WM 3 September 2022

Quotes

Wrong does not cease to be wrong because the majority share in it.

Lessons & thoughts

Habits: Excellence is not an act, but a habit

Leaders: empathic thinkers and actors

Weymar

What does inflation means for valuation?

Investment committees

What Technical analysis is about

Patterns

Reversal or continuation patterns

Bullish or bearish patterns

Divergences

Technical analysis is about timing and but works less well when time is your friend

What do you do? Depends on the set up

Before buying this market

Buffet is a quant using qualitative criteria

Buffet want managers who are accountable

Politics & Science

Student loan give away is not good and send the wrong signal

Reacting to ST fears are always wrong

The year of the Tiger

Three reasons to sell? You forgot one: you were wrong.

Why you must cut your loss

Macro news

Lower growth for longer

Ageing is global

Taking the money out of the system!

Energy shock

In the UK, yielding families from rising fuel bills would cost GBP 100bn. In Germany, EUR 200bn. Also stories doing the round that in Britain, small cafés electricity bill jumping from USD 12k to USD 64k a year!

Everything changes

French salaries

Net worth

Consumer confidence collapses

CEO starting to reflect the mood

As demand destruction is here

Growth vs Inflation

Surveys

China lock downs hit growth just as credit impulse rebounds

Good news on the horizon?

Do you want some euros?

What about silver?

Bitcoin perhaps? Only if you're bullish on equities. I am not (yet)

Fixed income

Fed is targeting 4% 2y yield. Danone issued a bond earlier this week at 3%. Last year, the same bond would have cost 0.5%. If you had 4.5% equity risk premium, that's the difference between a 5% yield and 7% or between a PE of 20x and 14x (-29% difference).

Real estate

Equities

Global money supply

The bull... is over

Cycle: 1987, 1994,2001,2008,2015,2022

Continuation of bear market

1000 points

Retracements

Not over til it's over

Nowhere to hide

Yet, secular bull is on some would argue

Buy on pessimism?

Only when ISM bottoms

Yet analogs say wait

Dow Theory

Growth vs inflation and SPX

% stocks above 50d mav

% stocks above 200d mav

Put/call ratio

AD volumes

McClellan oscillator

McClellan Summation index

Nbr of large down days

Dip

Trifeca

AAIM exposure

Net futures positioning

Technical score

Divergence

Where are we? Fear or capitulation

Does it make sense? Oh yes: derating underway and earnings downgrades to follow: next stop 3000

Buy backs to the rescue?

So what?

The cruel season: it is called Fall

VIX

Thoughts

The story of the decade might well be that demand remains low but fine, but that supply is unable to meet demand, as if 10 years of monetary profligacy had only managed to keep up demand above water and financial assets at elevated levels, but had failed to make the necessary capex investments that would have spared us the embarrassment of having to consider going back to candles and wood fire as an alternative to electricity for the winter.

I looked at the S&P500 sales, ebit, eps and market cap since 2005. I could not believe it. Since 2005, the best companies in the world have only grown sales by 1% per annum, EBIT by 3% and EPS by 4% over that period for 7% share price appreciation over that period. One can clearly see the problem, the money and debt creation has fuelled financial assets, but not the economy. I imagine the picture is even worse for the tech-light European equity market.

In retrospect, it looks like the Fed decision to create a lot of money during Covid just as the governments were also creating money through fiscal stimulus and as consumers could not spend it but only save as supply had to be shut, was a major mistake (arguably the entire lock down decision was). Now, they are doubling down on that mistake, by taking out the money they created in the first place to kill the demand (even as they probably know that they can do nothing about the supply shortages that are responsible for the inflationary pressures). The fact that governments are still subsidising demand in the context (student loan, energy subsidies etc) is also beyond me.

If many commodities have come down already, it looks to me that electricity in Europe will stay high, especially if 50% of French nuclear reactors stay shut for maintenance or if China decides to reopen its economy between now and the CCP 2022 congress in November. Perhaps not as high as EUR 600-1000/MWh (=USD1000/bl oil equivalent and 20-30x the cost of electricity we have been used to), but high enough to hurt.

Moreover, if European government continue to subsidise demand, the euro will continue to slide making the problem even worse, as it does not address the supply shock (which by the way may be grand repetition of the peak oil scenario that underpins the decarbonisation agenda) and only accumulate more debt on European sovereign balance sheets, which higher interest rates would make unsustainable already.

I think we should have a clear view on the Chinese economy too, as its zero Covid policy looks like an aberration from a domestic popularity standpoint but must be justified by other political reasons (keep the dollar reserves high by curbing consumption? Keep people at home and away from public places as the real estate bubble is bursting, banks default and inflation impair living standards?). The mid term election in the US seem like a foregone conclusion (landslide win by the Republicans), which should also mean deadlock on that side and increasing risks of geopolitical tensions ahead of 2024 presidential election?

I agree that corporate margins and growth expectations are too high, although we could see some lagging factors there. With the giant pile of debt still sitting on corporate, household and government balance sheets out there, my question is whether we should anticipate a major credit event as a result? We had a few already (Evergrande in China, the nationalisation of power utilities in Europe, etc) but none seem to have been taken seriously by the market. Perhaps there is something more sinister out there that we should be on the look out or is this all contained at state level, in which case the damage will be done on the currency/inflationary front?.

The reason I ask is because my civil aero are recovering and have a big backlog to supply. As some of the supply side recovery has lagged demand, we can contemplate a decent catch up phase as we return to pre covid demand levels. However, if balance sheets start to return to investors’ focus, I can see why 2024-2025 top line estimates could be put into question, even if margins should remain strong courtesy of the weak euro and cost absorption.

Moreover, I think we perhaps should think about the main themes of the decade, including energy transition (inflationary), the onshoring of production (inflationary), ageing/decline of population (bad for consumption but inflationary nonetheless as less labour available?) etc

In this tough context, with government not paying attention to key problems and spending money they don't have, one can always be concerned about social moods. The Divided States of America is very worrying and its ongoing policy to curtail China looks like a slippery slope.

Maslow pyramid vs pyramid schemes