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Rona Spendfest?

Updated: Oct 31, 2023

To all those still peddling a narrative of panic and fear whilst stuck in a Netflix and DOMINOS Pizza sofa tape and clearly being welcomed by everyone who is long tech. [Yes Nutstuff is in 3 key themes but its not where my incremental Portfolio additions have been, and will be where I will make some cuts, and I have been very clear in my controversial call that AMZN is making me nervous a week away from results and +60% Rel YTD].

Don’t forget in the strange World of recent Mkt and Weather Sunshine meets Real World Misery, the S&P500 has recouped 50% of its YTD losses already, and the NASDAQ 100 is only -75BP’s YTD.

For those talking “valuation” and maybe needing a reason to justify Fear of participation in Mkts here, this is one measure of “value” which is pretty sobering: The price/sales ratio of the S&P 500 at the end of September 2007 was 1.64. At the end of March 2009, it was 0.82. At the end of March 2020, it was 1.86, and that was down from 2.32 at the end of December 2019!

Then look at the UK, and the Hunt for Yield, managers of income funds may have somewhat averted carnage in Dividend-Land by holding off on de-classifying dividend cutters/suspenders is a theme that deserves more focus; Just 10 firms are forecast to pay out two-thirds of FTSE 100 dividends this year, I find that terrifying.

Add to that that while investors gorge in zero rates and valuations that as of last Thursday retested the exact DOTCOM bubble highs. The difference between 2000 DOTCOM was that it was still only a quarter of the market. Now it is ALL of the market and 4 or 5 stocks are 20% of the market and tech and tech-like (Fintech etc) is pretty much all of the market.

On the other side, energy, natural gas, commodities are after thoughts and have also fallen off the other side of the radar. [You have heard Nutstuff on hated value] and yes, many Financials are trading as if they are going bust quickly. Then think simplistically of Momentum vs Value, From Monday to Thursday, the MSZZMOMO Momentum index outperformed the MSZZVAL Value index by over 30%! Thats now 160% since November 2019! Nutstuff can still see a scenario where June thru September is a consumer Spendfest. Talk of societal change I’m afraid I dont really buy when it comes to broader behaviour old behaviour will happen as much as it is allowed to! Will be a debate of availability not demand! Consumers are spending nothing right now and getting forebearances and payment holidays from autos to mortgages.

The LAST thing they will do is pay their bills. When we come out of lockdown, people are going to party with tons of disposable income and drive their cars. Yields will rise. The excess liquidity will weaken the debased paper thin dollar. Banks today have extremely high capital ratios, oil will not stay at $20 forever, shipping companies are going to print money, natural gas is going up a lot, uranium has just started a bull market and I think tech valuations will soon peak. Nutstuff is positioned for much of this in Portfolio.

Further to this, my Friend Chris Wood is again talking so much sense this week; and I would encourage you to pay for and Read Greed & Fear; "The politics of the Coronavirus have become ever clearer over the past week. Domestically it is evident that Donald Trump wants to return to normal as soon as possible, while the Democrat opposition is much more inclined to take the line of safety first. It is inconceivable that President Trump is going to lock down the American economy into a Great Depression and, seemingly, certain electoral defeat. This suggests an American economy returning to normal next quarter – with a lot of activity resuming in June - just as the Chinese economy is now attempting to return to normal.

The Chinese experience suggests the stock market can look through one quarter of appalling data if there is light at the end of the tunnel. The biggest risk right now for all world stock markets is a renewed outbreak of the virus in the mainland economy. So far that is not happening. If it is assumed that China can continue to manage the health issue it will set an encouraging precedent.

The other point is the question of how quickly economies can bounce back once controls are lifted. Here the duration of the virus cycle remains critical. There can be a surprisingly quick bounce back if the virus proves to be a three to four-month cycle. This is, after all, an economic downturn which has been mandated by governments with the service sector hit hardest. If there was a case for lockdowns, or circuit breakers, to slow the virus to allow hospital systems to cope, that has already been achieved. Covid-19 and the subsequent fiscal spending orgy adopted by panicking governments is yet another example of baby boomers shafting millennials in terms of the extra government debt burden taken on. It is not as if the millennials are at great risk of dying from Covid-19.

I agree with Chris; that the end of the lockdowns will trigger massive pent up demand, most particularly in the Western world where many people have continued to be paid a big percentage of their normal wages on furlough schemes. Pent-up demand pressures raise the potential for an inflation “impulse” resulting from the current crisis. That is despite the fact that the near-term impact will undoubtedly be dramatically deflationary… Then consider the introduction of price controls in the US government bond market will mark the introduction of a formal regime of financial repression. By then it will have become obvious that equities will have become a far more attractive asset class than bonds in the developed world which is why fixed income investors should increasingly concentrate on emerging market bonds." GOLD; as above GLD finally to new 7yr high, on the clear rationale for ownership from Paul Singer @Elliot; "this is a perfect environment for gold to take center stage. Fanatical debasement of money by all of the world’s central banks, super-low interest rates and gold mine operation and extraction issues (to a large extent related to the pandemic) should create a fertile ground for this most basic of all money and stores of value to reach its fair value, which we believe is literally multiples of its current price. In recent months, gold has gone up in price to some degree, but we think that it is one of the most undervalued investable assets existing today.

There is nothing else that has its historical and fundamental characteristics, and we think that it is only beginning its inexorable, but impossible to time and place boundaries around, uptrend. The fact that it is so under-owned by institutional investors is astonishing to us in light of the obsessively inflationary policies being pursued by central banks around the world. From the world Gold Council: “Gold is the only reserve asset that bears no political or credit risk, nor can it be devalued by the printing presses or extraordinary monetary policy measures. The yellow metal is insulated from income inequality, polarization of political parties, trade disputes, deteriorating government budgets, rapidly aging populations, massive growth in unfunded liabilities and counterparty risk.”

Emerging and developing economies hold only 5% of their total reserves in gold, compared to a 16% share held by the developed world. The share of gold in total global reserves has fallen from 13.5% to 10.6% over the last 20 years. Institutional investors around the world own basically zero gold. Gold today, despite its modest run up in recent months, is the answer to the question: Is there an asset or asset class which is undervalued, underowned, would preserve its value in a severe inflation, and is not adversely affected by COVID-19 or the destruction of business value that is being caused by the virus?

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