There is a genre of financial newsletter that tends to the alarmist or an extremist view of the imminent collapse of financial markets, society at large, the death of the US dollar and the political order as we know it. In recent weeks Spy has seen more than the usual run of these tomes filling up his inbox. These writers tend to pride themselves on being “contrarian” and “telling you what others don’t want you to know”. Paradoxically, Spy takes this as a little reassuring. The moment these excitable Nostradamuses are having their day in the sun, is usually when markets tend to stabilise after a poor run. Of course, even stopped clocks are right twice a day.
Are there too many ETFs, wonders Spy? One might as well ask: are there too many grains of sand on the beach. The number of ETFs listed around the world has now exceeded 10,000 different strategies. More appear weekly. For sure, some don’t last long as they gather scant assets and are not viable, but the trend is clear – if a security is even vaguely tradeable, somebody, somewhere, is going to wrap it up in an ETF structure and put it on an exchange. Apparently, in 2016, the former CEO of Vanguard, Bill McNabb asked for “restraint” in ETF creation. That was about 7 years ago and the total number of ETFs at that time was just under 5,000. It would seem the market has resolutely ignored Bill’s plea.
The one ETF currently missing is the bitcoin one in the United States, notes Spy. With bitcoin having a blinder of a few weeks, rallying close to $35,000, some pundits Spy spoke to this week are convinced the SEC is finally close to a green light. Bitcoin’s recent rally arrives, coincidentally, as the fraud trial of Sam Bankman-Fried, the founder of crypto exchange FTX, is underway. The remarkable thing about bitcoin, is that despite the many problems and frauds in the industry surrounding the digital token, the coin itself has lived up to its promise. Its gold-like qualities have held up, despite the best efforts of its fanatical supporters and promoters.
The S&P 500 has been having a rather tough time of late. In fact, yesterday it fell another 1.2%. That is the 27th daily decline of 1% or more this year. The index is now down over 10% from its high in late July, the largest drawdown thus far in 2023. The question however, before anyone gets too excited, is: is this unusual? The answer is not at all. A 10% intra-year drawdown has happened on average, every 1.6 years or so. The Nasdaq is also having a bit of a wobble. The benchmark tech index is down 11% from its July peak. We are certainly in correction territory. But again, this is not unusual.
Keith Skeoch, the former co-CEO of Standard Life Aberdeen was quoted this week as saying about special purpose acquisition companies (SPACs), “You’ve got to ask yourself who benefits from these things? What’s the benefit to the investor or customer? I’m very doubtful.” These wise words sprung to mind as the news broke that Air Asia’s holding company is looking to list some of its businesses in New York via a SPAC. The colourful CEO of Air Asia, Tony Fernandes, is planning regional expansion of his low-cost airline. Spy must wonder if a SPAC is the right route for such a well-known Asian brand?
Asset managers and company titans are increasingly dealing with the political. ESG has turned political. Investing in (or divesting from) China has become deeply political. Now we can add one more dimension: a firm’s perceived support for Israel or Palestine. In the first shot across the boughs that Spy is aware of, the Florida State Board of Administration (SBA), Tallahassee, has added data, analytics and portfolio management firm, Morningstar, to its list of “Scrutinized Companies that Boycott Israel.” Apparently, according to a local law, Morningstar will now have 90 days following its placement on the list to cease what the SBA defines as a boycott of the country.” It will soon be impossible for firms to not be annoying someone, somewhere on some culture-war issue. Tread carefully.
Talking of China investment, the rotation out of the mainland seems to be gathering pace. Asset managers and investors have been swapping out of the emerging markets funds that include allocations to China to those that exclude China. As the graph below clearly shows. Whether there is a political tinge to this or purely driven by the fundamental outlook, Spy can’t say.
Any doubts that Amazon is on the right track were dispelled last night, reckons Spy. Amazon revenues increased 13% over the last year to $143bn. Net income increased 243% to $9.9bn. Both numbers came in well above expectations. Betting against Amazon has been a mug’s game for years.
Spy’s quote of the week comes from Jim Grant: “The problem is the structures that 10 years of ultra-easy money brought about. People blame it on the normalisation of rates. [But] the previous bout of abnormal rates is the problem.” Nailed it.
Until next week…
P.S. It is the Rugby World Cup final on Saturday evening in Paris. For the record, Spy’s prediction is that New Zealand’s All Blacks will pip South Africa’s Springboks in a rain sodden mess of muscle and brutality.