UK: digging a deeper hole

Two really bad things happened to the UK in 2020: covid and Brexit, the self-inflicted economic wound of withdrawal from the EU.

It’s hard not to see similarities with politics in the US: a group of politicians capitalize on the sense of grievance of left-behind rural citizens by vowing to restore the country to its former glory. In this case, it’s by cutting economic ties with continental Europe, thereby shutting off the inflow of foreign workers at the same time. MUKGA, in other words.

Although the pandemic muddies the waters, this has worked out so far at least as badly as one might have expected–especially so for those who favored Brexit. So the recently minted prime minister, Liz Truss, turned this week to the neoconservative playbook for a way to stimulate growth. What she found there: tax cuts for the rich, on the idea that making them wealthier will eventually “trickle down” to gains for ordinary citizens.

Three issues:

–with no offsetting reduction in government spending, the cuts–$50 billion over the next five years–will presumably be funded by increased government borrowing

–as the world is trying to dampen high inflation, the last thing it needs is more stimulus

–the underlying economic malady is Brexit, not too-high taxation.

One market reaction was a sharp drop in sterling, part of which has since been reversed.

A second was a rise in interest rates, on the idea that the UK government would be forced to borrow a lot more to fund the tax cuts. An unintended result (I can’t see why Truss would have intended this outcome) has been a mad scramble by UK traditional pension funds to cover hedging losses that the sudden and unexpected rate rise generated.

Possibly the most damaging has been the highly-indebted, high-inflation emerging country look that Truss’s announcement conjured up for her country.

where to from here?

In overnight trading, futures on the major US indices all dipped slightly below their mid-June lows. That’s probably significant only to someone like me who thought that was probably not going to happen. Arguably, then, we haven’t yet set the lows for this bear market.

It may be that we’ll end this down market with a whimper–that is, without a clear-the-air selling panic that, in dramatic form, purges negative sentiment and puts the world on notice that the next big move is up. Or we could do things the old-fashioned way, with a big downward move.

Clearly, I’ve demonstrated that I have no feel for what might happen. That’s the way it goes sometimes. The important conclusion to draw, though, is that calling overall market ups and downs can’t be the centerpiece of my strategy.

I have one positive thought and one worry to work with:

–A bear market is sort of like the movie Groundhog Day, in that investors rehash the same, usually negative, news over and over, without being willing to recognize and pay for possible future positive profit gains.

I thought the recent Ford news was indicative. The said it had a bunch of mostly-assembled vehicles that needed semiconductors to be installed before they could be shipped to dealers. Those chips weren’t going to arrive in time for 3Q shipment. Full-year profits would likely remain the same; 3Q would be less profitable than expected, with the difference being made up in 4Q. F, which had been cut in half, ytd, before the announcement, and trades at less than 5x earnings, yielding about 5%, fell another 12% on the news.

I thought this was a bit much. Although I’m no fan of the auto industry, I’ve begun to think that F might turn out to be the best of a bad lot of domestic EV entrants. So I bought a little bit, to force myself to research the company.

–inventories. This is my worry.

In May, WMT and TGT, both very well-run companies, both announced that they had a big inventory problem. Basically, they were up to their ears in stay-at-home merchandise, like TVs, kitchen equipment… at a time when the pandemic was coming under control and customers were no longer interested. It took TGT a little while to figure out that the highest priority for it should be to turn this stay-at-home inventory into cash as quickly as possible (my wild guess is that this amounts to $6 – $7 billion)–and before other merchants start to do the same thing.

Anyway, if the best of the best have made such a mess in making a huge bet on what were once shortage items, what companies are still lurking out there with big inventory problems they haven’t owned up to yet.

very close to the June lows

As I’m writing this just before the open in New York, the S&P and NASDAQ are both hovering a couple of percentage pointes above their mid-June lows. The Dow, valuable mostly as an indicator of the user’s cluelessness, actually dipped below its prior lows last Friday.

The first thing to note is that my guess was that this wouldn’t happen–that we would maybe approach the old lows but that most investors had already acted out their fears by selling during the summer.

My experience is that in Asian markets, which have historically been deeply influenced by charts, when a support level cracks, the market quickly sells off until it approaches the next level support level (meaning a locus of broad-based buying and selling–in a sense a former battlefield of bulls and bears). In my experience, US behavior is quite different. For whatever reason, we tend to want to see the abyss opening up beneath our feet before we stop selling. The break below old support is the catalyst for the reversal of selling to buying.

Who knows whether this will still be true in an AI-driven world.

In any event, I think the overall level of the market should be a secondary concern. For us as investors, the much more important task is to try to imagine what the world will look like after this selloff is over and to seek out companies that stand to prosper in the new environment. So much the better if they have been pounded into the ground and are unusually cheap today.

The ideal stock, for me at least, is a growth stock that has lost so much that it is buyable as a value stock–that is, based on here-and-now cash flow and asset value.

Looking at performance since the mid-June lows can be useful, I think, as a way of trying to capture the mind of the market today.

ROKU, for example, was around $73 in mid-June. It’s now $68.

ZM bottomed at around $85 in early May–it was $100+ in mid-June. It’s now $76.

SHOP was $31 in June. It’s $30 now.

In contrast, HOOD, which I hold, was $7 in June and is $9.70 now.

F’s figures (I hold a tiny bit, I’m almost embarrassed to say): $11.25 and $12.25

MGM, another holding: $27.25 and $31.40.

The financial press seems to me to be more stridently negative and more devoid of substantive content than usual. Yes, interest rates are rising; yes, the dollar is strong; yes, wages are up; yes, the market is down. But who doesn’t know about this already? This is usually a contrary indicator.

more tomorrow

inflation: 1970s vs. now

There are superficial similarities between the recent high inflation the US is experiencing now and the hyperinflation of the late 1970s. It seems to me, though, that the differences between then and today are an awful lot greater. This appears to me to have completely escaped the notice of the financial press, maybe because the headlines wouldn’t be as sensational.

My take:


In 1970, the price of Saudi oil was about $1.80 a barrel. Then came the oil “shocks” of that decade as OPEC asserted its economic power. By 1980, crude was at around $36 a barrel, a 2000% increase during the decade.

In contrast, although the current oil price is double the decade lows, and is roughly 50% higher than the decade average, it’s about the same today as it was in 2012. Though the current situation is dramatic to us, it’s a bump in the road compared with the 20x rise in the 1970s.

worst-in-the-world response to the 1970s oil shock

In the 1970s, the US, uniquely among world powers and aiming to protect a sad-sack domestic auto industry, instituted a complex system of price controls (old vs. new oil) on crude production, as well as volume and location controls on the sale of refined products. The latter caused widespread shortages (urban/suburban consumers were afraid to drive long distances to vacation spots, for example, but Congress mandated all the gasoline be sent away from the cities to resort locations in the summer). The former prompted the oil majors to lose interest in lifting lower priced “old” oil. The result: higher usage, higher prices and lower production from the world’s largest oil consumer.

Today, in contrast, we’re by and large doing what we should have done then, living with the higher prices and letting consumer behavior adjust


–in the 1970s, large portions of the workforce worked under multi-year contracts that called for wages to rise annually in line with the CPI (sometimes a bit higher). The CPI tends to overstate inflation, something not well understood at that time, and sometimes wage increases were CPI+. The result was, according to the Pew Research Center, that wages grew 7%-9% a year. This produced real wage gains from 1964-1980, in addition to big increases in the nominal amounts.

In other words, at least part of the accelerating inflation of the 1970s was baked into the wage cake.

Today, we have, if anything, the opposite problem. Except for the highest-paid workers, there have been no real wage gains in the US over the past decade +.


the consumer

In the 1970s, consumers expected that inflation would accelerate, thereby damaging the value of any savings. So the better course of action, we thought, was to spend as soon as possible, or “invest” in tangible assets.

Today’s consumer surveys, in contrast, indicate that people expect the current inflation to return to 2%-3% annual rate over the next year or two. This makes sense, since it’s the lesson taught by the past forty years of disinflation.


Toward the end of the 1970s, when I was beginning my career as an oil analyst, there was panic in corporate board rooms, especially of mature companies with slow-growing profits, whose main investment attraction was a, say, 4% dividend yield. I don’t remember the names, but such companies decided to “save” themselves by buying gold mines or hotels or office buildings–assets and businesses they knew nothing about. This was, as you might think, almost an immediate disaster. But it illustrates how out of control even seasoned businesspeople thought the economy was.

Nothing like that is happening now.

the dollar

The dollar was a relatively weak currency during the latter part of the 1970s. World confidence was so low that during the Carter administration, the Us was forced to issue Treasury bonds denominated in Swiss francs and German D-marks.

The opposite is the case today, with the dollar excpetionally strong.

maybe it’s not inflation…

I’ll finish writing about inflation over the weekend. The main point is going to be that the present situation is hugely different from the 1970s, which was way different, and worse.

As I was writing, I started to think about the FDX report, which has caused that stock to lose almost a quarter of its market cap in early trading today.

Maybe the real issue the stock market is struggling with now is that the pandemic is over–and that this has come more suddenly than corporate America realized.

Take one of the first big casualties, Target. Months ago, TGT announced it was up to its ears in stay-at-home goods that no one wanted. My reaction then was that it was very odd that such a savvy company should have misread its customer base so badly. I also thought that the main factor behind the speed at which it was cutting its losses was internal–the size of the inventory excess.

But maybe it was also that it knew that everyone else was as loaded up with the wrong stuff for the emerging economic climate. So it would be doubly true that the first sale would be the best, that, say, Amazon was in the same general shape but much slower off the mark.

So maybe the reason the stock market has been treading water is not the (crazy, in my view) belief that something like 1981-82 is going to follow the Fed’s aggressive attack on inflation but that the TGT and WMT inventory problems are just the canary in the coal mine.