Lessons from the Druck
Your Daily KnowHow
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In today’s KnowHow…
Update to our Market Sentiment Indicators
Lessons from the Druck
The problem with Zoom
Investors hunt for new model after years of broad gains
Erdogan at it again…
What happened overnight…
Oil once again leads the way as the commodity advanced once again this morning post closing at the highest since October 2018. The Turkish lira did the exact opposite as Erdogan renewed calls for lower interest rates (more below). Looking at the equity space and European stocks continued their strong performance driven by the energy names while in the US the S&P and Nasdaq fluctuated as the debate between inflation concerns and economic optimism continued to play out. On the single stock front Elon Musk once again hits the headlines; Samsung Publishing, a shareholder in the producer of ‘Baby Shark’ viral YouTube song, rallied as much as 10% after Elon Musk tweeted about the kiddie pop jingle…. We are still waiting for the nod to KnowHow from him.
Chart of the Day
A chart courtesy of HowMuch.net via ZeroHedge showing you the debt as a percentage of GDP across the globe. God, that is a lot of red. And, it’s without even taking into account the demographic time bomb that’s ticking away in the background in many Western economies. The US is bad but really it’s the cleanest dirty white shirt.
Analysis
Update to our Market Sentiment Indicators
Note, we will be updating our Market Sentiment Indicators this afternoon for paid subscribers. These are the indicators that have led us to be more cautious through much of this year but highlighted a switch back into growth equities towards the end of April. Don’t forget to sign-up below to avoid missing out.
Lessons from the Druck
Learning from great investors is an important ingredient in being a good investor yourself. In a social media, podcast and 24/7 news world, these investors are now more accessible than at anytime in history. Few have been as consistently great as former Quantum Fund manager, Stanley Druckenmiller. Following quite a few recent interviews, we have been thinking about how we would categorise his views as an investor.
Have a view on the macro
Like many successful hedge fund managers, Druckenmiller’s starting point is to try and define the current macro paradigm. That entails a few things:
what is the direction and size of economic growth short-term and medium-term?
what is the policy backdrop? both fiscal and monetary
what do the above mean for risk assets?
His comments recently have been particularly damming when it comes to Fed monetary policy. Last year, in the midst of the first COVID wave, the Druck was very much of the view that a recovery would be very long-dated. But, policy makers responded and his concerns have now shifted to how hot the economy is running.
Our central case is that inflation occurs, but we’re open-minded to something like ‘07-’08 when you never really got to the inflation because the bubble popped. So, inflation never got to the manifestation stage.
He has also been very vocal, he’s not the only one, about the potential for a continued de-basing in the US dollar as the Fed continues to backstop fiscal spending. That, will eventually lead to the US dollar losing reserve currency status and all the benefits that come with that.
What does it mean for investing?
Effectively, this macro backdrop assumes inflation and risk appetite runs too hot, fiscal spending continues at pace and when the Fed gets to tightening, it essentially pops a bubble. In that scenario, you would continue to invest in hard assets like commodities, cyclical equities that have pricing power and want some sort of dollar debasement hedge, traditionally gold or now bitcoin. You would also be very cautious on long duration assets, particularly growth equities where valuation multiples could continue to compress.
From a more philosophical perspective…
If you have been following our macro and equity strategy work over the past few months, you will know that our views are somewhat different. We aren’t convinced inflation will be sustained and there is still far too much slack in the global economy for central banks to step away any time soon. But, rather than focusing on differences in macro views, we wanted to touch on something more philosophical. However, rather than following the thought process of great investors blindly, it is important to understand that every investor’s strategy is dictated by their own knowledge base, access to resources, time frame and risk appetite. Druckenmiller and many great hedge fund investors will tell you that if the information changes they are very willing to change their mind. That is an important discipline for any investor… put aside emotion and ego, and be willing to accept when you’ve got something wrong. But, for most, being able to assess and respond to information as quickly as some of the great hedge fund investors isn’t really feasible. Below chart courtesy of Michael Batnick.
What we’re reading
The problem with Zoom
If you’re just looking at the business, then Zoom’s Q1s last night would tell you the company is in incredible shape. Sales have nearly trebled, customer growth and retention look strong, gross margins are going up and guidance has been raised for FY sales. Some would argue that competition, particularly for large enterprise customers is ramping up from Big Tech. But, Zoom is inherently a better product and as history has shown with Internet Explorer, the market doesn’t mind bringing in better quality products provided they can be integrated. That’s a non-issue in our view. Plus, if you look at the cloud and monetisation run way, it is still substantial. The problem for the stock however, is that the market needs to get its head around what the growth run rate looks like when the comps get tough over the coming months. As it stands, consensus estimates will see sales slowing from the current staggering 196% to low double digits by Q4 incorporating the new full year guidance. The stock is on 20x sales… a significant de-rating from the highs of last year but still expensive. The risks to that multiple are likely still to the downside for now. Sales and sales estimates from Bloomberg below.
Investors hunt for new model after years of broad gains
Over the course of the last day or so, we have read a few articles saying a very similar thing: the 60/40 strategy needs a makeover. It is by no means a new argument but the investment portfolio cocktail of 60% equities and 40% bonds seems to be gaining more critics. The key principle underpinning the 60/40 strategy is that the smaller fixed-income allocation should cushion losses when stocks slump. Yet during a bout of market volatility in March, both equities and bonds sold off at the same time. It was interesting to read in the FT this morning that, based on historical valuations and returns, AQR, the investment group, now estimates that a traditional 60/40 portfolio will return just 2.1 per cent a year after accounting for inflation over the next five to 10 years. A US 60/40 portfolio will return a miserly 1.4 per cent in the coming years, compared to an average of nearly 5 per cent since 1900. As a result, the tide has been turning for a while now and most investors are increasing allocations to alternatives, including PE, VC, Hedge Funds and even timber land to counter the dimming outlook for mainstream markets. This, though is much more difficult than many think to make money and while specialists such as David Swensen have done a fantastic job in the past, many have failed to emulate his success.
Erdogan at it again…
Turkey used to be a big EM market for us to invest and use as a bell weather for EM sentiment however over the last few years, the performance of the country tends to follow then news flow coming out from President Erdogan and today is no different. Erdogan renewed calls for lower interest rates despite elevated inflation, pushing the lira to a fresh low against the dollar and piling pressure on his central bank governor to address high unemployment. Against what we have been taught in Economics lessons, the President holds the unorthodox belief that lower borrowing costs will help slow price gains as well as stimulating the economy, and he has repeatedly urged the central bank to cut the benchmark rate. Erdogan’s repeated interventions in the monetary policy since 2013 (see below) has also led to an increased appetite for foreign currency and gold in the economy as Turks have remained reluctant to convert their savings to liras to hedge themselves against runaway consumer prices and bouts of volatility. For us, it seems like nothing much is going to change at the below and similar trends will continue.
