Spy found himself in Singapore this week enjoying some Diwali cheer. He was reminded, over a few too many glasses of whisky with Hindu friends, that the festival of light, in addition to celebrating good triumphing over evil, is all about welcoming (or encouraging) Lakshmi, the goddess of wealth into your home. It would seem to Spy that many central banks across the world, could do with a little of Lakshmi’s kindness, because at the moment, the bond vigilantes are beginning to exert their ruthless discipline on the lavish debts that are darkening their economies’ horizons. Countries that have been confidently spending beyond their means, with the enthusiasm of a preppy trust fund kid, are starting to see rates rise again, sharply. It is going to take more than Lord Krishna, riding to the rescue, to save us this time.
The American markets, for all their extraordinary dynamism, are often referred to as one giant casino. Spy could not help but feel that is the mindset with a new range of ETFs titled, Battleshares, by asset manager, Tidal Investments. The idea is relatively simple. The ETF will sell short a legacy company that once dominated a sector and concurrently go leveraged long on the ‘new kid on the block’. Examples would be Intel (Short) vs Nvidia (Long) or Ford (Short) vs Tesla (Long). The leveraged long position will be as much as double the short side. These trading strategies are aimed at the ‘day trader’ crowd who think of investing like supporting a sports team, probably spend too much time mouthing off (with bad grammar) on Reddit or X (formerly Twitter) whilst maintaining a tenuous grasp of market risk. It would surely be easier to just go to Vegas or Macau.
Goldman Sachs’s David Kostin, chief US shares strategist, turned all Cassandra this week and warned investors that the S&P 500 will deliver paltry returns over the next decade. His worries are fairly straight forward: the market is highly concentrated; it is historically expensive and, fundamentally, strong competition from other assets, will mean money flowing elsewhere. It is not hard to disagree on the concentration, after all, the ten biggest stocks in the S&P 500 tally to more than a third of its total market capitalisation. The question is, will investors heed the warning, or like Odysseus and the doomed travellers after the Battle of Troy, ignore Cassandra and her woes.
Spy can remember when property in Hong Kong was about as close to a sure thing as one could get. Buying multi-million-dollar apartments that resemble broom cupboards was ‘the right thing to do, because they always go up’. Sadly, the tide has rolled out and a staggering number of people have been found to be swimming naked, to paraphrase Warren Buffet. The value of negative-equity property loans reached HK$207.5bn ($26.68bn) at the end-September. This was a significant jump from HK$155bn recorded in June, reported by the HKMA. According to Bloomberg, that’s the highest amount since at least 2002. The number of loans that are ‘underwater’ is now 40,713. That is a lot of naked property owners on the seashore. Spencer Tunick would be proud.
The millon dollar question, or perhaps, the billion dollar question: what if it is actually the trillion dollar problem? Ninety One has just published its multi-asset strategy outlook and one paragraph really caught Spy’s eye. “With hundreds of billions in capital expenditure flowing into data centres, investors naturally want to know if the spending will pay off. Venture capital firm Sequoia recently called this a $600bn question, referring to the gap between fast-growing AI capex and the less certain AI revenue stream that will be generated from it. But at the pace that AI capex is rising, this could easily be framed as a $1trn problem. The key questions are: Will investments in AI models pay off? What valuations are the current AI leaders discounting? What scenarios might accommodate different implied valuations” The trillion dollar question, indeed.
Contrarian investor alert, thinks Spy. The Conference Board’s Consumer Confidence survey which includes the question, “Do you think stock prices will be higher in a year” has just hit an all-time high with data going back to the 1980s. This is surely the equivalent of one’s manicurist, taxi driver or hotel doorman asking for stock tips?
Let’s make a little list, shall we? Things that are at an all-time high. Political lies, stocks; gold; US home prices; US, French and British debt – the list could go on. Couple that with core CPI inflation staying above 3%, for 41 months in a row, which just happens to be the longest period of high inflation since the early 1990s. What is the Fed likely to do next week – oh, that’s right, cut interest rates! Makes perfect sense, doesn’t it?
Some people have too much time on their hands, reckons Spy. With Halloween bringing its usual roundup of ghoulish memes, it was not going to be long before some bored keyboard warrior found something like this. And no, Spy does not remotely believe there is the slightest correlation…
Spy’s quote of the week comes from Horace Barlow, a neuroscientist and the great-grandson of Charles Darwin, “Intelligence is the art of good guesswork without being fooled by randomness.” Nailed it.
Until next week…
