That the US stock market remains wildly overpriced does not disturb us – and in any case it has been wildly overpriced for years. We can search quite happily for diamonds in markets like Asia. (But not China, for what should be obvious reasons.) 2021 will surely be a challenging year – perhaps most acutely for bonds and currencies. But we’re ready for the fight. We wish all our clients and readers a happy, peaceful and prosperous New Year !
“Imagine, if you will, a man wakes up from a year-long induced coma—a long hauler of a higher order—to a world gone mad. During his slumber, the President of the United States was impeached for colluding with the Russians using a dossier prepared by his political opponents, themselves colluding with the FBI, intelligence agencies, and the Russians. A pandemic that may have emanated from a Chinese virology laboratory swept the globe killing millions and is still on the loose. A controlled demolition of the global economy forced hundreds of millions into unemployment in a matter of weeks. Metropolitan hotels plummeted to 10% occupancy. The 10% of the global economy corresponding to hospitality and tourism had been smashed on the shoals and was foundering. The Federal Reserve has been buying junk corporate bonds in total desperation. A social movement of monumental proportions swept the US and the world, triggering months of rioting and looting while mayors, frozen in the headlights, were unable to fathom an appropriate response. The rise of neo-Marxism on college campuses and beyond had become palpable. The most contentious election in US history pitted the undeniably polarizing and irascible Donald Trump against the DNC A-Team including a 76- year-old showing early signs of dementia paired with a sassy neo-Marxist grifter with an undetectable moral compass. Many have lost faith in the fairness of the election as challenges hit the courts. Peering through the virus-induced brain fog the man sees CNBC playing on the TV with the scrolling chyron stating, “S&P up 12% year to date. Nasdaq soars 36%.” The man has entered The Twilight Zone.”
– Dave Collum, 2020 Year in Review.
Judging from the chaotic scenes in the US Capitol building on 6th January, a strange year is being followed by a not conspicuously less strange one. Our brief being an investment brief, we focus here not on politics but on the financial markets (assuming the two can be strictly separated, which as assumptions go may be somewhat implausible). As Grant’s Interest Rate Observer points out, perhaps the strangest market development of the year just gone was the extraordinary rise of Tesla.
With its stock changing hands at 1,000 times net income and 135 times enterprise value to EBITDA, Grant’s fairly describes Tesla as “the financial singularity of 2020”:
It isn’t the plague year’s only marvel. Runners-up to Tesla in the can-you-top-this
sweepstakes include the $17.6 trillion of fixed-income securities that are currently
priced to yield less than zero, the $7.7 trillion that the leading three central banks have materialized on their respective computer keypads since Jan. 1 and the $1 trillion that the U.S. government contrived to tack on to the gross public debt in a single month, April 2020, after having required 192 years (1789 to 1981) to amass the first trillion. Such prodigies spring from a circumstance perhaps even more remarkable than the Tesla ascension. We mean the indifference of the people who buy securities to the ancient beacons of price and value.
We do not call these people “investors.” Probably, no central bank hesitates to buy a note, bond or ETF because that security looks rich, lacks once-standard protective covenants or is at risk of a downgrade. Nor do the passive-investment titans so much as glance at a price-to-earnings ratio before tossing the day’s intake of client funds into the appropriate index cauldron. To the Vanguards, BlackRocks, State Streets, Schwabs, Feds, European Central Banks and Banks of Japan, it makes no difference whether the market is overvalued, undervalued or half out of its mind. They buy and sell as if Benjamin Graham had never lifted a pen.
If you need a visual image to reinforce the point, Grant’s provides the following doozy. Tesla is now worth more than Berkshire Hathaway:
James Grant is not alone in observing (US) stock market conditions with some trepidation. Fellow market veteran Jeremy Grantham could hardly be more explicit in what we can legitimately call his latest Jeremiad:
The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.
These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.
But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time..
“Privilege” ? – not quite sure about that, but each to his own.
From long and sometimes painful experience, we have developed an approach to investing that enables us to be more or less fully invested at all times. Not least, because we believe that market timing is essentially impossible. But that doesn’t mean that we’re always fully invested in the stock market. Instead we diversify our own, our families’ and our clients’ assets across three core constituents, namely:
That the US stock market remains wildly overpriced does not disturb us – and in any case it has been wildly overpriced for years. We can search quite happily for diamonds in markets like Asia. (But not China, for what should be obvious reasons.) 2021 will surely be a challenging year – perhaps most acutely for bonds and currencies. But we’re ready for the fight.
We wish all our clients and readers a happy, peaceful and prosperous New Year !
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