FIASCO

Nantucket Sleigh Ride – source: wikipedia

WHY SYSTEMS FAIL, AND IT IS REALLY NOT ABOUT MONEY

A winter lockdown forces us all to examine our domestic interiors, with in my case perhaps a superfluity of paper, which led me to “Fiasco”, by Thomas E. Ricks. It is a seminal description of how complex systems create monsters and then fail, not for lack of effort, nor goodwill, nor money, but from thrashing about with no coherent strategy.

Indeed, arguably all those three inputs make matters worse. The tale simply told, in a largely deadpan tone, is of the greatest failure of American foreign policy since Pearl Harbour, and the greatest crime perpetuated by a British Prime Minister, since the Bengal Famine. It is how Bush, looking for revenge after 9/11, has spawned the disasters of the modern Middle East and locked us all into an unending cycle of terrorism and for the millions of people in the Middle East and beyond, brought poverty and despair.

Strategy matters

How? Well as Ricks tells it, they used the wrong tool for the wrong job: the strategy was hazy, mission creep endemic, the reporting system mangled everything to suit those making the reports. In the meantime, the aims kept shifting, and staff rotation and comfort swamped the original purpose of simply executing the mission.

While those they were sent to save, service and otherwise succour, were embittered and made hostile by the sacrifices they were expected to make, in return for specious, obscure propaganda.

So that led to the USA seeing the Iraqi people as the enemy, not just their crazed leader, while the entire Iraqi government was blamed for funding and concealing these non- existent weapons. Read it. Because from that flowed the failure of Phase IV (the post conflict reconstruction), the hostile occupation (not liberation) of Iraq, the idiocy of making that occupation subservient to Pentagon (not civilian) demands, the destruction of the fragile sectarian balance between Shia and Sunni, the rise of ISIS, the Syrian nightmare, Yemen, and the Iran nuclear programme.

Meanwhile, the attendant loss of money, the coming to power of the isolationist and militia based right wing in the US, the triumph of China in the emerging world, the resurgence of Russian thuggery all remorselessly followed on. Simply unbelievable. As Hicks writes it, you can hear the quiet click, as the lid of Pandora’s box was ever so gently released; beats bat breeding labs in Wuhan for the sheer laconic horror of it.

They did start the fire.

I do not know what the Pope going to Baghdad shows, beyond a startling personal courage, but it is no ordinary trip. The story also shows how in the modern world massive complex heavily manned delivery systems just can’t operate. They are dinosaurs. There was nothing inherently wrong with the US Army, but yet it created its own defeat.

WHY THIS SYSTEM WILL FAIL TOO, AND AGAIN, IT IS NOT ABOUT THE MONEY

So, to the UK budget, another set of tactical responses to poorly understood problems, hemmed in by contradictory rules, horribly distorted by politics. Sadly, the government really does believe it is the presentation that matters, not delivery. So, we had Rishi, spooling out unending largesse, and crudely claiming he was going to level with us, and level up North Yorkshire, and hand out freeport concessions to his chums and give Ulster another £5m for their paramilitaries (oh, you missed that one?).

A more extensive piece will shortly be on our website. It questions whether we are building back better. To me this looks more like ‘business as usual’, no growth, no decent jobs, London’s supremacy ploughing on, the regions thrown scraps. Green? When you freeze vehicle fuel prices for the eleventh year? Hardly. So yes, the budget was a relief, but no it should not have been. I doubt if markets will like it much, just because the publicans do.

DEBT AND EQUITY MARKETS AND INTEREST RATES

Markets Well, there is another puzzle, I thought the august President of Queens’ College Cambridge was going to self-combust into his tache, such was his thrill at seeing the bond vigilantes shooting up the US ten-year interest rate, during the week. Biden must pay his electoral base the bribe needed to win those Georgia Senate seats, at the full inflationary excess of $1.9 trillion, pumped onto an economy that is already visibly and dangerously overheating. The one Game Stop we do need, won’t happen.

So, you have $27 trillion and rising of outstanding US government debt, do the maths, if the bond vigilantes push rates up by 1% for the average duration of that debt, 65 months, that will cost you some $1.5 trillion back. So sure, you can cough up on your election pork, but it will cost the American people $3.4 trillion to do that.

Well, we don’t actually think that attempted rate increase can stick, for all the reasons it failed to stick over the last decade. Powell at the Fed then agrees with us, which on past form is perhaps an ominous sign of our approaching error (or possibly his gaining of wisdom).

Equity markets certainly felt unhinged; they started to whipsaw around in a frankly worrying fashion. On prior performance this does need sorting out, before it is safe to go back in. If (of all places) the US will lead on raising rates, it has to then pull up all other global interest rates, which we know will slow growth and take the wind out of the recovery. Indeed, it may threaten it, it has to cut (see above) how much governments can then borrow, has to start foreign exchange rates jockeying for position, has to question the whole free money basis of tech valuations.

I simply don’t think this recovery and these valuations can stand that just yet, and after a decent pause, the Fed (like many other Central Banks do already) will have to act to somehow hold down rates. Whatever Governments say, money does have a time value, and behaving as if it does not, is rather unwise. But I think extend and pretend will still persist for a while yet.

Charles Gillams

Monogram Capital Management Ltd

Time to Plunge into the Property Sector?

As stock markets seem to hit a pause, the implication is either that they are too richly valued, so the marginal client will not buy, (perhaps the Tesla case), or that everyone who wants to buy has already done so, so there is no demand at any higher price, (the UK value stock case).

One I suppose is active, yes, we want it, but the appetite is not here just now; the other passive, no, and not here, as we are already satiated.

So as investment performance comes from either accruing income gains or from prices rising, we are looking for new places to make a return. We are therefore asking ‘when does property become attractive again’?

Being driven towards property?

Property as an asset is largely about demand; as an expensive item buyers usually only acquire the rights over a space in order to then utilise the asset. So that comes down to rental demand, where in theory you will rent a space if you can make more money by so doing. Otherwise, why bother?

Developers meanwhile will add to available stock as long as the cost of doing so, less the costs of funding, plus the resulting discounted rental stream, is greater than zero. Simple economic theory.

Yet this is one market area where taking a thirty-year view on valuations, which of course allows you to fully discount 2021 and even 2022, seemingly just does not apply. Those earlier years are instead looming very large over current prices even for long life assets.

Another problem is that a lot of stock is still being held off the market, but not used for various reasons. Some is the inequity that landlords can leave a property empty, refuse to assign the lease and then demand an uncommercial surrender premium.

If you are the landlord, that seems fair, to everyone else it looks monstrous. More advanced legal systems, such as in France, effectively ban the practice.

Is suspending evictions effectively seizure of private property by the government?

Then there is the equally odd suspension on evictions and the extended mortgage holidays, which is in essence the government seizing private property, without compensation or due process, and requiring it to remain either empty or non-income producing.

This happens to be a curious feature of this health crisis, but one that they are happy to keep extending. I am looking forward to the inevitable litigation on this, and I suspect a rather large bill to HM Treasury will inevitably follow (so that’s one payable by us).

In some areas (warehousing for example) by contrast this is not an issue, demand is strong. In others, like residential, enough of the market still operates to give pretty good price indications anyway, although the impact of empty property levels from an extended mortgage holiday, or voids that can’t be repossessed, may still be significant in some areas. While other areas, like Central London, where high priced short tenure deals had become too common, (also known as Airbnb) the flushing of the system came quite quickly.

Nevertheless, I think the end of tax incentives, plus the release of frozen stock, plus builders using the summer to restock (a number of housebuilders saw stock levels swing alarmingly low, as restocking stopped last spring, in the peak build season) will cause excess supply, for a while, later this year. However, such is the extraordinary level of excess liquidity and the pace of household formation, it does not feel a significant threat to residential sector pricing overall.

Office and retail sector – commercial property

So, what about offices and retail demand? Well, when we have looked at these areas, we have simply said they are uninvestable, like cinemas and airlines, we know far too little about the end of lockdown. There is a great deal of valuation angst about high priced office developments and clearly some distress in the over-priced short tenure deals, (so WeWork and its precursors). But there is relatively little sign of extensive non-payment of rent, certainly compared to retail, where an effective rent strike is visible.

Meanwhile retail tenants are well aware that they will be able to pick and choose prime sites in future and that landlords have a slim chance of finding a bigger fool, to take on their current inflated terms. While the judicial innovation around the CVA option, has allowed courts to ignore the future rental income stream as a valid current claim by property owners, on the rather logical grounds that the service has yet to be provided (so it can’t be current).

Valuations of office space

So, pressure on office values will come from excess supply still arriving (this stuff has a very long lead time) and a mix of non-renewal of leases (which takes some time to work through) as well as downsizing, is likely to follow as bosses realise that hiring their employees’ spare room for free is a good scheme: no business rates either, nor season ticket loans.

I think this is the office pressure point, that is ‘where is long term demand going to settle’? On that I tend to be optimistic, London with far fewer commuters, tourists, and also cheaper rentals, seems a rather nice thought, just now. It will take time, but from my experience post crisis London, once the coffee shops reopen, has always been rather attractive. Whether it was caused by the Luftwaffe, the aftermath of Big Bang, Irish Republican terror attacks, the Dot Com bust, the GFC – all of these saw life improve in London after the smoke cleared.

Retail premises

Which leaves retail and retail services as the ‘unknowns’.

Now that is driven by footfall, and by the ability of online to undercut the physical stores. Here I do see the online world as slowly hitting more and more problems.

Much of its delivery advantage has been attacked this week by the UK Supreme Court, in typical countercyclical fashion, just as we are desperate to create more work and revive the economy, they have ruled the flexible, self-employed workforce involved in on-line retail, are actually high cost, inflexible, unsupervised employees. Nice one. Zuckerberg has also decided to delete Australia, (and China to ban the BBC). While even without that pressure on media content and advertising and on delivery costs, there is a lot of unprofitable cap ex chasing a finite on line market.

So, some retail still looks oddly shaky, stocks like Shaftesbury and NewRiver were stock market darlings, but now look very subdued, and oddly much more so than their typical tenants; both rely heavily on the restaurant trade for instance, but seem to have done worse than a typical volume operator in that sector, like Wetherspoons. Or indeed the discount grocery sector, which currently seems fine.

Commercial property – property investment trusts

The problem one assumes is that the commercial landlord’s costs barely move, but the tenants have been able to not pay business rates, and to furlough staff, turn the heating off, stop marketing, and stop paying rent. Indeed, in Shaftesbury’s case, the one fixed cost that mattered, finance, has rather gone the other way, interest rates have risen and “covenant repair” costs are rather high, as their creditworthiness apparently slips.

While putting this all together, property investment trusts, like TR Property, are therefore sitting well below pre COVID levels, the vaccine recovery trade has yet to arrive for them. Their prices were pretty flat from June to November last year, before a spike up in November, which both in their NAV and share price, has now just dissipated.

Yet so much is now in their apparent favour, compared to in June 2020, we must be much closer to the end of the COVID recession, or at least vast areas of the stock market are saying so. Property does also have that bit of gold dust, a solid yield well above inflation. But no, the property investment trusts (PIT) are apparently stuck at this level.

The blight over the sector is the NAV, of the underlying stock of REITs (Real Estate Investment Trusts) which are not the same thing, but a classic piece of passing off, but that’s another story. Anyway, a PIT largely owns REITs, just to be clear.

So even as valuers take a big slice off values in the worst sectors (about 20% is not uncommon) no one knows if that’s really it. They have been slicing those retail values for a while now. They don’t trust the few actual transactions, claiming new tenants are exceptional cases (for which read fools with too much cash). They don’t trust the lenders, as nearly every interest coverage covenant is blown, and they know new supply is immense (from slowly finishing development and rapidly collapsing store groups), and so the answer is just no.

In other words, they really have no idea where values are. Or if they do know, the stock market simply does not believe it.

How long will this be true for? Indeed, is that a rational market position? I suspect it is mainly the unknown part of this that currently holds prices down, whilst if you think you can see through all of that confusion, or you do trust the valuers, you might take another view.

In particular you might do so, if you can find areas not so exposed (or even benefiting from) the Amazon firestorm.

Charles Gillams

Monogram Capital Management Ltd

Monogram Capital Management Ltd services the elective professional client and offers two products in the Global Real Return sector. An active UK UCITS, the VT-GTRF, where it is co-manager, and the MonograM momentum model, through managed accounts. Factsheets and performance details for both are on our website. As always please read all the information, it may not be suitable for you and this is not a recommendation to take any specific action, at any point in time.

We are rather proud of our 2020 performances, check it out, let me know if you would like more details at charles@monograminvest.com.

We are happy to explain more and discuss co-operation with IFAs: as MCM has no retail clients, our interests may align. Just hit return to this email and get in touch.

Some Big Calls

US Markets: The ‘no-Trump’ response

We may learn a little about markets from the curious absence of Trump.

We had been confidently told that without him the US stock markets would fold, and as US markets collapse, these days so do global ones. Indeed, not just relying on the US, has become the fund management challenge of the last decade.

Well, he went, admittedly in a two-stage collapse, but he and the Republicans are out of office, yet the apparent upset in Georgia passed with barely a market ripple. Markets just went on up, unconcerned. Now some of that is their appetite for short term debt fueled spending, which even if you know makes little sense, it is folly to stand in the way of.

But beyond it, higher taxes and lower growth must be the consequence, if you are buying stocks on a 6 times multiple of earning the next two years matter a lot, but when buying them on the current S&P 500 forecast of 25.35 times earnings, that implies those later high tax years must surely be in the equation too.

Has the market priced in the downside?

So, what seems to have happened, is the downside of future years has been calmly offset against the short-term gains of a stimulus package: is that logical? It seems unlikely, if nothing else a big corporate tax rise is due, to notionally pay for it all, plus a fair slice of traditional “stick it to the rich” revenge legislation.

The assumption seems to be that the winners in the higher consumption aisle will be neatly offset by those who suffer from the new regulations. We are less sure and do feel the ultimate impact will inevitably be lower US growth.

Of course, tech might solve all, but then it is very richly valued already. It might solve the growth problem, but could still be loss making for investors, at these levels.

That is not to say that Biden put on a poor show in his advocating a “go big” package, he did it lucidly and with passion, a good speech.

For all that, when a new leader arrives and confidently asserts lots of economists (but notably not including The Economist this week) think he’s doing the right thing, it means trouble ahead. While his near certainty that the US would consequently be back to full employment by Christmas was touching, but absurd. The excess stimulus might get growth back to pre-pandemic levels, but that’s really not the same as employment.

The China issue remains big.

Another really big asset allocation call:

We are hearing ever more gruesome tales about East Turkmenistan, following on from decades of horrors from Tibet, both sovereign states seized by China in the political chaos after WWII.

If you see them like the other nations seized by Mao’s fellow imperialist Stalin, at much the same time, you will understand the repression. Although as ever with China, with a big dose of racism, against the 7% of their population who are not ethnically Han Chinese, plus of Communism, which still stands against any form of religion, be it Buddhist (Tibet) or Islam.

Will Biden care more or less than Trump about human rights? Well obviously, he will care more, as something is more than nothing. But will he be more effective than Trump, indeed do the Chinese find an unpredictable enemy with a penchant for sudden tariffs, harder to deal with, than a believer in the international order and gentle fireside chats?

Well here cynicism prevails: these are nations caught between empires, like Poland was for centuries; any tension in the international order will always see a land grab by their bigger neighbours.

I also believe Biden will find the proposed attacks on American consumption through both higher taxes and the removal of cheap energy and labour, can perhaps withstand also keeping Trump’s price rising tariffs in place. As notably he has done just that, to date. Indeed, he seems to be out-Trumping Trump on Federal procurement and protectionism.

But I still don’t think cutting China out of global trade, however barbarous their actions have been, is a runner. I think the vile abuses of power can go on, just as the EU has already handed a free pass to China’s torture chambers to plough on, by agreeing a new trade deal with no human rights teeth. So, in time, realpolitik will triumph with Biden.

It was I suppose nice to see China (after a pause for thought) suggesting locking up elected politicians in Burma, after the Army grew tired of holding all the cards, but getting no thanks for it, was a poor move. But there was a long enough pause to just tell the junta they didn’t mean it and were really rather pleased. A little more discord, more repression of the ‘tribal’ areas along their shared border, more sanctions to exploit, a few less pesky journalists, all are very much in China’s interest.

So, I see a curious dichotomy, in the Han Chinese areas, Tesla car plants, Apple phone stores, Starbucks a plenty, for a sophisticated technologically advanced middle class, will all thrive. While the minority non-Han areas will be pillaged for resources and labour and if they are good, be re-settled and re-educated and polished up for tourists. A bit like California in the 19^th Century. So perhaps Xi is right, only China can split China, but then history suggests, it will, one day.

But not any time soon; you can take a moral position on Chinese racism, or an economic one on Chinese dynamism, but I am fairly sure the market will easily favour the majority.

This of course does create another ESG contradiction, the US high flyers rely on selling to the Han Chinese but are keen to exploit minority Chinese labour forces and natural resources. We can look forward to a great deal of sophistication in somehow disconnecting the two.

Efficacy of the Astra Zeneca / Oxford vaccine

Finally, I should mention the battering the EU and even perhaps the Euro (at a nine month low) has taken from the principled resistance to fudging the data exhibited by German scientists. The scientists are right, the evidence base for efficacy in the over 55 age group is indeed absent. Excitable politicians, including the normally precise Macron, have said it means it is ineffective, which it does not, only that proof is lacking.

Now that is presumably in part to cover the arrogant and inflexible EU procurement process, so full of checks and balances it strangles itself.

Boris’s vaccination stance

While Boris (faced with the same data) decided to wing it, correctly seeing that to save the NHS and his own electoral chances in May, he would rather give a potentially useless but harmless jab to millions of elderly disease vectors, than talk about due process. For once his disdain for the experts paid off.

The opposition in the meantime pleaded for a longer deprivation of our liberty by a longer pointless lockdown. Thank you for that suggestion.

Call it luck, if you will, but Boris has spent a long time practicing that ex tempore talent.

Proof might have been lacking, but it looked a jolly good bet. It sure was.

Charles Gillams

Monogram Capital Management Ltd

A Startling Infinity Pool

a flooded Gloucestershire field beyond a fence, reflects the sky

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.

MUST THE POOR BE CLEAN?

Attempting to comment on the last few weeks seems largely futile, save perhaps for the apocryphal remark attributed to Chinese premier Chou En Lai, that ‘it is too early to tell’, when asked about the impact of the French Revolution.

We suspect the markets are a little too relaxed about the assumption that Biden will spend furiously, effectively and in a way to spark inflation, but without any significant extra taxation or regulation. Lost in the exuberant desire by the market (and voters) for yet more debt are those inevitable downsides. While clearly the amount of speculative froth in the US market, is a clear warning of disaster to come; it never ends well when valuations get this daft.

As for these shores, it is not clear why it is almost mid-January, before the blindingly obvious need to vastly ramp up vaccination rates, for drugs that were available weeks ago, has only just penetrated Boris’s head. We are all rather immune to his elastic grasp of promised numbers now. Like the Relief of Khartoum, I suspect they will have dithered into disaster. Vaccines by the barge load will be coming in, just after COVID has over-run our defences.

It is reassuring to learn that the seven days a week NHS so touted by David Cameron, still remains a distant hope. And indeed, that this is not so much of a crisis, that vaccinating people on a Sunday can be contemplated. Over the next fourteen weeks that will cost a further fortnight of unforgivable delay. Luckily for the government, the EU is even more hidebound and inflexible, so we can claim a comparative victory.

Environmental, Social and Governance – an active conscience at work?

So, to a wider issue, the dear old ESG (Environmental Social Governance) standards to which all fund managers must now adhere. This seems to be largely (well intentioned) greenwash, it will not surprise you to hear. But we do have to start somewhere. JP Morgan have conveniently set out a simple guide on this, around whose elastic edges they must invest. We will shortly clamber through this.

The risk in ESG cuts several ways. From a market view, the damage comes from the familiar “buyers and sellers” equilibrium, which means every buyer needs a seller and vice versa; where the impact is profound.

Assume that most big liquid stocks grow into their positions over a decade or more, and therefore once in an institutional portfolio, they will also hang about in it for many years, think IBM or GE. Now suddenly condense that holding period into a far shorter span to dis-invest and you will blow the subtle price balance apart. By the same token, a company typical grows, acquires, improves over decades, just as companies like Apple and Microsoft have, plugging away and expanding. Now what happens if the demand for all the buyers of a decade or more, are suddenly packed into a few months? Again, that delicate price balance is destroyed.

So, you can then easily model remarkable over or under valuations, based not on any core worth but on supply and demand. Now there is a whole new world of pain from this, if you get what is called “common ownership” which is the phenomenon of a trio of giant asset managers, who own 20% plus of the S&P 500 between them. So, if those asset giants decide to switch course, the volume of stock unleashed (or indeed acquired) will clearly be far beyond the market’s power to react in a balanced way.

The Democrats are already nervous about this feature, and may well look harder at it, although probably after a nasty market crash, of course, not before, when it might actually help.

ESG In Action

So, in JP Morgan’s definition, what is ESG? What does the “E” constitute? Carbon pollution and emissions, environmental regulations and adherence, climate change policies, sustainable sourcing of materials, recycling, renewable energy use, waste and waste management. Seems OK. Under the S we have to look at human rights, diversity, health and safety, product safety, employee management, employee well-being, commitment to communities. Fine too. While finally G is Board structure, effectiveness, diversity and independence, executive pay and pay criteria, shareholder rights, financial reporting and accounting standards and finally a catch all of how the business is run.

So, it has become quite a narrow definition, although a little less so on the environmental side. It favours businesses that are not vertically integrated, those that just skim the last bit of others production. No direct mention of water or indeed of total consumption, in that part of the guidance for instance. Other areas also justify that late-stage business model, a focus on employees, but not workforces, on low skill workforces too (which are easy for diversity targets), no actual production (helps a lot on health and safety, to have no machinery), while ESG advisors love the soft option of ‘commitment to communities’, a couple of village halls and a sponsored half marathon and you are there. It is completely silent on fair tax.

Indeed, you can almost see this definition leaning into the big distribution, tax avoiding, gig economy US firms and most strikingly into fin tech. Maybe ESG is the after all the revenge of the bankers?

There are some traps in the G section, Board diversity and effectiveness are easy enough to fix, that’s what chairs of audit and remuneration committees and indeed HR directors are for, while Board effectiveness is always assessed by consultants they themselves appoint, we have seen some right turkeys ‘assessed’ as absolutely fine.

Independence used to mean something, but Cadbury et al have made that vacuous box ticking just related to tenure. Pay is sorted by a very low (or zero, for high grade virtue) basic salary and generous yet soft bonus targets, with personal targets again a great loophole. Mine are to try to do a good job (and yes, we have seen that actually used). I can certainly meet that before the year even starts. As long as you don’t set pay upsides too eye wateringly high, most things on remuneration still get nodded through.

A hollow laugh then follows for shareholder rights, with so many of the big tech stocks having odd voting structures. Financial reporting? Well, “adjusted” profits allow pretty much everything on that side now. Some conspicuous angst over valuation of goodwill or deferred tax or lease accounting, none of which have any impact on cashflow, also apparently counts for good accounting compliance.

So, the ideal ESG business would be something like PayPal, Visa, Verisign, Alphabet, Autodesk, Charles Schwab, in short fintech is simply delightful as it has no factories and makes nothing. Distribution is not too far behind. All cracking market performers too.

Is ESG then just convenient ‘tagging’?

Now that gets us back to “common ownership”, if enough big managers decide that’s the way to invest in what they like already, but they now simply tag it as sustainable, then there is a rush into those same stocks, which as we know then go up, more buyers than sellers time again. Magic, you have created both a market outperformer and an ESG winner and yet not stepped an inch beyond your comfort zone.

Well, each of those listed stocks above do indeed feature in the top ten of our very own sustainable fund holding, what a surprise! That also gives us performance, and we know exactly what our holders hire us for. Get enough buyers in line and any stock can be made to shoot up like a rocket.

While just as ESG has been a perfect template for the overvalued US tech stocks and the cleverly presented top slices of the real economy, investment in that part of the globe where the 30% of the poorest people on earth live, has also dropped remorselessly this decade, helped down, by yes, ESG.

Just like the Victorians, we seem to believe that the poor must be clean to be helped, both literally to enter the workhouse, and figuratively to justify our assistance. If you ain’t clean, free of drugs and vices, and suitably docile, you are simply not the deserving poor.

So, we reject those dirty countries whose firms make up 5% of the world’s listed profits, but only 1% of investable assets. In other words, we are all 80% underweight in those so-called Frontier markets, you can guess where the compensating overweight is, of course.

Many such holdings are rejected because they run vertically integrated, job creating, people hiring, output generating, dividend paying businesses which are exactly those that are so despised by the neo colonialists on ESG committees, because they are both poor, and not yet clean. Only sinners that have repented can be helped, we do remain Victorian at heart. While their output, once sanitised by distance, can happily be the base for clean, ESG compliant, fintech services or advertising.

When judgment is made to look like virtue

There are few better tools of subjugation than denial of access to capital and banking services, there are few better ways to keep colonies in check than protectionism, preferably founded on opaque, subjective rules. Just ask the British Raj about those devices.

Somehow that awareness has now crept into how the ‘ghetto’ poor are to be treated, but not into how the poor are treated globally. Yet we also know that the one remorselessly feeds into the other.

ESG has become a means of protectionism, of restricting access to capital for the poorest economies, but also a path to destabilizing our own equity markets, piling on volatility, mis-allocating capital. Well, you can’t fault good intentions, but as Boris so often demonstrates, good outcomes are not quite the same.

What the global poor need, is a shot in the arm from unfettered capital markets and an end to protectionism.

Keep an eye on what Biden achieves, with his “summit of democracies”, as colonies, much like ghettos, always adore being preached to with evangelical fervour about their own morality, especially by a country with such a vibrant, exuberant, healthy democracy.

Charles Gillams

Monogram Capital Management Ltd

10^th January 2021

What doesn’t sink me makes me stronger

A strange old year winds down, with proof once more of the exceptional power of suggestion and the great strength of cohesion.

Tired Markets, Bullish Investors

So what now? Clearly markets are tired, we have the odd position that investors are almost universally bullish on next year, that fund managers report unusually low uninvested cash, and yet it still feels like there’s no great power behind the mainstream markets. Indeed, over much of the developed world after the November vaccine/Biden sudden jump in markets, not that much has happened overall, a slow grind higher at best.

We see that lull as temporary, reflecting the month or so of pain and uncertainty before the onset of spring. Yet if anything we ourselves also want a little more liquidity, driven in part, by our awareness that markets are always thin and unstable going into the year end, so we can see little to be gained by jumping in this week.

Typically positions for 2021 will be taken in mid-January, once we have a reasonable steer on how 2020 ended. Not that that matters greatly either, neither of the next two quarters (or indeed the last two) will be in any way normal, Q1 2021 will be heavily influenced by COVID, but 2021 Q2 will see it fade very fast in the sunlight. Lots of scope for extreme volatility in that switch around.

But then, why rush in?

A lot could still go wrong. We assume Brexit disputes are just typical posturing for the crowd, but given those involved, maybe that’s brave. We assume the vaccines will work, which is one of the key points in this whole saga. Indeed, almost everything has been conjecture and spin, with the virus seeming to come and go regardless of our frantic efforts and illusions. It has been barely possible to discern cause and effect for all our demented jumping about. However, the vaccine is going to be at last a single, vital, fixed data point.

By late January if we (and the markets) are right, the most vulnerable will have been given a 95% effective shot, excess mortality should tumble, indeed you should almost be able to watch the vaccine defences build week by week, as ICU’s empty. The rush to start vaccination, played far better by the UK (a rare event it is true) was all about getting the vulnerable sheltered before the very worst of the winter. In that case this epidemic is over, and the fearsome fangs will have been drawn in a few weeks.

So, in that case, why dive in now, if waiting a short while answers that most fundamental question. Besides nearly everything looks too good to be true. Our own returns are clearly too good, typically they have been double figures for most managers, even our low volatility products are (depending of course on the next week) going to end up there, which is truly exceptional for a good year. For a year in which economic growth has been halted for so much of the time, it is downright amazing.

Overbought?

We have already (in the VT-GTRF) shifted into slightly higher risk areas, such as Listed Private Equity, where we see good value. But we are reluctant to go much deeper just yet. Every emerging market that feels half credible is already at a twelve month high, and frankly the data from those is even less reliable than ours. All the Wall Street overbought signals are flashing red. There is clearly too much speculative cash racing about looking for a home, be it DoorDash or those irrepressible SPACs.

Government debt is in an elegant swallow dive onto the zero axis, you are getting very little return to lend to some odd places.

So, we will enjoy some pensive digestion after the feast, if we are somehow wrong to the upside, we almost don’t care, what’s better than best? Being wrong to the downside, seems the graver error.

Echoes of the Weimar

We started with a quote from one of the trio of great Weimar philosophers; now there is a history to conjure with. In a year when democracy seemed set to topple, when there are indeed no facts only interpretations and when it became government policy globally to stoke up inflation to destroy the value of money and create negative interest rates, Weimar has many echoes. Throwing in its capture by a communist dictatorship and assault by ideological zealots, leading to near terminal decline, means comparisons just get too spooky.

So, to leave you with one of the Weimar trio, as you head into whatever glee Boris has left with you, “Man muss noch Chaos in sich haben, um einen tanzenden Stern gebaren zu konnen”.

That is, we all need, in whatever we do, a bit of luck, inspiration or indeed plain chaos to pick up the inspiration to move on to better things.

We wish you well for Christmas and the New Year.

We will return to the fray on the 10^th January, no wiser, but we will hopefully know more.

Charles Gillams

Monogram Capital Management Ltd

20 12 20

All eyes on the last disaster?

Some thoughts on key economic indicators

All disasters lead to the subsequent focus being on averting that disaster, which is highly unlikely to recur, at the expense of averting the next one, which because it is not being looked for, nor prepared for, will inevitably be worse than it need be.

So too with markets, they fret about the last setback far more than they anticipate the next. Our eyes were fixed on the Fed and a re-run of 2008, when we should have been thinking about biosecurity. Although if you grow trees, the ruination of careless transfers still stands bone brittle and clashing in the wind around you.

While conversely, markets also expect the next victory to be as easy as the last and indeed fought on the same field. It just won’t be. We value first movers highly, as they seek to be category killers. The replicas and coat tail riders deserve no such premium.

Are we already entering a post-Covid world?

So, we feel the market is now being too cautious on the so-called value names, so those with real profits and real yields, and too bullish on the smoke and mirrors valuations of the new wonder stocks. I leave out the so-called epidemic stocks (cruise lines, air travel, mass entertainment) as they have losses to suffer still, but that is quite possibly our being rather too cautious. Those who said it is all about the vaccine, were spot on. That was indeed the story of 2020.

Yet the market is still searching for reasons to justify COVID as being important for years into the future, while we feel we are already entering the post COVID world, and indeed will be well entrenched in it, as winter turns to spring. As Easter follows Christmas.

The myths we might be chasing

What are the ongoing myths that many of us fear will let this disaster movie steal another reel from our lives? Technical ones all seem trivial, the US FDA, having been made to look an ass by other regulators, will not still deny us the vaccines, as the tumbrils roll across America. Really not likely.

That a cool chain that got vaccines to the Congo for Ebola won’t work in Wolverhampton, or parts of Wisconsin where artificial cooling is barely needed just now? No to that too.

Who refuses a vaccine, and should we mind if they do?

That the vaccine numbers, plus those previously infected, will fail to reach accelerated herd immunity. Again, not likely, I have yet to meet someone who won’t roll up their sleeve for freedom. And if they won’t, do we really care?

The unvaccinated hurt the unvaccinated, it is like smoking, drinking, their choice. With the wave of decriminalization of recreational drugs, surely the age of individual responsibility is now advancing not retreating.

Besides, a pool of the unvaccinated will be a useful control population to study the epidemic and its ongoing mutations.

Inflation, liquidity and asset prices (all temporary)

There is a similar spooky game played with interest rate forecasts, we have long predicted (going back to pre-Easter) a blip in inflation, as supply costs rose, just look at air freight rates for Christmas, and supply chains then become knotted up with lost labour hours, again raising short run prices.

While the extraordinary flood of liquidity also inflates asset prices. But none of this is enduring, once the demand pain of weak employment markets returns, once vaccines slice the supply chain free, once excess labour is allowed to reset wages. So, we would still fear deflation more after such a major demand fall. While the monetary stimulus is itself already unwinding.

It is quite odd how the same voices crying out for more fiscal stimulus are the ones fearing the Fed will inexplicably raise rates. Either it is a recession (needs stimulus), or it is not (needs rate rises). It can’t be both.

US Unemployment, labour participation rates, tariffs

Remember too that Janet Yellen is firstly a labour economist, with no great love of inequality either. She won’t have Trump’s infatuation with stock indices. Nor will Powell survive for a second term, if he does not row in behind Biden pretty sharpish, as since Jackson Hole, he has signaled he is doing. In short getting both the unemployment rate down, and the labour participation rate up, and reaching higher wage levels in the service sector, all matter more than inflation in this new world. Note how Biden has already said Trump’s reviled tariffs will stay in place.

Strength of the dollar, bond interest rates, value stocks

Nor will the US want a strong dollar as it fights to recover in those ever more electorally critical rustbelt states. Turns out they, not the sunbelt states, are the true voter battleground now.

So, beyond a damaging infatuation with interest rates on Wall Street (or rather the money to be made by setting them a shimmer every now and then) we see no reason for rates to move next year.

That is not saying there won’t be attempts to shift bond yields up, at regular intervals, just that they won’t amount to much. Indeed, given the expected rotation out of government debt into equities, some movement is to be expected. But driven by supply (high) and demand (fading) not by inflation.

Then there is the story that with the November market move, value has rerated. Really? Nearly everything popped up by around 20% and then started to ease back, almost as one. That looks like index buying to us, not fundamentals.

But we don’t see when so much halved in value during the March crisis, that a 20% jump back is the whole story. We see the return to value, and the great weakening dollar trades, of rising Emerging Markets and commodities, as continuing well into 2021.

Now asset markets also have their own tides, nothing moves in a straight line, a lot of funds and investors only hit gains for 2020 during November, ours included. So, the temptation to take profits, close the ledger, have a long chill Christmas break, is strong and understandable.

While whatever that next disaster is, is related simply to time, like an earthquake it is brooding far from sight, but each day, every day it can happen. So why be overextended into the slack period with so many markets closed for extended periods? We follow that too.

Boris, the fish question, UK recovery and Sterling

Besides given Boris’s year, the chance that he accidentally fumbles the ball on Brexit is not trivial. We see such a failure as caving into French theatrics, as Macron grows increasingly nervous about his own elections and Le Pen. He has handed her a prize already over cartoons, the gilets jaune are strong in Breton ports too, so he’s jittery. As is his “we will reinvent politics crew”, the re-emergence of the old Democratic party machine, unharmed, fully formed, limping back into Washington, will not have escaped his notice. The shambles is the UK failure on COVID, and on economic policy around it, the OECD now noting only Argentina will now fare worse next year, with a UK economy predicted to be still down 6% at the end of 2021, when all other major economies will have fully recovered. A 6% GDP shortfall buys a lot of fish.

Although given both the OECD forecasting skills and notorious love for the EU, from their haughty Paris offices, maybe that’s not too scary.

It does appear either sterling must collapse against the dollar or soar against the Euro, its current position seems rather tortuously suspended between the two.

But overall if you believe the Post COVID world is now upon us, there still seems a lot of value out there and we expect equity markets to keep seeing it.

LIFTED FROM THE SHADOWS

The question on our minds this week is just how permanent is the sudden reversal in value stocks, shares in the old economy, and by contrast how fragile are the over-hyped and over-valued COVID stocks?

Photo credit: stills collage from the Lighthouse Family Official Video – Lifted: Here is the YouTube link.

Are we looking at blanket over-valuation?

It is a pretty big question because for the last decade there has been pretty much only one game in town for savers and investors, which is a stream of innovations, let loose by the rapid advance in computing power discovered in the twenty years prior to that.

So, all investors have been riding that tech wave; you can label it China, but where the process runs from is hardly important. You can call it ESG, because Google is pious. But you are really riding one trade. Open any nicely wrapped and insulated portfolio you will find that beneath the balance, the index, the diversified, there is a big slab of Microsoft or Apple powering it all along.

And thank heavens for that, owning commercial bricks and mortar or being pinned down by xenophobic regulators, who destroy our savings just because they can, has been a fine way to lose money. Ask long term investors in British banks, or utilities, or public transport or retail property, or even prisons, the list goes on. That’s why value investing is still poisonous to so many.

Well that answers the second question, can the tech boom survive? It seems to validate the insane multiples, which were crazy three months ago and are now just crazier, justifies Tesla being worth more than the GDP of any of Austria, Norway, Thailand, Hong Kong. Really? That’s a whole lot of pointless countries then. Get a grip you guys, build a battery factory.

So yes, the tech trade will surely roll on. Of course, it is a bit like whale hunting, the largesse does depend on willing lumbering “old economy” victims waiting to be speared, so it has to end somewhere, but not yet.

So, what’s the value trade case?

Well if innovation and tech are going to power on, we have a few value arguments. But to be clear, the stock market case (which is why we are here) needs to explain why an economy that is 10% smaller than last year is potentially worth more than it was last year, before a virus wiped out so many jobs and so much capital. The "$63 Trillion of World Debt in One Visualization" image here shows the position a year ago, sadly the page is just not big enough to include where it is now.

And indeed, can that economy service a rough doubling of national debts round the world, so adding in one year what had accumulated in thirty or so before that.

The simplest case, is that the business is the same, if it was valued on a twelve times multiple of forward earnings, in November 2019, it should be valued on the same this time, as 2020 earnings are no longer forward, they’re done.

Another pretty easy argument is that if the cashflow yield (so spare cash after all inputs and taxes and maintenance expenditure) was 5% last year, that was 3% above Government debt. So, if it is 5% again next year, that is now 4% above Government debt, so the income stream is clearly worth 33% more.

What about more sophisticated arguments like efficiency?

In 2019 the economy was running hot, labour markets were tight, space was at a premium, be it office space, road space, air space – all of it was pricey. Energy was costly, commodity markets constrained, loans were hard to come by, tax had to be paid on the nail, VAT applied to everything, a decade of expansion had swallowed tax losses, recruitment was hard, you were holding onto yesterday’s people for fear of employment laws and not being able to hire decent replacements.

Then voila, a brave New World erupts. All those barriers were suddenly just illusions.

Or the other favoured explanation, is the pull forward one, we naturally wanted to speed up the digital transformation, to shed old buildings, obsolete staff, multiple systems that pre-dated the ark, boring dividends to shareholders, stamp duty on buying a house and lo, it was so. More magic.

Clearly the earnings of such a business rejuvenated and humming is worth a shedload more money to investors. Not to mention the margin gains of having all your consumers bottled up, forced to spend in far fewer outlets, at times to suit you, not them.

Well there you are. We could indeed “be lifted, lifted from the shadows” as the brilliant Lighthouse Family sang, “ ‘cause we’ll get through it anyway”.

Well we now know we will, but I do hope there is no warning about rocks and wrecks implicit in their name. Because while we can see a lot of what is happening, not a lot of it makes much sense.

It happens because it happens, and when the mood changes, where is the substance? Tech has to suffer mean reversion, but when? Ah, well we wish we knew. Logically, value could be due to shine a while longer – we are not in a COVID world now, but entering the ruins.

However genuine rebuilding will take a lot longer.

Charles Gillams

Monogram Capital Management Ltd

22.11.2020

Monogram offers the Monogram Momentum Model, a balanced, four pot, global, systemic, low cost process through managed accounts.

Monogram is the Investment Adviser to the VT-Global Total Return Fund, a UK based UCIT, available on all good platforms.

VT-Global Total Return Fund Information:

Group Name:	Valu-Trac Investment Management
Asset Class:	Mixed Asset
Fund Launch:	06/08/2010

Biden Wins – What Next?

Well two weeks ago, I was keen for the whole noisy charade to stop so we could cut to the obvious conclusion that:

“Following the expected Biden win, and a tight Senate race, the Democrats have a clear mandate. However, the euphoria that victory created, including a market buoyed by its long desired additional stimulus package, has failed to disguise the deep underlying economic and health crisis. The market in the meantime still senses instability with the same elevated readings on the VIX that have been apparent all summer.”

As predictions go, I will take that. In other words, everything changed, but nothing changed. It seemed far easier to do that piece, than trying to trade the febrile run into the US election and a new COVID wave.

Well here we are and so it came to pass. Biden has a mandate and it certainly was a tight Senate race. I guess the noise of re-running the ballot machines may distract us for a while yet, but the outcome seems clear enough. After the initial euphoria at not having the more extreme anti- capitalist Democrats running key Senate committees, the reality is the Republicans don’t hold the White House or won’t come January.

While the partisan shenanigans will persist, those critical two Georgia Senate seats will not be decided until after yet another vote, and while they would stay Republican on the poll we saw last week, anything is still possible and an awful lot of money will be spent trying to secure the outcome either way.

So while the market had reasons to exhale last week, and it dodged the more extreme ‘blue wave’ outcome (while at the same time ditching the popular but whimsical Trump) we are still not that clear about US policy in the New Year. The one safe assumption seems to be that there will be no immediate gargantuan stimulus package, but a set of smaller ones. While the market is assuming the Senate retains both the power and inclination to block some of the more extreme options cooked up by a hot-headed Congress.

Overall, we still see the position as positive for US markets, and arguably global ones, but wonder just how much is baked into high US stock prices already.

BACK TO COVID IN THE UK

We are less worried about COVID, partly it feels (to us) to now be what it is. The current jitters are around a second wave hitting just at (or even slightly ahead of) the seasonal peak of hospital utilization, across a swathe of Europe and much of the US, but those are precautionary nerves, it has yet to translate into a large-scale health issue (although as we know, it could soon do so).

Economically the telling contrast for investors is between the more robust employment numbers out of the US (back below 7% unemployment), compared with the rather panicked response in the UK, of throwing another wall of borrowed money at doubling the length of the already rather generous furlough scheme.

Britain is acting, in essence, as if in November we are exactly where we were in March and so an identical furlough scheme is justified. We are not in the same place, nor is it that obvious it was the right move before. All the careful summer attempts to reduce the extraordinary cost, have seemingly just been abandoned in a flash.

I recall long and bitter arguments about keeping uneconomic coal mines open and miners on payrolls, long after their skills were redundant; like Mr. Micawber the then government was desperately hoping “something would turn up” to rescue them.

But that was crazy then, so holding onto lost jobs is crazy now. That is even without the roaring pace of innovation and technological change. Worse: it holds people pinned on their sofas, racking up debts, when what we need is to focus on core personal skills, and new talents.

As we long predicted the two tyrants of this recession, will be a government bent on stopping labour markets clearing and the political impossibility of withdrawing the addiction to the public purse, once that first craving has been satiated. So, on top of whatever COVID and its lockdowns does, we have a UK government seemingly unable to plot and hold a course.

I have very little idea what Eat Out To Help Out was designed to do (except keep the virus in town, until the university term started) and whatever it was, it was both inconsistent with public health and with prudent economic management. The price we must now pay in lucre and lives for that brief and premature morale boost, feels very high.

This image has an empty alt attribute; its file name is eat-out-to-help-out.jpg — Taken from the preceding link from the Conversation

So, if we are now doomed to four more years of this facile government by media (what other explanation is there?), we maybe should stop being so aloof about the Americans and Trump. Except Trump knew (it appears) what his voters wanted. Someone else is pulling our Prime Minister’s strings, the resulting “Socialism with Borissian features” just seems a concoction of the usual Whitehall experts and over paid consultants, acting on a whim, accountable to no one. I seem to recall we were pretty clear that this is not what we want or need.

Into all that, we now have an appreciating currency, if little else BREXIT put downward pressure on sterling and consistently provided better UK growth figures than those very same experts had expected.

Oddly (and I can’t tell you why) that economic prop is steadily being lost. It is part of a general weakness of the US dollar, but it is not clear to me where that comes from or how durable it will be as we move through three more months of political infighting in the US. I suspect it (and those fishy BREXIT talks) have a few more currency gyrations in store for us.

So, while we see rather more scope for some tremendous run of market optimism than before, it still feels as if we are climbing a wall of egg shells.

Do ask us a question, or make a comment. Use the contact us page.

Charles Gillams
Monogram Capital Management

CANARIES IN THE COAL MINE

I would really feel much happier to be writing our next fortnightly commentary, rather than this one.

As of now it would be simple, “Following the expected Biden win, and a tight Senate race, the Democrats have a clear mandate. However, the euphoria that victory created, including a market buoyed by its long desired additional stimulus package, has failed to disguise the deep underlying economic and health crisis. The market in the meantime still senses instability with the same elevated readings on the VIX that have been apparent all summer.”

In other words, everything will have changed, but nothing has changed. It seems far easier to do that piece, than trying to trade the forthcoming febrile run into the US election and a new COVID wave.

An old-fashioned economic recession

Still, we are in this week. The conundrum is that the only real weapon global governments have against COVID is to press the self-destruct button on their own economies. Having tried that once, in the spring, they both know it works (for a while) and also that the impact was disastrous, and they simply can’t hit that terrible red button twice.

So, we are all merrily sliding down the cliff into a natural disaster, which we are effectively powerless to prevent. Indeed it comes with the added twist that all the excuses for staving off the inevitable and all the poisonous political blame games and all the potent belief in the all-conquering power of science, are just masking what looks like an old fashioned pretty awful flu season. Medical treatments are at least better and indeed better organized, so it will be much less deadly than the first wave, a mercy to be thankful for.

Well, I can’t say it will be fun, and I am sorry we seem, still, to believe that all will be much better if we stop drinking and dancing, ban sports and keep the foreigners out (all good traditional Calvinist responses). Even those perceived moral failings, once rectified or banned, will sadly not stave off the punishment, but it somehow seems people feel better about it all with those restrictions. If we are not going to have fun, no one else should either.

So, is it business as usual? I think for the real economy it is, yes we have too much capacity and some of it must now go, and too many inputs, be it oil or labour, and that must be repriced or eliminated, where demand has plummeted. So, after that, the residual questions are all now about managing those transitions and providing welfare. They no longer appear to include systemic financial worries.

The return of the shell company

Although one thing, at least in terms of asset prices, that does look really bad, is the spate of SPACS (Special Purpose Acquisition Companies)- true harbingers of an equity market top. You might recall centuries ago when bubbles had non-medical meanings, the raising of enormous amounts of money “for a purpose yet to be established” – what we used to call shell companies or blind pools are exactly that.

`ze of these and the money raised, shown above, show a remorseless cyclical rise, with that little 2016-2018 plateau, before a blow out in 2020. It means the supply of money has become so inflated, that otherwise sensible folk will write blank cheques, to any plausible promoter, who after taking off a healthy slice themselves, will find something to stuff the rest into.

We naturally get the pious explanations, with the sudden, inexplicable presence of numerous “oven ready” virtual “dead certs” as business propositions, which just happened not to have made it to market (or made a profit) as yet, and for some technical reason, can’t be floated through a normal capital raising process. How very convenient!

We also learnt (again) how good sales executives are at evading internal controls. With the Goldman Sachs compliance team explaining on record (and as revealed by the DoJ this week) that the IMDB Malaysian scam was something they would and should never touch. That bit went well. When big ticket banking revenue is on offer these things somehow just find a way onto the books.

Well of course “it will be different this time” is the eternal cry. But those SPACS tell me otherwise and that far smarter people than I have called a top. Smaller fry, like us, should be very careful when these games start, as we have noted before, when elephants dance the grass gets trampled.

What it also shows is that however much cash is flowing, many US investors simply will not touch European and Emerging Market stocks. Although, as ever the currency is a subtle counterbalance, as someone somewhere is also clearly selling an awful lot of dollars just now.

So we have a nasty mix, health, economics, politics, winter, all scream caution, but against that the world’s most influential and widely held stock index just won’t give in, as all the excess liquidity unleashed to buy an election, pushes prices ever higher.

None of that makes us want to be too long into Christmas, indeed tucking away some of the year’s gain, if you are lucky enough to have held assets that have appreciated in value, is already rather tempting.

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