A Startling Infinity Pool

First posted in January 24 2021

There are a few investment quandaries this week.

The first, tactical, one is that while we largely think we, (along with most market participants) ‘know’ that markets are going up this year, we can’t overcome the feeling that this is somehow wrong.

It is of course the difficulty in crossing the vale of winter fears directly ahead of us, to reach the sunlit uplands of bright summer beyond.

In our minds we know once the snowdrops are out, and the daffodils pushing though, that the lockdowns if not yet over, are surely on the way out.

We know the absurd stimulus, dedicated to giving every business as well as every citizen, impossible immortality, will keep being splurged, and so inevitably asset prices have to rocket upwards. It is kind of automatic. 

Yet we can see the still overfull hospitals and the ceaseless tolling of the vaccine nay sayers, and in our hearts, we know even at 400,000 jabs a day it will still take another five months to vaccinate the adult UK population.

We also know that many businesses will just be taking on more debt which they can never repay, and quite a few countries are doing the same.

The visual capitalist is the source of this image.

When the next Greece or Argentina implodes and you ask what idiots lent them more money, well mark these days of plenty. This is when we stoked the next debt crisis to its full noisome plenty.

While cheques are sent out with no thought for their need, flowing effortlessly, in a significant number of cases, past well stocked larders, into Bitcoin or the latest gambler’s stock. We all sit, with supine regulators behind us, egging on those playing at the tables, with fantastic stories of easy wealth, afraid to be the ones pointing out the chances of a lottery win are significantly higher than that of every SPAC and each market hustle coming good.

MANAGING EXPECTATIONS

So, it is the fund manager’s speeding train dilemma, our clients are desperate for us to board the train but expect us also to time our exit jumps to perfection, before the locomotive ploughs over the precipice. 

Well, it is an illusion. This is a bubble and bubbles end badly. As it happens, as long as the punchbowl is refilled, we too must stay at the party, but with an increasing sense of unease, as markets leg higher, driven by all that excess liquidity. We are really keen to leave, until it quietens down a bit and rejoin say after Easter. Would that it was that easy to time markets, we certainly don’t claim to do so.

Two thoughts then, the first is what we most fear is the NASDAQ rolling over. Why? Well for the last decade at least, the NASDAQ is what has propelled positive investment returns, globally. The FTSE 100 is still stuck below 1999 prices, the Nikkei has yet to surpass its old top from 1989. For those “lesser” markets you need great patience and good timing. The easy cruise of buy and hold index investing is a global rarity.

INVESTMENT PERFORMANCE IN THE LAST DECADE

Like a listless blackbird, caged in our dens, we leaf through old debris.

A copy of “Time” from 21st January 2008, drifted past my eye line, which recorded the UK’s per capita GDP as $46,380 which was apparently some $500 above the USA. Now I can’t source that stat, but I can see another, for 2019, with the UK’s per capita GDP, using purchasing power parity at $44,288, that’s right, down over a decade of Brown, Cameron, May. The US number, same basis, is $63,051, under Obama and Trump. Reflect on the relative failure of those UK governments and yet look at the undiminished scale of their spending ambitions.

Now, a great deal of that move is currency related, the average dollar pound rate for 2008 was 1.85, the average for 2019 was 1.28.

So, in investing, just those two issues, the dollar value and the NASDAQ market, have determined if your savings can grow or shrink.

Just to chill your blood, in 2008 the NASDAQ was at 2,161 (yearly average), in 2019 it was 7,940, so far in 2021 it has been 13,115. See why this causes us to lose sleep?

Yet we should look at the UK bubble stocks too. In the sensible old stalwart, Law Debenture Investment Trust, the latest factsheet shows its biggest holding is Ceres Power, above real-world stocks like Glaxo and Rio Tinto.

So, what is Ceres, to have a market cap of £2.6 billion? Well, the 2019 accounts show revenue of £19m and losses of £9m. Obviously no earnings or dividend, so a value of some 135 times sales is quite impressive. Its share price has also gone through £15 now, having only crossed £7.50 per share in the autumn of 2020.

Now I am sure you can make the case that with Biden, hydrogen fuel cell technology is going to the moon, indeed Ceres has notched up some impressive recent collaborations with some big fish. It is a serious technology innovator (with the losses to prove it), and a reasonable history in this area. All granted, but has it really added £1.3 billion of value in the last six months?

Well, that type of stock is driving quite a lot of funds, but it looks to us like a speeding train, when it gets to a big curve, the market will crash. The company, like many Japanese firms from 1989 will survive, the passengers (investors) may be less lucky. While Law Debenture is a well-run outfit, and indeed it may even have trimmed Ceres already. Yet when that type of stock embeds in those type of investors, we do sense trouble.

Law Debentures third largest holding is Herald Investment Trust, another small company wonder stock, but one we do track, (Ceres as a single stock is outside our universe) but even for that, we simply can’t justify buying at these levels, after so abrupt a recent rise and the closing of a big historic discount.

Other small company funds globally have rocketed up, although it is still a sector, where we do want to add to our exposure.

As we started out saying, we do believe this ride goes on, but 2020 was the easy money, 2021 will be far tougher.

The excess cash now driving valuations is just not the same as value being created, in a crippled and still bleeding global economy.    

Charles Gillams