The name of the game
What is the point of investing? How has that changed over time.? Do we still need so many choices? Are single stocks relevant? And we salute the prime palindrome.
We were taught that investing is an economic process for allocating capital to allow competition to seek out the best opportunities and fund the best businesses for the benefit of all. Countries with good markets have good capital allocation, grow faster as enterprises with the best return on capital, and then attract more of it.
Really? Not what it looks like now. Things change. The old gateways got knocked down, so anyone can access any investment anywhere. The paternalistic City was never sure about that, but in reality, markets followed communications, which went global.
The FCA (and to a degree the SEC) has a muscle memory of these protected times, and constantly wants to suppress innovation, keep new issues and ideas away from investors. Slow it all down, so they donât just regulate markets, but control them. But excess capital flows are changing all that. It is instructive how the SEC, by trying to stop Bitcoin, has simply made it respectable and transacting in it safe.
And looking skyward and not understanding how this excess liquidity is created by quantitative easing is sadly no longer viable for investors; entire economies are built on it, like Japan. Nor is it transitory, it is embedded in the US and EU as much as anywhere.
Governments hoped to take control, using QE they forced the cost, to them, of debt down to zero, on the way creating such a shortage of bonds, that prices rocketed. Paradoxically as did equities, for they could keep offering a yield and had no âlower boundâ, so their prices could rise for ever.
Then equity investors got back in control, they realised they could move the price, on the thin sliver of equities that are actually traded, pretty much as they wished. In particular they could signal or co-ordinate, so that everyone was on board with the price direction. Which is both the meme stock phenomenon, but also at the heart of momentum investment.
And liquid, global, interconnected exchanges were designed to let all those price signals out in an instant. Of course, co-ordinating them takes only a few seconds more.
THE POINT IS
Which brings us back to what the point of investing is. I am only interested in capital allocation, if by understanding it and dissecting the choices, I can get better returns.
I can have an altruistic angle of course, I just like old style engineering and banking outfits, I sponsored the IPO of an art gallery once. I have a soft spot for Kenya and Bulgaria. I want to avoid âdefenceâ industries, I dislike tobacco and polluters, and not sold on slave labour either. How nice, and in the investing world, how utterly useless. Never, ever, fall in love with a stock they said: quite right, sadly.
Indeed, what you and I call capital allocation is what others call hot money, and it moves faster and faster. As for those bad actors, well money always attracts crime, the faster it moves the more options for criminals exist, quite a few of whom wear suits.
But then who needs stocks and analysis when you can now buy a market cheaply? Everything says invest in multiple geographies, but really? The process I have outlined above favours one or two markets, they win, so they give a good capital return, so they win again, almost regardless of what the underlying business does.
Indeed, Bitcoin shows, it can indeed be regardless of the underlying asset. Coordination and belief matter, not reality.
So, what of all the rest, the unfashionable markets, unfashionable stocks, they just keep underperforming, keep being sold, with very little scope to recover. With rates low it was possible to pay a competitive dividend, but when money market funds are expected to offer you twice the rate of inflation, even those dividends are unattractive, and they get taxed hard.
NO COMPETITION IN COMPETITION
While the Government has also destroyed the competitive market for companies, by largely sidelining hostile takeover bids. In any event issuing poorly rated paper for poorly rated paper never sounds great. But that closes out profitable exits; sure you get insiders sweeping the Aim floor for cheap deals, but by definition those are not competitive, you canât have two sides both inside.
The government knows that almost any deal has a loser, or someone not as well protected for life, as they had hoped. Which means media noise and MPâs getting lobbied, so far better to âlong grassâ it, via a competition investigation. Isnât it odd that the competitive market in asset allocation created by an active takeover market, is the one market the competition authorities simply wonât investigate. But without that cheap stocks just stay cheap, it is why buy backs are so prevalent: the companies are right, the price is wrong.
Of course, index investing has issues, you buy the bomb maker, cigarette seller and dodgy legal firm all in one bundle, but thatâs the game. If it is big enough, it goes in the index, and you buy the package.
And hot stocks are likely to favour low commission markets, and low transaction costs. It may be an accident, that UK commission and tax is based on total deal value, but US commission is based on share count (and there is no stamp tax). But it does mean that you buy a share in Berkshire Hathaway for the same dealing cost as one in Game Stop, or if you prefer Nvidia and Trump Media.
Assuming sanity, you trade in the US, or in stamp free index ETFâs, not UK stocks. Although the FCA are fighting a rearguard action against both ideas, with the discrimination against holding ETFs seeming particularly bone headed and indeed against consumer interests.
But few stocks, fewer markets, more hot stock volatility, it is just the way we have set it up, donât be surprised that is how capital is now allocated, growth funded, prosperity achieved and destroyed.
TIME FOR A BREAK
As for this market, it had to break, we have said it for a while.
Levels have dropped sharply, and money is rotating back into bonds, or at least not flowing out of bonds.
Waiting to see through the summer, when that first rate cut arrives and who wins the US Presidential election, is all impacting the hot flows and making staying in cash feel easier.
While a more sinister undertow is coming from the narrative that the terminal interest rate settles out higher.
Our core assumption is still that real interest rates are now in a steady decline, but the equity bonanza of negative real rates is not coming back anytime soon. While for now, only one Central Bank and one market is going to keep on winning the hot money race. No prizes for second anymore.
The Winner Takes It All.
