Tag Archives: strategy

thinking about the US stock market

July 16, 2020 By in economics, Strategy, Uncategorized Tags: , Leave a comment

tactics

There’s a struggle going on in the market between secular growth stocks and business-cycle sensitives. This contest has two parts: valuation and concept.

valuation

If we look at the performance of NASDAQ vs. the Russell 2000 over the past 2 1/2 years, the former has outperformed the latter by an almost unheard of amount for a developed country. Relative valuation alone argues that the R2000 should have its day in the sun.

One would expect balance to be restored by some combination of NASDAQ losing relative ground and R2000 going up. The immense money and fiscal stimulus coming out of Washington suggests the central tendency of stocks will be up, so NASDAQ could conceivably do its part to restore valuation balance by simply standing still.

concept

On the other hand, this performance differential is arguably justified. Thanks to Trump’s epic incompetence, the domestic economy has been increasingly weak–both vs our own history and results in most other places (not the UK) since the effects of the 2017 tax cut have warn off. And the R2000 is much more closely tied to the US than the more global NASDAQ. Every recent rally attempt by the R2000 has petered out in short order–although the one now underway may have more legs than its predecessors.

Then there’s the pandemic. Washington has spent trillions of dollars, correctly so in my view, to prop up a country being ravaged by a deadly disease. Unfortunately for us, with his usual blend of insight and judgment, Trump has armtwisted states like Florida, Texas, Arizona et al into lifting quarantine restrictions much too soon. The result has been that while Canada and the EU have Covid under control and are revving up their economies, we’re seeing the virus flare up again with huge increases in new cases and red-state hospitals and funeral homes overwhelmed. He’s now, in inexplicable fashion, compounding his error by pressuring schools to reopen shortly, amplifying the risk of disease to both students and teachers.

All this implies both that another round of aid from Washington may be necessary to offset Trump’s gaffe and that the domestic economy will be relatively weak for longer than hoped–and longer than any other OECD country. (The financial press has begun to link Trump’s handling of the coronavirus with his disastrous foray into Atlantic City gambling, even though the fact that he’s done this sort of thing before isn’t a great explanation for why he should be doing it again.)

Other worries: the national debt is now higher as a percentage of GDP than it was at the end of WWII, and the budget deficit is already approaching $4 trillion.

Concept, then, argues that investors should continue to do what they’ve been doing for the past couple of years–stay as far away from the domestic economy as possible.

strategy: i.e., what happens next?

I think we muddle along for a while. But the two big questions that I see eventually coming to the forefront of the market’s consciousness are:

–in November, will the US reelect a white racist economic illiterate who has crushed GDP growth, who’s a fanboy of corrupt dictators, who seems to revel in the suffering of others and who appears to be unraveling mentally before our eyes? It says something about the parlous state of domestic politics that the answer is not clear.

–how/when/at what cost does the country begin to clean up the gigantic mess Trump, his administration and his enablers in Congress have created?

Special Purpose Acquisition Companies (SPACs) and speculative fever

July 15, 2020 By in special purpose acquisition companies, stock market, Uncategorized Tags: , , , , , 1 Comment

SPAC is a new name for an old capital-raising form. The first instance I’m aware of is a mention in Extraordinary Popular Delusions and the Madness of Crowds, a famous 1841 book on the craziness that happens in financial markets at times of speculative fever. The author, Charles Mackay, cites an operator during the eighteenth-century South Sea Bubble in the UK. He writes:

“…the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled ‘A company for carrying on an undertaking of great advantage, but nobody to know what it is.’ Were the fact not stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project.”

According to Mackay, the “adventurer” set up an office, issued shares and then disappeared.

I came across this form early in my investing career, when the vehicles were called blind pools. They’ve also been called blank check companies. My reaction was the same as Mackay’s. Now, as SPACs, the name is fancier but the idea is the same, as far as I can see. An entrepreneur offers to use his skills to make shareholders a lot of money by means not specified in the offering document. Unlike the case in 18th-century London, the adventurer doesn’t simply close up shop and disappear. My impression is that the entrepreneur mostly pays himself fees while he looks. I have no idea about the ultimate outcome from such blind pools, but the fact that promoters don’t seem to point to past glories suggests that results aren’t that great–for shareholders, at least.

The current reemergence of blank check offerings is important to me in only one sense. They appear at times when speculation is rampant. They serve as an unambiguous signal that government policy is too stimulative. In other words, they typically signal market tops.

In the present case, I’m not so sure. Even before the pandemic, Trump had somehow managed to get a vibrant US economy to grind to a halt. Now, a second tour de force, as Canada and the EU are opening up again–crediting this outcome to having followed the advice of US medical research–the coronavirus is spiking again here. Why? …because Trump pressuring state and local governments to ignore medical protocols. Sort of Trump’s Atlantic City debacle twice over, only a lot worse.

The upshot is that while I can imagine more economic stimulus from Washington, I can’t see the punch bowl being taken away any time soon.

if Biden wins

June 30, 2020 By in administration economic strategy, economics, Strategy, Uncategorized Tags: , , 2 Comments

As I’ve mentioned once or twice before, a former work colleague of mine was writing, presciently, as early as 1990 that neither major US political party had much relevance for ordinary Americans any longer. Democrats had a social justice program but no economic strategy; Republicans didn’t stand for much of anything, and were in danger of being captured by religious cultists.

damage from Trump

It’s thirty years later, and the basic story remains true, I think. It has set the stage for the election of Trump, an inept and unsavory businessman with anti-science and white racist views plus a fondness for dictators, especially Vladimir Putin. His campaign, to put the best face on it, called for revitalization of the South and Midwest, areas hurt by the demise of basic industry over the last half-century and abandoned by both parties, through a return he fantasized for the country to the world of the 1950s. Despite the fact that this “solution” is flat-out crazy, rank-and-file Republicans fell right in line with Trump’s idea. Many independents, too.

The results are about what one might have predicted: economic growth had slowed to close to zero even before the pandemic, foreign investment into the US was drying up; domestic firms were shifting operations abroad to escape his white racism that precluded hiring many highly skilled foreigners. In my view, we have only begun to feel the negative economic effects of his blundering. And in vintage Trump form, he has hurt most badly the people who have trusted and supported him.

The most visible damage to date from the Trump administration, however, is its epic coronavirus failure. More than simply pandemic denial, Trump has politicized routine safety precautions, like wearing a face mask, turning them into partisan political statements impermissible for his followers to make. The result has been a domestic death toll so far that’s horrifically higher than elsewhere, and pandemic cases reaching new peaks here while the rest of the OECD is at maybe a tenth of the March-April highs.

if Biden wins

If Biden wins, repairing the damage from Trump’s extending and deepening the pandemic-induced domestic downturn will be his first, and most difficult, priority, I think.

The counterproductive Trump tariffs were put in place by executive order, so they can presumably quickly and easily be reversed. The damage to the US “brand” can also be repaired to some extent by ending Trump’s anti-foreigner and anti-diversity measures.

On the other hand, the US is way worse off than it was four years ago. In addition to the unnecessary suffering and loss from the pandemic, creaky domestic infrastructure is four years older. The tax system remains unreformed, unless we call lowering taxes for the ultra-wealthy a “reform.” Because of this, the federal budget was in deficit before coronavirus-related spending. Now it’s worse. Also, as I mentioned above, in true Trumpish fashion, nothing has been done about the legitimate grievances of Americans left behind by structural change.

In short, there’s lots to do, both promises not kept and new messes made.

Government finances put into disarray by Trump will eventually have to be repaired. This process can be gotten to voluntarily or, unfortunately the more likely case, through an eventual crisis of confidence–a decline in the dollar or a refusal of professional investors to buy Treasuries. That could be years down the road, however–I truly have no idea.

the Wall Street worry: higher taxes

The front line, but specious, anti-Democrat argument is the Republican staple that Democrats raise taxes. The facile, but correct, I think, counter is that higher taxes on rising income is a better situation all around than lower taxes on lower income. We already have the latter now, with little of the really permanent economic damage Trump has put in motion having kicked in yet.

Will a Biden administration have the willingness to really reform the tax system by attacking entrenched special interest tax breaks? Who knows?

a market rotation?

The defining characteristic of the Trump presidency in stock market terms has been the extreme aversion of equity investors to stocks exposed to the domestic economy. Presumably, a Trump loss would trigger a substantial rally in laggard domestic-GDP-linked names–as cheap, with improving prospects. My guess is that Trumpish back-to-the-Fifties issues wouldn’t participate fully, if at all. Maybe their joining in would signal that the rally was nearing an end.

timing?

I don’t know. Most election experts were wrong in 2016, so I’d expect Wall Street to be cautious about reshaping a portfolio around either candidate. On the other hand, the bigger the bet that Trump is a combination “useful idiot” and George Wallace redux, the greater the outperformance over the past 2 1/2 years. This would argue for an early portfolio shift for successful managers, not to eliminate entirely the bet that Trump will continue his trademark turn-lemonade-into-lemons, but to come closer to neutral to protect gains already made. However, Trump seems to be doubling down in recent days on the idea that overt white racism and pandemic denial is his best chance for reelection. So maybe it’s too soon to think the worst is over.

a different path

I’ve always found that if I’m stuck on an either-or where I have no idea how to choose, the best thing to do is to reject the idea that I need to choose either. Maybe for me looking for names in Canada, the EU or even Japan is the way to go to reduce my Trump dysfunction bet–at least until I can see the US situation more clearly.

the biggest constant

If Trump is such a loser, why has the stock market gone up during his term?

–the biggest reason is that money policy has constantly been extraordinarily loose, partly to offset the substantial negative effects on GDP of Trump’s trainwreck trade agenda. With cash yielding nothing and Treasuries close to that, money seeking liquid investments pours into stocks. At some point, interest rates will rise and stop the flow. But with the US reeling from the coronavirus, I don’t think that’s any time soon.

–about 50% of the earnings of the S&P 500 come from outside the US. Of the rest, half comes from Europe and the remainder from emerging markets and Japan. In my view, equity investors really want the second 50% and hold the first because they’re forced to.

musings (iii)–the presidential election

June 26, 2020 By in administration economic strategy, economics, Uncategorized Tags: , , 1 Comment

If the US is to retain a leading position in world commerce today we need better infrastructure, better schools and the ability to harness the efforts of all Americans in support of economic growth. Washington has fallen down badly on all three fronts for a very long time. Discontent with the status quo has resulted in the election of Donald Trump as president, as I see it, on the idea that things couldn’t be worse.

Whoops!

Though a Barnum-like showman, Trump is, unfortunately, a popular former reality show host but not much else. He’s an incompetent businessman and a white racist who appears to relish the suffering of others. His economic “vision” is for a return to the TV sitcom world of the 1960s, to be achieved by creating a Depression-era tariff wall that will prevent better-made or cheaper products from reaching the US.

In my view, this is suicidally crazy. As far as I can tell, mine is the consensus view in the rest of the world, which is appalled by the severe turn for the worse in the US. Even now, though, my sense is that Americans in general have been surprisingly complacent the damage Trump is doing.

So far, the stock market reaction has been to shun stocks tied closely to the US economy and bid up shares of companies with global franchises or with intellectual property that could just as easily be held in, say, Canada. Over the past month or so, foreign stocks have also begun to outpace US equities for the first time in years.

What if Trump is reelected?

Let’s ignore the messy possibility the Financial Times, for one, is now beginning to discuss–that Trump will “steal” a close election, again losing the popular vote, in a contest marred by voter suppression in red states. Without that complication, the results of a Trump victory would be pretty straightforward.

First and foremost, it would be read worldwide as a national endorsement of his loony-tunes economics, as well as his racism, sadism and eagerness to use the military to violently suppress civil dissent. Not a pretty picture.

The current trend toward stocks with substantial non-US businesses, innovative technology and/or the ability to transfer operations elsewhere would likely continue. Presumably, we’d also begin to see downward pressure on the dollar for both economic and ethical reasons, as fixed income investors as well as equity holders sought to reduce their US exposure.

US brands would likely begin to lose their aspirational appeal, if they have not already. Tourism, both to the US and to US-operated attractions, would wane, even if the coronavirus is brought under control. Global businesses would feel pressure from customers and from employees to relocate. The working population of the US would begin to shrink, as a result and as 1930s Germany became a more plausible analogue for the US. Even Japan might start to look good.

US self-destructive impulses would also open the door wide to China to supplant the US as a cultural and economic world leader. At the very least, capital and portfolio investment diverted from the US would have to find a home somewhere.

more on Monday