Issue 96

"Do you like solar companies?"

Delivered on 18 January 2021 by Justin Pyvis. About a 7 min read.

Markets are hot right now. Very hot. All the usual warning signs are flashing red, from soaring asset prices to unsolicited stock advice from cleaning ladies:

When you see all this stuff coming out and all these people talking about penny stocks and pushing them higher, it's got to make you wonder, where is the top? Is it too frothy? Is there too much exuberance out there?" said Ryan Nauman, market strategist at Informa Financial Intelligence's Zephyr. "That's my concern -- the fear of missing out is driving stock prices."
Cromwell Coulson, the president of OTC Markets, says there's a simple explanation for all the buying. "It's clearly a bull market," he said. "I would be very careful. We're definitely in a market where my cleaning lady is asking me 'Do I like solar companies?' Because she bought a solar company that's a NASDAQ stock through Robinhood. And it's tripled."

The cleaning lady analogy draws from an old story about Joe Kennedy (JFK's father), who:

...decided to stop to have his shoes shined before he started his day's work at the office. When the boy finished, he offered Kennedy a stock tip: "Buy Hindenburg." Kennedy soon sold off his stocks, thinking: "You know it's time to sell when shoeshine boys give you stock tips. This bull market is over."

A similar quote has been attributed to Bernard Baruch, who made a fortune in the 1920s US bull market but sold well prior to the crash in 1929:

Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.

The lesson is timely, given some are now suggesting we may be entering "a second 'roaring Twenties'".

Many markets have either recovered or are above where they were pre-coronavirus, despite the huge loss in economic output due to self perseveration (voluntary social distancing) and government-mandated lockdowns:

Asset prices - stocks, houses, crypto, commodities (copper and nickel are up around 30% since the first coronavirus case was declared, iron ore nearly 90%) - have all soared in the last several months due to unprecedented monetary and fiscal support. While the bottom quartile is struggling, lots of people have actually done quite well working from home, accumulating savings while their respective governments thrust even more cash at them:

“The damage from COVID-19 is concentrated among already challenged groups,” Brainard said in a speech Wednesday. “The K-shaped recovery remains highly uneven, with certain sectors and groups experiencing substantial hardship.”

At a time when the national unemployment rate has come down from the pandemic peak of 14.7% to the current 6.7%, Fed economists estimate the jobless rate for the lowest quartile of earners is “likely above 20%,” Brainard said.

Much of the global stimulus has flowed not to businesses and individuals who have suffered legitimate hardship but into assets, which are now easier than ever to speculate on thanks to micro-investing app such as Robinhood. Just look at what happened to an obscure stock called Signal Advance Inc. when everyone's favourite salesman, Elon Musk, tweeted "Use Signal":

Signal Advance is, of course, completely unrelated to Signal Messenger, which I've been recommending for years and is what Musk was tweeting about following the WhatsApp debacle. But a sufficient cohort of people are so cashed up and enthused they don't care: just buy, buy buy!

I'm not going to pretend I know how long this euphoria will continue. But price surges and corrections will probably hit different markets at different times, given the interconnectedness of the global financial system.

Take China, which last year embarked on a massive credit-fuelled, infrastructure-led stimulus programme. Its credit growth eased slightly in December, but given how centrally directed much of China's economy still is, the outlook will depend heavily on the policy stance adopted in its 'Two Sessions' in early March. Xi Jinping will have learnt from the 2014-15 taper and will also want to maintain an appearance of strength on the world stage with a new US President, so I expect Chinese-driven demand to slow but remain relatively buoyant at least until the second half of 2021.

In the US and other more market-oriented economies, the outlook depends on vaccine efficacy and rollout (long lasting social distancing and on-again, off-again lockdowns will keep activity subdued), how long central banks decide to keep their feet firmly pressed on the liquidity pedal and how much debt governments are willing to accrue to continuously hand out cash to many who simply don't need it.

But I find it hard to believe earnings will ever live up to the current lofty expectations for many companies, so when the hot money eventually dries up, a decent reality check is in order. Tread carefully!

Google flexes on Australia

Google is flexing against the Australian government’s proposed News Media and Digital Platforms Mandatory Bargaining Code. Sorry, I mean “experimenting”:

Google has confirmed it is burying links from traditional media outlets in some of its search results, as an ongoing spat between publishers and the tech giant continues to escalate.

The company told The Australian in a statement that the move was part of a “short term experiment”. It means that for some users, news stories from commercial media outlets, are hidden by the company’s algorithms.

Australia's Treasurer, Josh Frydenberg, wasn't happy:

Google, Facebook, other digital giants should focus not on blocking users in Australia accessing domestic content, they should focus on paying for it.
It [the Code] has been acknowledged, not just by other regulatory agencies but by other governments around the world, it’s going to have a final arbitration model in place and it’s going to be a very significant advance for our domestic media businesses.

Well why didn’t you say so earlier Josh! It must be great if regulators and governments around the world like it so much. But what about businesses outside of the legacy Australian media (no doubt generous political donors)? Or more importantly consumers, who may soon have to use a VPN to find the news they want?

For those interested, I wrote about the proposed Code back in December.

Trust us, we're from the government

AUSTRAC, an Australian government agency “set up to monitor financial transactions to identify money laundering, organised crime, tax evasion, welfare fraud and terrorism financing”, “accidentally” told:

…Parliament that the Vatican transferred $2.3 billion to Australia over seven years when the actual amount was less than $10 million… and blamed software for the bungle.

Wow. It’s not as if AUSTRAC isn't well funded or staffed - it had its budget more than doubled last year (+$100m, +67 staff) and its management is well compensated, with its CEO alone taking home $392,048. The other 11 executives on its books pocket between $117,358 and $308,039.

A private company's CEO and responsible executive(s) would have resigned after such a major gaff. AUSTRAC will probably get even more funding in this year's federal budget.

But believe it or not, it could be worse! In the UK, a "software error" apparently caused the police to delete:

...150,000 arrest records and thousands of other pieces of information. In another blunder in October, the Police National Computer (PNC) went down for several hours after reportedly being accidentally unplugged.

Better increase their IT budget to ensure it doesn't happen again!

An anti-trust zealot fires a parting shot

Makan Delrahim, the US Justice Department’s outgoing antitrust chief, said:

In markets where you have network effects which lead to a winner-take-all, you want to ensure there is continued competition, continued innovation… [the Federal Trade Commission and Congress] are right on the money in taking a close look.

Winner-take-all at a particular point in time. Network effects aren’t enough to fend off potential competition unless the incumbent continuously improves and innovates. Just ask Hi5, MySpace, Friendster, Yahoo, Netscape or even Nokia (and soon WhatsApp?).

Then there's TikTok, which went from zero to around a billion users in just a few years. That kind of growth shouldn't have been possible in Delrahim's framework, given the dominance and network effects possessed by Facebook. But when all you have is a hammer...

That was then, this is now

UK plan to shun EU vaccine scheme ‘unforgivable’, say critics, was the title of a Guardian article back in July:

In response to the UK government’s decision to walk away from the latest initiative, Munira Wilson, the Liberal Democrats’ health spokeswoman, said: “When coronavirus is such a threat to people’s lives and livelihoods, ministers should leave no stone unturned in their bid to end the pandemic.

“This government’s stubborn unwillingness to work with the European Union through the current crisis is unforgivable.

“The crisis does not stop at any national border. It is about time the prime minister started showing leadership, including fully participating in all EU efforts to secure critical medical supplies and a vaccine.”

It turns out shunning the giant, bureaucratic (read: slow) vaccine procurement process that the EU implemented was one of the UK's best decisions so far this pandemic.

On a per capita basis, the UK is currently fourth in the world in terms of vaccinating its population behind Israel, the United Arab Emirates and Bahrain.

Meanwhile in the United States - which is still doing better than every EU nation - thousands of doses are being thrown in the garbage because vaccine administrators are too afraid to give unused, expiring doses to vulnerable patients or non-hospital employees in violation of state rules. Depressing.

Issue 96: "Do you like solar companies?" was compiled by Justin Pyvis and delivered on 18 January 2021.