Wednesday 30, March 2022
25 - 4 == 9?
A lot of the financial world is concerned with valuation. It would seem that we can know what the SPX is valued at. I write a (mostly) daily paragraph about how valuations of a small range of liquid assets has moved. It might be hard to predict how these assets will move in the future, but it surely isn’t hard to know where they are now. Surely!
Well, Doomberg points out that it can be, and the more private a market it is, the more difficult it is. We are seeing very low volatility. Many contracts that were quite liquid a few months ago never trade. The exchange comes up with a price, but given the importance to some individuals to have the right price, it’s not surprising that there is a lot of manipulation.
To me, at least, it seems clear that the price of Tesla ($TSLA) is constantly manipulated. The same goes for $AMC, $GME, most private equity funds. You name it, it’s manipulated.
Doomberg explains how this is sometimes done, and goes into quite a bit of detail on the valuation of OYO Rooms, a Softbank-backed Indian startup. Parallels with WeWork abound. Will things work out like WeWork (i.e. not very well)? I have no idea, but it’s tempting to think that Doomberg is onto something.
This whole problem is amplified by cheap borrowing costs. If money is free, borrowing it to buy your own stock makes sense. Virtually every company in the SP500 is doing it. Executive compensation is going through the roof. The US gets floods of foreign capital to counterbalance its chronic current account deficit. The US President gets to brag about what a fantastic job he’s doing, citing as evidence the level of the Dow Jones Industrial Average. This arrangement has run and run. How could it possibly go wrong?
The bears have given lots of ways, but none has come to pass. With the force of the US Treasury and the Fed behind the status quo ante it only the very brave would bet against it. But still, if something cannot go on forever, it will stop. Isn’t that what Herb Stein said?
The heading is based on a presentation from Masa San, the boss of Softbank. He gave a presentation arguing that you should not count liabilities when valuing assets in his fund. The missing $12 (billion) is accounted for by them.
China
@MacroAlf has had a go at working out whether China is investable. He’s written up his thesis here. He’s a smart guy. You should follow him. His conclusion is hedged:
After weighing all these arguments, I believe China deserves a place in a global macro asset allocation portfolio. While it’s true that the structural drivers of GDP growth are weakening, the same can be said about most other global economies - but the ability to implement meaningful reforms is arguably much more impaired in Western societies than in China from a political standpoint.
I am no China expert, but I just feel that being a dictatorship is China’s big problem, not an advantage. I feel that Alf makes the mistake that Xi cares more about the peasants than the elites that keep him in power. All the evidence is to the contrary: Putin could enact reforms that would be painful and unpopular in a democracy, but he’s not going to because it would drain power from the oligarchs and strongmen who keep him in power (silovki?). The gratitude of the proletariat is no match for a bullet in his back as some senior KGB persuades the inner circle to switch their allegiance. Xi is president for life because he’s paid off those who would prefer term limits. This will have been expensive. There’s no money left for the peasants!
Wrap
Commodities were up a bit, bonds too, equities were weak. Private payrolls in the US grew in line with expectations. I cannot see that there were any developments in the war. The 10Y USD yield is now 2.345%.
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