DotCom Crash Rerun?
As human we seek patterns in random data. The current market conditions are pretty odd: the prices for growth stocks are unstoppable, but value stocks left in the dust. All while we have near zero (or sometimes negative) interest rates. Not all of these conditions are the same as 1999, but quite a few of them are.
One problem is the extent to which EM stocks, and commodities prices, have failed to benefit from asset price inflation generated by QE. In 1999 China had a huge demand for commodities. Today, the Chinese economy is dominated by services. EM economies, and companies were much more indebted, especially borrowing in foreign currencies. They were largely confined to miners and basic materials sectors, where they had little pricing power.
Today seems different for EM. A lot of trade is between EM economies. China doesn’t rely on selling cheap plastic stuff to the US any longer. It produces a lot of high end products (like generic pharma) and home grown high tech. Certainly, the likes of Huawei depends in part on US chips, but the PRC state will stop at nothing to remove that dependency. Already, expensive Apple phones are giving way to high quality Chinese and Korean substitutes. Luxury as a strategy has had a good run, but I can’t see many Vietnamese consumers trading “up” to an iPhone from a Samsung.
Bonds prices have to weaken. Interest rates can get a bit lower, and even negative once governments mandate institutional savings to be invested in “risk free” Treasury bonds. But at some point even that arm twisting is going to fail and to fund all that fiscal deficit treasuries around the world will have no option but to offer higher yields. Once this starts, I simply can’t see what will stop it, beyond a “debt jubilee” (effectively, central banks buying up all debt) or a purging dose of inflation the likes of which only Venezuelans and Zimbabweans have recently experienced.
EM currencies must at some point rally. They are held back by risk, and US government liabilities in US dollars remain, for the moment, the single safe asset that many savers are scrambling to hold. Eventually, this too will pass, and maybe RMB bonds will take their place. Until then, EM equities and bonds will have an attractive risk reward ratio.
Turkish Lira
Of course, my prediction that the Turkish lira would fall after the departure of both the country’s central bank governor and their finance minister was way off. The currency rallied 4% against EUR and USD. No doubt the CB organized a bear squeeze. It will run out of dollars, probably quite soon, and the lira will resume its downward trajectory. Until then, it’s best to stay away.
Biden
We are in the phase of frenzied speculation about people and policies. Nobody really knows, but there are acres of newsprint to fill, so a lot of speculation is printed. Given that the result was so close, one might have thought that the more radical policies of the Dems would be dropped, and even some of the more centrist policies of the former regime retained. I fear that this is not the way things work (except legislation that is on the statute book will not be repealed). Every new administration builds a new layer of “new” policies on top of thousands of layers of incompatible and inconsistent policies of its predecessors. And people like me bemoan the unanticipated outcomes of the congealed mass of legal text that forms the law. The only people who are pleased with this situation are the lawyers, but they are the only ones that could rationalize the corpus of statute, and where would the billable hours be in that?
Container Shipping
There is a worldwide shortage of containers. The Baltic Dry Index has been hitting highs. Somehow there is a lot of shipping activity and possibly not enough capacity.
This article explains why investing in shipping lines is tricky. There is a tendency for the industry to generate excess capacity, resulting in a value-destroying collapse in shipping rates. I don’t really know where we are in the cycle, but I’d like to understand this better because if there is a genuine shortage of capacity there could be profit opportunities over the timescale it takes for shipping lines to take deliver of new ships.
Polling Failure
Although Biden has (apparently) won, it’s pretty clear that the mainstream polling organizations have failed again to get a good handle on the numbers. Obviously, they can widen the error bars they put on their estimates, but it seems that there is a systematic bias coming through in the numbers. We all know that we generally avoid disagreeing with someone for the sake of it. Even if we think that a person’s view is misguided, we’ll rarely try to correct it unless we have a strong incentive (e.g. to save that person making an expensive mistake, or because we will be adversely affected). Because Trump is so universally despised by les bien pensants any member of the hoi polloi will know perfectly well what a young (probably female) market researcher thinks and will simply make the more acceptable choice. Just as I will choose a salad for a starter when eating with my family, rather than a the black pudding and fried egg that I’d much prefer to eat but will bring forth snorts of (good-natured) derision.
Wrap
Risk on day. Pfizer got a vaccine approved, which is supposed to be 90% effective. Risk assets took off (even though they were already higher than they were before the pandemic broke out). Huge rotation from tech stocks to energy. Every equity market on the planet was up. France benefited a lot: up 6%. Silver miners got hammered. Silver dropped 5%. Gold got smashed. Bonds were down (US 10-years now at 94bp vs 51 in Aug). Industrial metals and food commods are up, but not much. Copper down a tad. Bitcoin down a fraction.
Hard to see this enthusiasm being sustained for long, certainly in the equities space.
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