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Tag: Stock Markets

More Blue Sky Than Blue Monday

Apparently, the Monday of this week is the worst every year for negative thought. Furthermore, the new UK Foreign Secretary, Lord Cameron, fresh from launching war in the Red Sea, told us in a weekend TV interview that “the lights are absolutely flashing red” on the global risk dashboard. Excellent. Well, that’s settled then – I mean Lord “Call Me Dave” gets all the big calls right doesn’t he? Ok, let’s not invite the rest of the world to turn the air blue. In fact, let’s do what should have been done in 2016 and pay attention to what’s really happening in the world right now. Not surprisingly for this writer, January is already confirming themes established and developing from earlier years and we are more than happy to keep screaming about them until we are blue. So, here we go with a little whistle-stop tour of the real world….

We truly believe the ‘convergence’ of various technologies is about to turbo-charge the acceleration of change in the global economy. An existential crisis also helps focus minds and….. money. The climate change crisis has prompted the greatest capital shift in history as $6 trillion of annual spending on cleantech is forecast every year until 2050 (Source: McKinsey). Indeed, one of the key investment destinations in moving away from fossil fuels has been electric vehicles(EVs), and the batteries used to store energy and power these vehicles. Chemistry advances have been key in driving costs down and capacity up where lithium-ion type batteries are the predominant storage technology. However, artificial intelligence(AI), probably the hottest investment theme outside cleantech right now, has just been used in conjunction with supercomputing to discover a brand new material which could reduce lithium usage by up to 70%.

Yep, Microsoft and Pacific Northwest National Laboratory (PNNL) research teams whittled down 32 million potential material combinations to 18 promising molecular structures within a week. Incredibly, the whole discovery project took 9 months in a screening process that would typically have taken more than 20 years using traditional lab research methods. The new AI-derived material, simply called N2116, should prompt thought as to what’s possible in the world of medicine, agriculture, transport and construction, but also counter an unhealthy commentariat focus on AI ‘safetyism”. The social and economic basics of health, shelter, mobility and food are in dire need of blue sky thinking but might just have found a genuine innovation accelerator. Microsoft themselves have told the BBC that one of the company’s missions was “to compress 250 years of scientific discovery into the next 25.” Thankfully, this was not the only positive solution speed surprise of recent weeks.

The IEA has confirmed that renewable energy capacity increased globally by 50% in 2023 alone(!). That’s the biggest growth seen in more than two decades. At that pace, it is conceivable renewable energy could be 50% of electricity generation by 2030 and, brace yourselves… would actually meet the renewables ‘tripling’ target agreed at Cop 28. Germany – not getting great economic press in recent times – is already at the 50% renewable electricity production level with CO2 emissions currently at a 70-year low. Furthermore, coal usage at a 60-year low in Germany makes for clearer skies but the gloomy headlines could have obscured another Teutonic trophy win. The EU has given the go-ahead for Germany to provide €902 million of state aid to battery producer, Northvolt, for the construction of a gigafactory producing EV batteries. Without that aid, Northvolt would have probably moved the project to the US. Instead, the €2.5 billion project at Heide will be the first to avail of the new ‘matching aid’ exception allowed by the EU to support more flexible/higher amounts of state aid to prevent an investment exodus to the US. Expect more good European news on this front as the region is forecast to build a further 250 battery factories by 2033 (Source: Buck Consultants). These are real actions and projects (not headlines) but companies are also showing confidence with more traditional strategic moves.

We perennially write “watch what they do, not what they say” and the big “tell” is often M&A activity. Given acquiring other companies results in wealth destruction almost 50% of the time, we tend to see a flurry of M&A activity as a positive illustration of executive confidence and found the headlines of recent weeks interesting. You might think the announced $14 billion purchase of Juniper Networks by HP was just another example of the technology sector enjoying the benefits(and valuation multiples) of a stellar 2023 but back in the ‘old economy’ things are stirring too. And, if M&A was tricky enough why not try to acquire a national icon, as a foreign company? Cue the Japanese execs at Nippon Steel have decided to swoop for US Steel in another $14 billion deal. Once the most valuable company in the world, US Steel could become a political football but both boards have agreed the deal and are acutely aware that the most recent offer from domestic rival, Cleveland Cliffs, was just over $7 billion. You don’t need the finance gurus to figure that one out. Anyway, they are busy too. The world’s biggest asset manager, BlackRock, has announced the $12.5 billion purchase of Global Infrastructure Partners (owner of Gatwick Airport and Melbourne Port). Clearly, the $10 trillion giant sees a future for the old stuff. As for the new stuff…

The SEC in the US has just approved funds (ETFs) which invest in cryptocurrencies (Bitcoin). This is massive for the crypto and blockchain ecosystem. In simple terms, this approval by the SEC means funds invested in Bitcoin are now regulated and can be considered an asset class in their own right. Nine funds (ETFs) have been approved to trade on New York regulated exchanges, and in the first two days of trading attracted $1.5 of investor inflows. BlackRock’s fund led the way with $500m followed by Fidelity’s fund bringing in $422m. For me, cryptocurrencies are a very good indicator of risk appetite, or confidence. So, if Bitcoin is trading close to $40,000, this feels like the world is not about to fall apart. Other new stuff is doing well too.

We’ve already touched on AI’s benefits to humanity but, if you’re an investor, the AI posterchild is still Nvidia. While the broader equity markets have spluttered in January, Nvidia continues to march to new record highs. Its market value is now in the region of $1.4 trillion. For context, if Nvidia’s share price increases by another 15% its valuation will match that of Amazon. Then consider Microsoft, another AI play, which overtook Apple this week as the most valuable company in the world. You might think all the AI excitement is in the big tech names but CB Insights has published data showing AI start-ups benefitting from significant valuation premia when raising capital. Median valuations for early stage/seed fundings were 21% higher, larger Series A fundings saw a 39% premium and Series B funding rounds clipped an extra 59% from investors compared to non-AI companies. Get ready for more AI references in investment ‘story telling’, but also watch out for the continuing battle for authentic stories and content needing no AI.

Over the weekend, the exclusive rights to the NFL game between the Miami Dolphins and the Kansas City Chiefs were sold to NBC’s streaming service, Peacock, for $110 million, or $1.8 million per minute of game time. According to the superb sports finance newsletter, Huddle Up, this is all about Peacock/NBC being given a foothold by the NFL as streaming overtakes cable consumption over the next 5 years. That means Apple, Amazon and Netflix will be a big part of media rights negotiations in many sports in the coming years. Think Hulu and Wrexham, then marvel at the Rightmove data showing Wrexham as the busiest property rental market in the UK in 2023. That certainly wasn’t forecast on those Brexit red buses in 2016.

Of course, a market whistle-stop tour would not be complete without a check on the ‘Big Daddy’ driver of all asset classes; the cost of money. Here too, the news was not blue. The cost of two year money in the US in the past week (measured by the yields on traded 2 year US Treasuries) was back to levels not seen since May 2023. In fact, the world’s most profitable bank, JP Morgan, didn’t just announce record profits last week but also told investors they believe the Fed will cut interest rates SIX times in 2024. We shall see, but it is clear that capital is “climbing a wall of worry” in lots of interesting parts of the global economy. That does not mean we can ignore the concerns of some serious and credible analysts. The world’s risk experts continue to watch Russia vs Ukraine, Israel vs Hamas and China vs Taiwan. More than enough volatility, and enough for Ian Bremmer, CEO of the Eurasia Group consultancy, to describe this year as…

“Politically it’s the Voldemort of years. The annus horribilis…. and then there’s the biggest challenge in 2024… The United States versus itself”.

Again, voting like sport doesn’t need AI. Who would have thought that US democracy would be the greatest geopolitical risk of 2024? Simply stunning. Yet, I am hopeful that younger voters, business leaders, investment capital and credible domestic influencers will begin to spell out the true potential cost of burning the US Constitution in front of the whole world. Just imagine fighting the “Red” threat of totalitarian Communism for decades and then discovering you have your very own Red totalitarian party at home? Now that must make more than a few voters go blue……

January 14, 2024
Five Numbers Say Don’t Give Up….

Perhaps it’s the prospect of beginning a 100 day no-alcohol stint which is causing, on my part, a sudden obsession with numbers. Then again, it could be just a time thing. I mean, who knew one of the World Darts finalists would be younger than the iPhone? Or, that just 9% of UK voters believe Brexit is going to plan? Well, probably the rest of the world knew that a policy to sanction your own economy more heavily than Russia was going to end in tears. However, the rest of the world should drop the sermons-in-smug and pay attention to the first of five key numbers we are watching in 2024….

Climate Crisis: The temporary visit on November 17th of global temperatures more than 2 degrees above pre-industrial averages is a five-alarm-bell ringing of an existential crisis for the planet. Given we have been in perpetual storm mode since late November, and the storm-naming cycle is already past “H” with Storm Henk, there is a personal sense that bad news could be good news. In particular, catastrophe losses in the insurance and capital markets could focus political leaders’ minds on the sheer cost of loose non-urgent language in the recent Cop 28 commitments.

Bond Markets: We regularly remind readers that the cost of money (interest rates) is the critical driver of ALL asset prices. The number which caught the eye this week was that bond prices (which fall when interest rates/yields rise) have been in negative territory for 41 consecutive months – the longest ever draw down in history. And, forgive the repetition, but again bad news might actually be good news for bond prices. In other words, a slower economic environment and some employment weakness could be the trigger for global central banks to ease interest rates and allow bond prices recover.

Venture Capital: In the Spark world of start-ups we are always watching the private markets as well as the more liquid (and better performing) public equity markets. The S&P 500 might have sucked in AI-excited investment and delivered 25% gains in 2023, but for younger companies access to capital was far more difficult. The VC data research team at PitchBook reckons global VC funding fell to $345 billion in 2023, down from $531 billion the previous year. In private equity, deployment of capital dropped by 29% and exit activity was down by 26%. That’s the worst combined performance since 2016. However, the silver lining in these numbers is that funding activity has shifted away from more mature private opportunities to early-stage, seed-type investments. In fact, two in every three deals done were in early-stage companies.

Cleantech: While Tesla is overtaken by Chinese rival, BYD, as the top electric vehicle(EV) producer globally, there is strong evidence that Europe is ramping up its capabilities in the EV ecosystem. Buck Consultants have published research forecasting the installation of 250 EV battery gigafactories in Europe by 2033. This won’t be a huge surprise to those who have seen McKinsey estimates of annual cleantech spend until 2050 exceeding $6 trillion. Imagine investing more than the entire GDP of Japan every year…..for decades.

Democracy: Of course, investment in our survival and a phasing out of fossil fuels can only happen with strategic political leadership. The shift to right-wing populism has been a striking feature of the global political landscape in recent years but 2024 is truly the “Year of The Vote”. The US and UK are high profile elections on the horizon but the global stakes are much much higher than that. Seven of the ten most populous countries in the world, with a combined 4 billion voters, go to the polls in 2024. That’s 46% of the world’s population, or 54% of global GDP, deciding where we go next. Oh, and don’t forget European/MEP elections this year too.

So, we can perhaps understand why financial markets are opening up 2024 in a jittery manner. However, as Sergeant Kenneth “Hutch” Hutchinson departs in his iconic red Gran Torino for his celestial precinct in the sky, I’m hopeful that young companies and young voters can put the five numbers above on the right trajectory. In particular, we must hope that younger voters reject the fear fraudsters and focus on the sustainability of their own future. Dare we suggest that the temperatures of both hate and climate are the key dial-down numbers to their survival, and engagement? Or, as David Soul might sing, “Don’t Give Up On Us Baby…”

January 5, 2024
What’s The Score For ’24?

It’s that time of year again to pause, reflect and hope to do better in future. Unless, of course, you’re the Conservative Party in the UK or the Republican Party in the US and ‘the race-to-most-nasty’ is the leadership badge of shame soon to be re-spelt with a ‘Z’. Back in the do-better world, a review process can help shape future efforts. So, let’s do a quick check on our four multi-year investment themes we identified almost a year ago in “Four Pictures To Develop This Year”. First, we will remind ourselves of what was written, and then score/review how things developed for AI, Housing, Corporate Credit and Cleantech/Batteries. We kick off with the biggie….. Artificial Intelligence (AI):

“The excellent database resource, Our World in Data, shows annual corporate investment in AI doubling from circa $80 billion in 2019 to over $160 billion by mid 2021. More specifically, the explosion of interest in generative AI (ChatGPT, DALL-E etc) has seen VC investment increase by 425% to $2.1 billion since 2020”

Review: Well, at the half-way stage of this year, 18% of global venture(VC) funding went to AI, clocking a total of $25 billion(Source: Crunchbase). Furthermore, with the tech-heavy Nasdaq index gaining almost 50% this year, Nvidia reaching a trillion dollar market cap and OpenAI hitting an $85 billion private market valuation, it is not hard to identify AI as the single biggest positive driver of investment markets this year. Of course, the trajectory of the cost of money (interest rates) also helps with the confidence bit, but we have written before that November 17 has more than one revolutionary connotation. As of this year, the night of November 17^th will be remembered for the $200 billion swing in value between Google and Microsoft in a matter of hours, and entirely driven by the relative success or failure of their respective cloud computing divisions. The AI revolution is in full swing and will continue into 2024

While the cloud has become the housing proxy for AI, what about our own housing markets? A year ago we were concerned:

“Of course, rising interest rates don’t just impact companies. The biggest item on an individual’s balance sheet is likely to be a house and as interest rates rise, so do mortgage rates. The push/pull effect of higher interest/mortgage rates can reduce the price of the assets being purchased, in this case houses rather than growth companies…… indicates a more difficult 2023 for a number of major housing markets.”

Review: Arguably, this theme did not play out in a significant way, unless you were Chinese. Bluntly speaking, the doomsday predictions of housing crashes in the US, Australia, Canada and the UK just did not materialise. However, house prices are somewhat softer in many markets. The St Louis Fed has said median house prices in the US are off 10%. Even the UK with its dysfunctional government, and one Prime Minister(Liz Truss) having a good go at crashing the property market all by herself, has seen price slippage of just 1% (Source: Halifax). The key flaw in the doomster arguments was that most people kept their jobs. Major economies in a state of full employment was not expected as the “vibecession” never turned into a recession. And, if recession is avoided then there’s another asset class which has dodged a bullet; corporate debt/credit. Here’s what we feared….

“In real world terms, the knock–on effect of tighter funding conditions will begin to reveal themselves in 2023 as companies with challenged balance sheets/indebtedness – aka ‘zombies’ – move into distressed territory.”

Review: As a proxy for corporate stress you’d expect high yield bond (lower quality debt) spreads to have risen through the year. But no. They’re actually at their lowest since April 2002. However, we’ve had a few big bankruptcies through the year – Silicon Valley Bank, WeWork, Diebold Nixdorf, Rite Aid, Van Moof, and even Birmingham City Council. By June UK bankruptcies were up 40% on the year before. According to S&P Global, in the first 10 months of this year 561 companies sought bankruptcy protection in the US. That’s more than any year since 2010, except for the Covid-19 hit in 2020. So, I’d give us a pass mark on this but feel there’s another year of stress ahead. In particular, commercial real estate as an asset class is going to witness some very painful write-downs and outright collapses. Check out the recent travails of Austrian billionaire, Rene Benko, and his $25 billion property empire, Signa, for a very current case study. However, not all building is in trouble….

“In some ways, the best proxy for the planet’s race towards reducing fossil fuel dependence is the enormous investment currently being ploughed into production facilities for batteries to power a generational shift to electric vehicles(EV). China in 2020 accounted for 75% of global battery production capacity but that’s going to change. Europe intends to up capacity 5-fold by 2030 and the US isn’t just home-shoring semiconductor manufacturing.”

Review: Like AI, I think this gets us pretty good marks. The cleantech and energy storage(battery) revolution is in full flow. McKinsey reckon $6.5 trillion will be spent every year on capital expenditure/building facilities which, in the words of the latest Cop-out 28 text, will “transition away from fossil fuels”. We did say catch up was required by Europe and the US in battery manufacture, but arguably the US has accelerated faster. Thanks to ‘Bidenomics’ and the IRA Act the US is seeing capital investment in manufacturing reach levels not seen in four decades. According to MIT, cleantech investments in the 12 months to July 2023 hit $213 billion, and was mostly allocated to EV battery manufacturing, renewable energy and green hydrogen infrastructure. No wonder the old-economy barometer, the Dow Jones Index, just hit an all-time-high level of 37,000 points. More amusingly, Trump whisperer, Maria Bartiromo, on Fox Business was forced to say “the economy is doing much better than most people understand.” Wonder how that misunderstanding developed, Maria?

So, there’s a temptation to stick with the same four themes for 2024, but in the spirit of Christmas we’d like to give a bit more. The bonus good news is that Christmas might also be easier on the waistline in the coming years. Yes, AI has stolen many of the headlines this year but there’s a 100 year old company in Europe breaking records too. Denmark’s Novo Nordisk is now the most valuable company in Europe with a $437 billion market capitalisation thanks to its insulin product, turned weight-loss miracle drug, Wegovy. This semaglutide-based drug is a game-changer for up to 750 million people living with obesity. However, there might be even bigger break-through treatments to come. And, it’s all about BIOLOGY.

We are entering the world of gene editing spearheaded by CRISPR technology. Get used to that term. CRISPR stands for Clustered Regularly Interspaced Short Palindromic Repeats. It is a component of bacterial immune systems that can cut DNA, and has been repurposed as a gene editing tool. Only this week we were reading that the FDA has approved two ground-breaking cell-based gene therapies, Casgevy and a new one, Lyfgenia, for treating sickle cell disease (SCD) in patients aged 12 and older. Notably, Casgevy is the first FDA-approved therapy utilizing CRISPR.

Now, think about healthcare spend being almost 11% of global GDP, or $11-12 trillion. The prospect of biology rather than pharmacology being used to eliminate various life-changing diseases is mind-blowing. Furthermore, as the first attempts to regulate AI emerge let’s open our minds up to the probability that these massive new computing powers can save decades of research time. So, as a final thought, perhaps 2024 will deliver a break-through global healthcare solution through the combination of AI and biology. Just imagine, our health becoming your wealth…. I definitely think that would score well.

December 17, 2023
Joe Biden’s Letter To Santa

If Joe Biden were to ask for just ONE thing this Christmas it would have to be a new writer or storyteller. I was reading various geopolitical scribes this week describe the poorly-polling Biden’s problem. According to the middle-ground commentariat, the Biden administration is describing an America with fantastic headline achievements on the economy but which the average American is not feeling on Main Street. Well, go ask the rest of the world. In fact, if Biden’s team were to follow through on their belief that “America is an idea, not a geography” then the solution to their messaging woes is staring right at them. Simply put, The USA has never been in a stronger economic or geopolitical relative position in its entire history. So here goes the report card….

The latest GDP print for the US shows an economy roaring along at 5% growth rates. That’s the first time in decades the US growth rate has overtaken China and there’s more relative superiority to report. Other large economies at a European or Asian regional level are not seeing that growth and you will only find US-envy among German or UK voters currently enduring stagflation.

US voters may not know it but international investors have already spotted US relative dominance. US stock markets clocked a stunning 8% monthly gain in a very rocky geopolitical November. The broader S&P 500 index is up almost 20% year-to-date and the tech-heavy Nasdaq indices have rocketed just shy of 50% this year.

We always write about how the cost of money drives asset prices everywhere. A lower cost of money is good news and the US bond market has indicated a 0.75% drop in interest rates in the last few months. In real life terms that’s the equivalent of the central banks cutting rates by 0.25% three times in 6 weeks. It is US businesses and mortgage holders reaping that benefit, not any Europeans.

Oil prices are back below $74 per barrel despite a Middle-East war. Of course, you won’t hear any Trump-cult Republican blowhard talk about the fact that US oil production is currently roaring along at 13.2 million barrels per day. Yep, that’s more than any country has ever produced in history. Not great for the climate, but a historic mark for US energy independence. Hold that climate thought….

On climate and cleantech the US is leading the way in transforming the industrial base of America. The Biden IRA Act is pumping more capex investment into the US economy in this presidential term than in any of the last 3 decades. The nation is at full employment, but to paraphrase Jeff Daniels’ famous monologue in the TV series Newsroom, the average American and all Fox News viewers have “become fearful”. The daily dose of fear on US media is staggering – “deep state”, Qanon conspiracies, baby-snatchers, immigrant hordes storming the borders, lawless cities, race replacement theory, and on and on it goes. No wonder there are more guns owned (350 million) than the number of people living in this fear frenzied nation.

It is clear that Biden’s story must feature the rest of the world. These are challenging times for the whole world, but somebody needs to tell the average American they are doing better than pretty much everyone else. The US is not perfect but it is definitely leading the planet on multiple opportunity metrics. Even better, the “America as an idea” vision is truly happening; eight of the US’s largest corporations including Microsoft, Adobe, IBM and Google have Indian-born CEOs. Incredibly, of the 700 US ‘unicorn’ start-ups with valuations above $1 billion, 100 of those companies have Indian founders. And, the beauty of nation power without borders is that it can drive activity globally.

We already have supra-sovereign corporations with billions of customers from Google to Microsoft to Facebook. Others will want to follow from outside the US. We are now reading about China retailer Shein readying for a potential $80 billion IPO. Elsewhere, in the venture capital world Q3 funding activity globally was up 11% at almost $65 billion(Source: CB Insights). And, for those of us in the start-up universe, we are always watching exit activity. So, check out Q3 M&A activity in acquisitions which were valued at more than $100m each; deals in that $100m + category were up 38%. Also, it was interesting to see VC Q3 activity in retail fintech increasing at a 53% clip.

Back in the US, inflation has been tamed and month-on-month price increases reduced to ZERO %. That will help Biden along with a crippled Russian military, a non-escalation by Iran or Hezbollah over Gaza, and a critical uptick in US consumer confidence. We don’t need Gen AI to write this story, albeit the US controls the 3 largest AI models globally through Microsoft(OpenA)I, Google (Bard) and Amazon (Claude/Anthropic). So, we will put that down as another Biden win too.

In the interim, I will just wait for that call……or write to Santa myself.

December 1, 2023
Corporate Activity is the Long View Tell

The pubs are back and so are the heroic trader tales, growing by the billion every day. By now readers may have heard about a new army of day-traders investing their stay-at-home savings in financial markets. There are some pretty good tales too; the Nasdaq hitting all time highs, gold flying to record prices, Chinese stocks up 10% in 48 hours, Amazon trading over $3,000 per share and Tesla up 42% in just 5 days. Whoop whoop. Welcome to a financial world with $10 trillion of central banking largesse.

Tesla might win the trader-tastic trophy this week given it is now the most valuable car company in the world. Elon Musk’s electric vehicle franchise is currently worth almost $250 billion or, to put it in a more domestic context, that’s the gross national product(GNP) of Ireland from as recently as 2017! Tesla has lost almost one billion dollars in each of the last two years so investors are certainly taking a very long term view on cash returns from this business of making……automobiles. Or possibly not.

The vast majority of buyers of Tesla stock through the pandemic lock-down are “trading” a short term view of further upside and hoping to exit with a quick profit. Nice if you can do it, yet all retail trading website disclaimers state clearly that most don’t. The track record of longer term investors is much better and this article is focused on a particular type of buyer, the corporate strategic buyer. These guys don’t have the luxury of a quick exit . They are in for the long haul and therefore their mergers and acquisitions (M&A) activity is a better barometer of confidence in the future. Clearly, a global pandemic has hit C-suite confidence but the data suggests some cautious optimism. Here are a few data tells:

• Bloomberg tells us the first 6 months of 2020 saw global M&A activity fall by 50% to $1 trillion. But that’s still $1 trillion of long-term wagers on the future.

• The Asia-Pacific region showed remarkable resilience with just a 7% decline compared to the similar period in 2019.

• According to Crunchbase global venture funding in younger companies was $129 billion in H1. That’s also just a 7% slip from last year.

• And at last, Warren Buffett is dipping into his $137 billion cash pile at Berkshire Hathaway to buy a gas pipeline from Dominion Energy for $10 billion.

• The FT is also citing data from Refinitiv showing private equity(PE) firms upping their activity. These firms are also long-term thinkers and they accounted for 16% of all M&A activity in H1. That’s the highest share for PE since 2007 and they have another estimated $2.5 trillion to spend.

It is not all dreamy optimism. US activity has collapsed by 90% and 44 deals have been pulled. That contrasts sharply with previous periods of turmoil and possibly reflects an executive pool truly exhausted by all that Trumpy winning. We just won’t go there today… and one can only hope Florida’s school children take the same view.

But let’s finish on a more upbeat note and return to our previous theme of a possible surprise recovery for the “sick man” of financial markets, Europe. We note with interest that European deal activity has slipped by just 15% in 2020 so far. It is early days yet but, when Buffett and Europe are leading again, there are grounds for longer term optimism. Natural gas and Europe are quasi-inflationary bets so it won’t be just us watching carefully. Indeed, feel free to listen to the day trader tall tales but we can assure you the bond trader tales could be seismic….and very very real.

July 8, 2020
Biden Our Time For A Market Panic

“Daddy, what did YOU do in the Great War?” was the teaser line in a recruitment poster used by the British Army in 1915. Nowadays there are no great wars. No teasing either, as Fawlty Towers fans have recently discovered. Wars are now cultural and the war against racism is finally going mainstream. The scale of street protests across the globe in support of Black Lives Matter have not been seen since 1968. And that year of 1968 did resonate with me as a reference point. On lots of levels actually.

China in that tumultuous year was in the throes of social and political chaos as Mao Zedong sought to reassert his authority in bloody fashion. The current political crack down in Hong Kong is thankfully less brutal at this point but Western observers should not be so quick to judge. The US in 1968 was horribly divided over the Vietnam War but at least there was bipartisan agreement that the USSR was the enemy.
The nation needed a unifying belief to overcome the horrors of MLK and Bobby Kennedy assasinations, a rogue Nixon administration and endless body bags returning from Indochina. Not so today.

These are very different days. Sure, military-style crack downs on the streets of Washington DC and other US cities in recent weeks have highlighted an increasingly polarised political and social environment in the world’s most powerful nation. However, there is an incredible lack of common ground across the US as to how to fight two deadly foes today. The current occupant of the White House and at least 40% of the US electorate seem to think the explosion of the Covid-19 virus in GOP-governed states and Russo-Taliban bounties on the heads of its servicemen in Afghanistan do not merit any protective action. Arguably, both are now the biggest single threats to US democracy.

Fox News chyrons might even use the “War on…….” headlines but that wouldn’t really fit the current editorial skew. However, this is where it gets interesting. Another war, the war against racism, is starting to impact voter intentions. The Atlantic magazine has been around since 1857 so it has seen plenty but a recent article by David Graham really caught the eye. The opening line expressed a view held not just in Wall Street but in most of the major capitals of the world – “ the only thing more futile than looking for Donald Trump to pivot was expecting the American people to do so”. Depressing, but probably true. Until now.

In the past few weeks something has changed. Joe Biden is now leading Trump in most polls by double digit percentages. But the driver is neither the economy nor the White House response to the pandemic. Both issues when surveyed by Siena/New York Times generate approval ratings in line or above his overall low approval. Instead, the driver of the Trump poll implosion appears to be race. Both the New York Times and Harris/Harvard surveys show approval ratings on race relations well below overall approval rates. That is stunning because usually Trump exploits racial tension to rally his base support. The “very fine people” tweets, the “white power” videos and the “looting starts, shooting starts” dog whistles are no longer having a positive poll impact, particularly with white females. Dare we hope for a panic of conscience?

That is not the only area of panic. By all accounts financial advisors on Wall Street are warning wealthy clients of a Biden election win and higher taxes ahead. Whatever about tax evasion strategies, there also seems to be some early evasive moves by the GOP establishment to prepare for a ‘social distancing’ strategy towards the White House. The GOP goal is to protect suddenly vulnerable Senate seats in red states like Texas. Simultaneous leaks to the press on this defensive strategy appear more than a coincidence and one wonders whether the Taliban bounties were the final blow to the charade that Donald Trump puts the US first. A dawning realisation that the very rich, Russia, Trump properties, the energy sector and Saudi, and the domestic Christo-Taliban were the main beneficiaries of Trump’s transactional style of politics could prompt a very severe political and financial backlash.

The problem for stock markets is that, when incumbent parties lose elections, the sell-offs usually happen in the months preceding the election. This chart from the excellent John Authers at Bloomberg captures Wall Street’s fear of change as a well known phenomenon since 1936; note the S&P 500 rolling over in Sept/Oct when the opposition ends up winning in November:

It is not all about finance. There is a genuine cultural battle taking place in the US. Too many people who should know better have chosen to turn a blind eye to corruption, trampling of the Constitution, probable treason and, at the very least, culpable homicide on a large scale. So back to that war question at the beginning of this article and a potential distancing by former members of the Trump cult.

Here’s the five questions every Trump enabler won’t want to hear when interviewing over the next ten years for a position of responsibility – take your pick from board director, educational leader, financial advisor, senior management position, political appointment and practically any other fiduciary position.

1. When did you speak out about the racist overtones in White House communications?

2. Is there any written record of your unease about White House relations with the Kremlin and Russian interference with the US democratic process?

3. Did you share your concerns with anyone in authority about the President’s wilful undermining of the Constitution and the corruption of the Attorney General’s position and the Department of Justice?

4. Did four years and 18,000 recorded lies cause you to doubt the assurances of the President on public health in the face of the Covid-19 pandemic?

5. Were you still a member of the GOP in 2020?

The difficult question in the 1970’s was did you serve in ‘Nam? Vietnam was an embarassing foreign policy failure with huge human loss, and combined with the exit of Nixon from the White House in disgrace, the US psyche and confidence remained damaged throughout the 1970s. Confidence is key in financial markets. It evaporated and stock markets kept falling for the rest of the decade. This writer’s fear is that a modern day combination of presidential criminality and cultural turmoil will erode confidence once again. Think of 1968 and 1974 as a double whammy of social and political shock. Then check out this chart of the Dow Jones Index from 1968 to 1980:

A multi-year halving of asset values might sound overly gloomy but there is no doubt the growing prospect of a Biden win, and social backlash, could spook markets. Mark Twain, the great American humourist, was reputed to have given us the maxim about history not repeating itself but certainly rhyming. Look at that chart again and then archive footage of 1968 civil unrest plus an ignominious 1974 Marine One helicopter departure from the White House lawn. Then ask yourself what did YOU do, say or write in 2020….?

July 4, 2020
ESG Goes MEGA: Making Europe Good Again….

The current perceived wisdom of markets is that doing good helps financial performance. Doing good even has its own fancy financial acronym these days – ESG. That covers corporate adherence to Environment, Social and Governance standards. In fact, more than $30 trillion of investment funds are now using ESG metrics/data in their decision making. It would seem the performance debate over ESG is now over which raises an awkward query for this writer. If ESG is a such a big driver of performance why does Europe’s equity markets lag the US so badly?

The data rarely lies. The following chart provides a stark reminder of a European Stoxx50 index going precisely nowhere over the past 5 years while US indices, like the S&P 500 and Nasdaq, roar ahead.

Of course, there are other macro drivers of equity markets. One of the most topical themes these days is the massive underperformance of the value style of investing. Europe is clearly more exposed to more traditional companies and business models and definitely lacks the turbo boost coming from the US technology titans. A $6 trillion boost no less. Yes, the 5 largest tech companies in the US have a market value equivalent to China’s GDP from just a decade ago. And yet, markets are supposed to discount the future. Technology is certainly the future but what about the future US?

Recent headlines from the US do not look out of place in a banana republic with ESG alarm bells ringing very loudly. Check out this medley of mayhem:

Trump demanded 10,000 active-duty troops deploy to streets – CBS News

Justice Department Reversal “Gross Abuse of Power” – New York Times

Revolt of The Generals – Washington Post

Trump Threatens to Invade Seattle – Vice.com

After Facebook staff walkout, Zuckerberg defends no action on Trump – Reuters

The media fixation on the unstable non-genius in the White House almost misses the point. The bigger ESG issue is the passive acceptance by half the legislators in the country(Republican party) of the potential corruption of the DOJ, the military and a massive social media company with a user base twice the size of China’s population. Trump is merely a symptom of decades-long social dysfunction. Yes, George Floyd’s death has forced the national address of systemic racism and a wave of corporate PR statements recognizing the issue and a firm commitment to do good, better. ESG box ticked, move along? Ehhh, not so fast. Where is the corporate concern on the following….

• The US has a prison population of well over 2 million. That is 25% of the global prison population for a country with less than 5% of the planet’s population.

• More than 300 million guns owned in the US.

• Thousands of immigrant children held in cages.

• Toddlers causing death/serious injury with guns annually exceed all Jihadi/Islamic terrorist activity.

• The top 1% of the population in 2018 held over $25 trillion in wealth which exceeded the wealth of the bottom 80%. With 40 million now out of jobs and the Nasdaq hitting all time highs one shudders to think where the current disparity lies.

• 1,000 people are killed by US police annually.

One suspects the most wide-scale street protests seen since 1968 are about far more than George Floyd’s gruesome murder. Europe is not a perfect place but the Covid-19 pandemic has surprisingly revealed a crisis response far more coherent than originally feared. It is early days yet in a hopeful recovery but one wonders if financial markets over time will see Europe through a more atttractive ESG prism. How ironic it would be if European capital markets over the next decade outperform the US due to the comeback of social values rather than financial value…..

June 12, 2020