquid….

     

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  • Banking Facing The Digital Music

    As I flicked through the quarterly results of JP Morgan and Citigroup this week I was reminded that in some ways the whole future of the financial system lies in my brother’s hands. He currently works for another monster bank and there’s a part of me which hopes he will leave banking for all our sakes. Perhaps I’m over-egging this career wish but the previous four banks for which my grim reaper-relative worked all went bust. The world can’t afford a sudden megabank failure. The good news, for now, is that things in the near term big banking world are pretty strong.

    Despite some gloomy predictions for the future of banking, JP Morgan just posted the most profitable year in the history of US banking. This makes it increasingly likely the record total $111 billion profits made by the big 6 US banks in 2018 will be beaten in the next few weeks as 2019 joins the reporting history books. Regular readers are certainly familiar with the challenges to traditional banks posed by technology transitions and even Big Tech competition.  However, it is still possible banks will not disappear but rather change their interface with customers.

    We recently wrote in our article “Are You Ready For Change?” that finance would probably become “a feature” of most products and services but would no longer be accessed as a standalone access point:

    “If we recall the pre-Amazon era, consumer spend and logistics were separate activities. Now, delivery is a feature of consumer spend from Christmas trees to sushi. In the world of finance, it is quite likely payments and financial services will be embedded features of other services rather than standalone banking. Prepare for “location” banking to die.”

    This prompted some thought as to whether there were any analogous experiences in another industry. Well, it has become mainstream thinking these days that banking is facing a technological music with which it might struggle for relevancy. So, let’s look at the music industry. As recently as 2014 the death knell of the industry was sounded with global recorded music revenues collapsing by 25% from $19.6 billion to $14.3 billion since 2006.

    The revenues from physical music alone in 2006 were worth $16.4 billion. The doomsdayers were correct. Physical music revenues have fallen a further 75% but there was no such thing as “streaming” back in 2006. Now, music streaming revenues account for more than 50% of global music revenues. Here’s the comeback graphic:

    Graphic showing the global recorded music industry revenues 2001-2018 (US) Spark Crowdfunding blog

    So let’s hold that “streaming” thought for the banking industry. It is entirely possible there will be new channels for banks to deliver core services. We should be watching activity in the “plumbing” of financial services for clues to the future. Interestingly, this week we witnessed a very big fintech deal with Visa Inc agreeing to purchase fintech start-up Plaid for…. $5.3 billion.

    For perspective, Plaid raised $250m in a Series C funding round barely more than a year ago at a $2.65 billion valuation. Plaid is a “plumbing” or “streaming” play as it allows consumers to connect their bank accounts to various 3rd party services from wealth manager robo-advisors to insurance. The technology which allows this connectivity is Application Programming Interfaces, or APIs. The following graphic shows how APIs work:

    How Open APIs work Spark Crowdfunding blog

    Clearly, Visa Inc sees the value of owning the plumbing which is connecting the latest fintech to traditional bank accounts. Note this deal does not preview a world where bank accounts disappear. Perhaps current thinking is too negative on the future of banking?  Music could be the inspiration, and ironically music featured in our last banking crisis. It was a rather unfortunate quote from a Citigroup CEO in 2007 who insisted “as long as the music (liquidity) is playing, you’ve got to get up and dance”. Well, the music stopped too quickly for Chuck Prince and many other failed banks.

    Technology is the current gloomy soundtrack for banking but “streaming” and APIs provide potential recovery and a future. Now, all we have to do to ensure planetary financial survival is persuade my brother to take up the guitar full time…..

  • Warren Buffett Not Feeling The Love

    It is amazing how a new series of Love Island can prompt such profound existential questions. Were Conor’s teeth stolen from the Fleabag make-up department? Will apprentice Lord, Ollie Williams, confess to predatory trophy hunting of wild animals before the Gale twins entertain his drooling advances? Profound questions indeed but these still couldn’t better contestant Callum Jones’ query as to whether the twins were both 20 years old. Yep, the twins bit was the clue Callum. While we pine for the return of the Teletubbies for intellectual stimulation let’s move on to another more serious question bothering us last night.

    The world’s most famous investor, Warren Buffett, is currently sitting on $128 billion of cash and we are wondering why he isn’t listening to President Trump. The White House is telling us the US economy is in the best shape of its life. Thankfully this observation stands up to data scrutiny better than the medical opinion of the doctors looking after the Orange Toddler. Consumer confidence is high as the US enjoys full employment, record Wall Street highs, low-interest rates, tax tailwinds and energy independence. What’s not to like about that?

    Well, Warren has been doing this investing thing for a very long time and he doesn’t need the instant gratification or performance required of more youthful investment houses. However, we were struck by the fact that Buffett’s last big deal was in 2016. Back then during a ‘socialist’ Obama administration, he splashed out $32 billion on industrial player, Precision Castparts. It must irk Trump that the Sage of Omaha has failed to endorse his presidency with a big deal. An unusual experience as this may be for regular readers, we are reluctant to pin Trump with the blame on this occasion.

    In this particular instance it would seem that very large companies are pretty expensive at the moment. And Buffett needs to do big deals to really move the performance dial. In his most recent annual letter to shareholders the Berkshire Hathaway chairman admitted that “prices are sky high for businesses possessing decent long-term prospects”. A few other things also probably bother Warren.

    Over the years he has been very fond of monitoring the relationship between the total value of the US equities markets and the US economy (GDP). The current measure of that relationship indicates a market valued at 157% of the GDP of the US, according to Wilshere index data. That is high by historical standards and compares to a 137% figure just before the credit crisis in 2007. Buffett is typically uneasy when the market goes over the 100% mark. So, that certainly must be weighing on his mind.

    He will also be noting that the global equivalent stock market value of $88 trillion (record high) amounts to 100% of global GDP. Furthermore, Buffett understands the role of credit/debt. Ultra-low global interest rates are rocket fuel in the short-term but excessive leverage can come back to bite investors very badly. Current IMF estimates of global debt are closer to $260 trillion. A debt pile almost three times the size of equity funding the global economy can certainly be described as ‘leverage’.

    Before we spook the horses it is important to point out that Buffett, due to Berkshire’s size, is nowadays forced to do very large deals. There is a school of thought that excessive valuations are concentrated in the very large market capitalization stocks. As an illustration, just 5 stocks (Apple, Microsoft, Facebook, Google and Amazon) accounted for a quarter of the S&P 500’s 26% gain in 2019! On top of those elevated valuations Buffett would also have to pay a premium to execute a buy-out. Now consider the estimated $2.5 trillion of private equity money sitting on the sidelines competing with Buffett to do deals. Low-interest rates and great tax deals are fueling great exuberance at private equity houses. However, it is worth considering one of Buffett’s more famous pieces of advice, “ Be fearful when others are greedy, and greedy when others are fearful”.  Just recently Buffett was outbid by private equity house, Apollo,  in a relatively small $6 billion deal for Tech Data Corp (TDC).

    Perhaps readers should take encouragement from Buffett’s attempts to take smaller ‘bites’ like TDC. In fact, it is interesting that the US index which tracks smaller companies, the Russell 2000, is at exactly the same levels as it was trading at two years ago. There appears to be more worry and fear in the smaller companies’ world. Now hold that thought and think about Buffett’s patience and requirement for ‘value’ as a margin for error. How heartwarming it would be, as Love Island envelops our consciences and sanity, that smaller companies could begin to feel ‘the love’ of investors in 2020.

     

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  • Are You Ready For Change?

    Any year featuring a new business, a new home, a 50th birthday and a divorce probably qualifies as a year of change. However, as I ran by the Poolbeg towers in the early days of 2020 my initial anxiety as to the pace of change in my life last year receded with the calming effect of a healthy dose of fresh air, endorphins and perspective. Maybe it’s an age thing, rather than my running speed, but it feels like the pace of change in the world is also picking up rapidly. In fact, on more considered reflection as I skirted Dublin Bay, my gut feeling was bolstered by the hard evidence of recent events.

    Let’s start with location. Location, location, location is the perennial property mantra. Indeed, investment in Irish commercial property in 2019 set a new record of €7.2 billion in sales value. That reflects a healthy business environment and, given 74% of the investment came from overseas investors, an external vote of confidence in Ireland’s future. However, striking as those sales statistics may be, the most stunning location figure for me in 2019 was the discovery of the largest live music venue in history. It wasn’t even on planet Earth.  The online gaming platform, Fortnite, hosted a 10 minute Marshmello performance which was witnessed by 10.7 million gamers at the same time. Now think about  Mass Open Online Courses (MOOC) in the world of education and one begins to realise the most valuable locations in the next decade are more likely digital than physical.

    Of course, many people spend the vast majority of their waking hours in the office place. The five day 40 hour week is undergoing serious review as productivity growth has ground to a halt in many developed economies. This puzzles many economists in a digital world but ignores the behavioural aspects of human endeavour. Four day weeks are increasingly common and “hot desks”  have become a major feature of office life but is it helping productivity? The evidence from Microsoft is thought-provoking. Having briefly regained its crown (pre-Aramco IPO) as the most valuable company in the world the business community is keen to learn from the Seattle brains trust. So, when Microsoft tested a 4 day work week in Japan the business world was jolted by a whopping productivity jump of 40% during the summer trial period.

    Companies may not have a choice in changing the conditions of employment. Japan now sells more adult diapers than infant diapers as demographic change bites. Japan now supports an over-65 demographic which accounts for 26% of the population! A shrinking labour force supporting a growing retirement population is not sustainable unless productivity grows sharply. China and Europe face similar problems this decade so expect major change to employment practices.

    Fortunately, AI (Artificial intelligence) is going mainstream. The value creation associated with AI in the next decade is estimated to be in the region of $15 trillion by the likes of McKinsey and Accenture. The numbers might not materialise but there is no doubt the workers of this decade will need to embrace the reality of working with technology, automation and even robot supervisors. The option for businesses to wait and see, do nothing or just hope is a death strategy.

    Financial services and banks are a good example of businesses that must change, quickly. Recent announcements from Apple, Facebook, Google and a plethora of Chinese players is confirming a major move by Big Tech into payments and financial services. If we recall the pre-Amazon era, consumer spend and logistics were separate activities. Now, delivery is a feature of consumer spend from Christmas trees to sushi. In the world of finance it is quite likely payments and financial services will be embedded features of other services rather than standalone banking. Prepare for “location” banking to die.

    Clearly, as human beings, our DNA has strong survival instincts despite our collective best efforts to kill our planet over the last industrial revolution. It would seem climate change will be an accepted part of our lives over the next decade. The last decade was the hottest on record with July last year documented as the hottest month in human history. The catastrophic fires in Australia are a further reminder that climate science denial is not a survival strategy.

    It would be wrong to conclude this piece with a negative change and it is wholly appropriate that the most prominent climate neanderthals are leaders elected on election platforms railing falsely against the woes of the world and warning how everything is taking a turn for the worst. The facts do not support fanning those fears. A recent fascinating article by Pulitzer Prize winner, Nicholas Kristof, in the New York Times posited the view that 2019 was actually the greatest ever year to be alive:

    “If you’re depressed by the state of the world, let me toss out an idea: In the long arc of human history, 2019 has been the best year ever … since modern humans emerged about 200,000 years ago, 2019 was probably the year in which children were least likely to die, adults were least likely to be illiterate and people were least likely to suffer excruciating and disfiguring diseases.”

    Furthermore, some of the statistics of recent years are truly remarkable. Every day in the past few years 325,000 got their first access to electricity and an amazing 650,000 people went online for the first time, every single day! Child mortality before the age of 15 has dropped from 27% in 1950 to less than 4% today and extreme poverty globally has halved since 1990.

    So it’s all change. A lot of it good. There will be challenges ahead but without sounding like Mel Gibson in Braveheart if, as a business or a human being, one runs away from change you might live. At least for a while. To really survive, the time to prepare for change is now and accept there will be failure along the way. That’s life.

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  • Asset Performances See The Ghost of Christmas Past

    As the UK faces electoral choices filled with Dickensian levels of misery one could be forgiven for approaching Christmas with some trepidation. However, there is better news in the financial world where mendacity and spin is consistently thwarted by an ever-present reality, price. With mere days to go, 2019 is turning into rather a good year for financial markets across asset classes. Here’s a quick menu of performances to cheer the wallet:

    • World equities are up 25% in euro terms year-to-date (YTD).
    • It’s not just the US markets; Germany’s Dax is up 23% and Emerging Markets are up 11%.
    • Bonds have also enjoyed central bank rate cuts with benchmark bond indices up 6-7%.
    • Property markets as bond proxies have generated positive returns in aggregate.
    • QE has been good to commodities with oil, iron and even gold generating returns for investors.
    • And, if that’s not racy enough, Bitcoin as the lead cryptocurrency has almost doubled in value.

    So, all good then? Yes, 2019 has been very good and history suggests subsequent returns can be pretty healthy after a strong year. However, Dickens’ Ghost of Christmas Past visited Scrooge not just to shine a light on kinder days. Scrooge was also forced to visit some less welcome memories and the dangers of CHANGE in intent.

    Let’s jog readers’ memories here and think a little further back to Christmas 2018 when equity markets were nursing their third circa 20% negative correction since 2009. Fear was the prevailing emotion and not just in equities. Deutsche Bank’s investment research team a year ago were highlighting that 90% of the 70 asset classes they tracked globally were on track to post negative annual returns. The last time that breadth of carnage was endured was in 1920!

    We referenced the dangers of change in intent earlier. Specifically, the critical change of intent in global financial markets has been the approach of the world’s central banks led by the Fed. As a quick refresher 2018 was the year when the Fed rapidly raised interest rates back to a more normal historical level. By January this year that tightening path was abandoned and we are now looking at the frothy results of a more accommodative approach from central banks, namely quantitative easing (QE). Think of the central banks as Scrooge. Markets and investors love “kind” central banks. So, here we are enjoying a benevolent central banking utopia of forever rising asset prices, right? Sadly no. There are two other human conditions we should watch for change.

    First, the vast majority of the world’s population is not participating in this asset price inflation. Income inequality now approaches the 1930s extremes. The dangers of a populist backlash are already revealing themselves in trade protectionist campaigns waged by the likes of Boris Johnson and Donald Trump. Global trade is under pressure and could still derail the QE train and the global economy it is fueling.

    Second, interest rates may be very low right now but there is another human behaviour which could cause real problems for a benign monetary environment. Expectation. Specifically, a change in consumers’ expectations of future prices for goods and services. That’s called inflation and that can raise interest rates and erode the value of financial assets very quickly.

    It’s difficult to identify an inflationary catalyst in the current technology revolution. However, it is worth considering a current image in the news which is very far from a Dickens picture of Christmas. Check out the gigantic bush fires suffocating Sydney and the absence of any technology solution so far. One wonders whether climate change and natural catastrophes could ultimately cause dramatic scarcity of certain goods and trigger inflationary panic? At the very least, Sydney is a reminder of our own greed and refusal to change our polluting habits. These words may seem harsh and apocryphal but recall the Ghost’s final words to Scrooge as he begged for no further reminders of the unhappy consequences of his actions…

    “These are the shadows of things that have been. That they are what they are, do not blame me!”

     

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