The Next Fifteen Years

Posted on by Nicholas Peart

When I look back on the last 15 years going back all the way to the beginning of 2009 and the aftermath of the 2007-8 Global Financial Crisis, it is clear that this has been a difficult and rocky period for humanity as a whole. In some ways it feels like many people have still not fully recovered from this crisis. There are so many people who are still struggling and with that there’s a palpable sense of tension and discontent. 

In the UK, for example, the early years since the financial crisis were marked by government funding cuts and austerity. Most notably, university tuition fees were tripled. The last fifteen years for young people, especially, have been very tough. As the years progressed we saw the emergence of politicians from the more extreme ends of the spectrum come more to the fore; reflecting this discontent. 

Economically, the last 15 years have been a disaster for many people. For over a decade, from 2009-21, the main central banks such as the Federal Reserve, the Bank of England, the ECB, etc, kept interest rates at near zero percent. The effect of this has been very real. When interest rates are at rock bottom levels, prudence is thrown to the wind. There is no incentive to save money (as it yields no interest) and only encourages rampant speculation and risk taking. And this is what happened during this period. Asset prices for property and many stocks and securities went to the moon. Also, due to interest rates being so low for such a long time, debt levels exploded. During this time frame, total US government debt went from just over $11 trillion at the beginning of 2009 to almost $30 trillion at the end of 2021. As I write this US government debt is now over $33 trillion. Furthermore, average US house prices doubled and the S&P 500 index increased more than 5 times in value. Meanwhile, during this time average wage growth was relatively flat. 

Keeping interest rates at such low levels for over a decade has been very damaging for society as a whole. The huge inflation in asset prices, far eclipsing income growth, has not been a good thing. This is certainly true for most of the younger generation where the possibility of owning a home is now very remote. But it isn’t just younger people who are hurting. This prolonged period of Zero Interest Rate Policy (ZIRP) has resulted in a level of inequality not seen since 1929 just before the great stock market boom of the Roaring Twenties collapsed and led to the 1930s Depression and a lengthy period of unrest and stagnation. 

Globally, it feels like the recent 2020-21 COVID pandemic was this monumental event to manifest during this difficult 15 year period pushing an already hurting population even further into the abyss. It was almost like the punishing final act.

In my view, I believe that we are now at a stage where we have reached a major turning point in economic history. Looking beyond the last 15 years, I think we are now at a moment in time where the wheels of this era of neoliberalism that has prevailed since Ronald Reagan and Margaret Thatcher were in power are slowly coming off. This epoch is coming to an end. 

What Will The Next 15 Years Bring?

I envisage that the next 15 years is going to be a period of enormous societal and economic changes. The current status quo and core orthodox beliefs of today are going to be turned upside down. This will be an incredibly disruptive time, but ultimately I truly think that it will be beneficial for all of humanity. If I had to compare this forthcoming period to a period in history, I believe that what we are about to experience will be similar to what happened during the French Revolution and the beginning of the Industrial Revolution as well as the Reformation more than 200 years before those two events. 

The Industrial Revolution was a time of unprecedented change through game changing innovations that radically transformed the lives of society. Yet in the beginning, at least, some of these inventions were met with fierce resistance from a population worried that such inventions were destroying their livelihoods. However, these inventions created new opportunities and new types of work. Before the Industrial Revolution, large swathes of society, especially those not born into aristocracy, worked gruelling and extremely long hours without the aid of any industrial production units that today are taken for granted. 

The French Revolution occurred around the same time as the Industrial Revolution was already getting going. It was a seismic period in history that completely altered the status quo in French society that prevailed for too long. Before the French Revolution, France had a feudal estate based system where society was divided into three estates; the First Estate (made up of the clergy), the Second Estate (made up of the French nobility), and the Third Estate (made up of “commoners”). The Third Estate comprised over 98% of French society that were not part of the clergy or nobility with next to no chance of improving their lot. Basically, if you were not born into money or privilege you were trapped. The Revolution was a violent and bloody event in world history, but it ultimately transformed French society for the better creating a much fairer and more progressive society. 

On that same note, I think that during the next 15 years we are going to experience something similar to those years towards the end of the 18th century. We will see many groundbreaking innovations just like during the Industrial Revolution. There will be new and emerging technologies and inventions that will be met with resistance and in some cases with violence by some sections of the global population. However, ultimately, this will all be hugely beneficial for all of society. As a specific example, let’s focus on Artificial Intelligence (AI). This technology has been around for some time, but recently it is being increasingly discussed and there is now a lot of hype around it. Yet there is no denying that this is a powerful technology that doesn’t stand still. People are right to be fearful and concerned by this technology, but I find that a lot of people are looking at it all too myopically. The very real possibility that it will eventually have the power and skills to do any kind of job that a human can do should be embraced. I actually think that AI will make the world a much better place. It will vastly reduce or even eliminate global poverty and will also negate the need for people to work. By this point I don’t even think that we will have an economic model based on Capitalism any more. In an earlier article I wrote back in 2019 entitled, THE TRUE SINGULARITY: A Universe Of Unlimited Abundance And Eternal Harmony, I stated how there would eventually be a “Post-Scarcity” economy of unlimited abundance facilitated by the exponential growth and development of new and emerging technologies like AI, 3D/4D Printing, nanotechnology, etc. Such a “Post-Scarcity” economy of abundance would negate the need for and nullify all the previous economic and ideological models of the past. 

I also believe that the political leaders of the next 15 years, compared with the last 15 years, will be of a much more enlightened breed who have more empathy and more of a human touch. They will be less self-serving and less career driven. They will encourage and support new and emerging technologies whilst making sure that everyone benefits. This culture of greed, Silicon Valley mega riches and extreme wealth inequality that has prevailed for far too long will become a thing of the past within the next 15 years. 

In the last 8 years, we have already had a taste of the discontent that many feel. Of those who feel neglected, marginalised and struggling economically amidst an unprecedented level of wealth inequality vote for more radical leaders. There is a sense that the current system and status quo is just not working any more for increasing swathes of the population. As long as the can of the current system continues to be kicked down the road, the more unrest and distrust there will continue to be. This is why I foresee in the coming years an event similar to the French Revolution. It will be an ugly, violent and potentially dangerous and unstable time, but it will also result in much needed changes that will lead to a better and more stable world. It will also create a society with a completely new set of values and core beliefs. And I would even go as far as saying that we will all be much more enlightened and more caring and altruistic as a society. I very much believe, as unrealistic as it may currently seem, that this is the new kind of world that will exist in the next 15 years and it will be a much better world than this existing one. 

Nicholas Peart

16th January 2024

©All Rights Reserved 

Image: Pexels

REVIEW: Don Van Vliet “Standing On One Hand”

Posted on by Nicholas Peart

This is the moment I’ve been waiting for; the chance to finally see in the flesh the paintings of Don Van Vliet, better known as Captain Beefheart. I’ve been a fan of the music of Captain Beefheart for over 20 years. He was a one off with an incredibly singular vision and a style that was completely his own, without competition. And this is what attracted me to him; I’d never heard anything like him before. 

Through discovering and immersing myself in his music I soon also learnt about his paintings. Quite often when great musicians also produce (or in most cases “dabble in”) paintings, sculptures, etc, their works tend to fall short next to their songs. Bob Dylan is one of the greatest songwriters of all time; a timeless poet and a genius with words. Yet when I look at his drawings, I don’t detect anything special. They are far from bad drawings, but they don’t match his power as a towering wordsmith. David Bowie is another example. Even though he had an impressive and deep understanding of art, his paintings pale next to his magnificent body of music. 

What makes the Captain different is that his paintings are on par if not even better than his magical and highly distinct music. They are not divorced or different from his music. All together, along with his own unique and idiosyncratic being, they are a total work of art. Projecting the same rhythms, grooves and off beat time signatures that I hear on Trout Mask Replica. And this is why I love his paintings. When he stopped making music in the early 1980s, he devoted himself fully to painting. 

Looking at the paintings on display at the Michael Werner gallery in London, created in the 1980s and 1990s, one can conclude that his own vision, code and core never deserted him. When I focus and meditate on his paintings, I unearth so much. I see animal, human and other organism spirits of the infinite and asymmetric world. I also see a multitude of symbols each with their own irregular shapes and DNA. In the painting, Crow Dance A Panther, I see a celestial dog-like creature in a state of drifting metamorphosis with a raven head and an object in the form of a chair forming from its mouth in a weightless state of perpetual cosmic motion. The paint marks and elements don’t seem random. They each all have their own connection and balance in the composition. Paint is often applied thickly. The heavy white impasto marks have a physicality resembling frozen smoke and other forms of invisible moving matter; as if the paintings are always moving beyond their earthly boundaries.

The large painting, China Pig, has elements in it that remind me of some of the earliest cave art paintings found in South Africa and Australia. At the bottom of the painting painted in yellow is an extraterrestrial-like supernatural animal creation, a lively golden eagle bunny type of creature, riding on top of what appears to resemble a warthog or the Captain’s china pig! Elsewhere in the painting are pools of energy in non-stop flux; semi-buried faces, the dead, the living, the living dead, dynamic bodies and spirits, a myriad of colliding landslide landscapes; remnants of our dreams and nightmares without any filters. The golden eagle bunny keeps riding on its china pig through all these forever changes. 

The adjacent Feather Times a Feather painting appears to be on the same wavelength as China Pig and the next destination. The horizon and world of that painting is where the golden eagle bunny on its china pig feel like they should be heading towards. It’s the next stop in their no-return voyage. Feather Times a Feather is the Captain’s very own Garden Of Earthly Delights; hues of pink, yellow, orange, blue and green all representing symbols, cosmic fragments and morphing spirits, dominate the vacuum above and appear, perhaps deceptively, relatively gentle and calm. Below this area in the painting things are more unsettling. A distressed face bent below an ominous black crow symbol. An awakening crimson warrior to the right shows no mercy. In the far bottom left corner is a stagnant but ecstatically demented grey evil space cadet scarecrow figure – like a highly toxic deep sea creature. This painting is a veritable tripped out minefield. Pleasure and decay traps mingle hand in hand. 

In the painting Red Cloud Monkey, there are three towering mountain-like beings cunningly statuesque, but not too dissimilar to active volcanoes, they can erupt without warning. Meanwhile a frantic red figure features like a nimble devil, restless and insecure, in the bottom of the painting. In the night next to the volcanic trio, the figure is doomed. The Captain channels and strengthens this energy by his gift of creating bold hunks of space and discordant brush strokes. The black, yellow and green empty quarters are applied to the canvas furiously. Their primitive physicality is palpable. 

The other paintings that draw me in are the ones that have an afterlife kind of eternal calm; albeit a collapsing and destructive calm. I see this is the paintings, The Drazy Hoops #2, and Luxury Rack.  In the former painting, I see an extinct and dead frozen-in-amber type of creature with prominent and luminous yellow and purple gases forming from it’s behind well after it’s long gone. The yellow paint is applied generously to the canvas making it appear like it’s in constant motion. One can almost smell and taste these noxious gases. In Luxury Rack there is a beaming plankton type of silence. The Captain knows where to find the gold in the trenches of the deepest oceans. He doesn’t need a submarine. There’s no need for him to embark on some intrepid physical adventure or to travel to Mars. For it’s all present and well illuminated in his limitless and fertile mind. 

By Nicholas Peart

11th January 2024

(c)All Rights Reserved

Image: Don Van Vliet Feather Times A Feather 1987

Don Van Vliet: Standing On One Hand is on display at the Michael Werner Gallery London until 17th February 2024.

Searching For Honesty In Financial Markets And Why Short Sellers Should Not Be Demonised

Posted on by Nicholas Peart

Today, I think there are too many people dabbling in the stock market and investing in highly speculative assets. Despite the cratering in stock prices in 2022 and the very brief crash in 2020, we are still in one of the longest bull markets of all time that began in 2009.

But whether we are in a bull market or not, I am still blown away by the valuations of many stocks and other assets and the sheer amount of dumb money still in the market. Over three years ago, the well known short seller Jim Chanos commented that, ‘We are in the golden age of fraud’. In an interview with the Financial Times from July 2020, Chanos commented on the market environment at the time as; “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”. He further expands on this by getting to the root of how such an environment was created;

‘ a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian “post-truth in politics, where my facts are your fake news”; and Silicon Valley’s “fake it until you make it” culture, which is compounded by Fomo — the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was“. ‘

In this paragraph Chanos nails beautifully the problem not just with the present state of financial markets and the industry as a whole, but with the current zeitgeist. The post truth world of ‘my facts are your fake news’ where real truth and wisdom has been forsaken is a real problem and dangerous. The Silicon Valley “fake it until you make it” culture has been exacerbated by the huge tail wind of a decade plus of zero percent interest rates and mountains of cheap and easy money. Such a background of very loose monetary policy has enabled many startups and companies with shoddy fundamentals that should have gone bust a long time ago to remain a going concern and in some cases even thrive with massively bloated market valuations. During this time wild levels of risk taking and speculation are rampant resulting in highly distorted and inefficient markets. Huge bubbles in highly dubious securities emerge with many dishonest charlatans with large followings on social media pumping these garbage entities to naive and unsuspecting investors. When the bubble eventually bursts it is those same impressionable investors who are left holding the bag. In the worst cases, some bet with money they didn’t have and couldn’t afford to lose. These incidents are especially common in the cryptocurrencies space and also for so called meme stocks – stocks made popular by a large following on social media. Often these stocks have market valuations completely divorced from their true intrinsic value. In some cases these companies should be insolvent, but are kept going by a zealous cult like following of investors happy to pay any price without questioning the fundamentals and integrity of the companies.

Short sellers often get a bad rep. In some cases this is justified. There are indeed short sellers who are nefarious and have a vulture-like mindset. However, there are those like Jim Chanos who play a very crucial role in the markets by searching for companies that are committing fraud and lying to investors. And they are often onto those companies at a very early stage way before the financial regulators get involved. As Chanos comically states, these regulators ‘will tell you after the company has collapsed what the problem was‘.

Chanos is famous for his large bet against Enron. At the time it was a darling stock and very popular with investors, but Chanos after having undertaken a deep fundamental analysis on the stock realised that the company was cooking its books and that at some point this would land the company in serious trouble. Whilst numerous financial commentators would be speaking glowingly and talking up the stock, Chanos, however, knew that something was rotten in the state of Denmark. The financial regulators were asleep at the wheel only acting after the fact.

Today we are still living in the golden age of fraud. Despite the 2022 wobble in equity prices and inflation spikes and rapid increases in interest rates, there are still too many investors playing foolish games who haven’t learnt their lesson. There are still zombie companies and entities trading on eye watering market valuations and worse, companies still trading at huge valuations that are committing fraud and the financial regulators continue to do next to nothing. This is precisely why short sellers like Jim Chanos should not be vilified. In fact, quite the opposite. They should be revered and respected. They search for honesty in the markets, pointing out the bad actors and the companies engaging in crooked behaviour. And I have no problem when they make money. Even when they make a lot of money. It is much easier to go long on a stock than it is to go short. Short selling is a difficult and highly risky venture. Even if you have spotted a company engaging in fraud and other egregious activity, the difficulty is getting the timing right when betting against it. The market valuation of the company may continue to remain irrationally high for a very long time creating huge losses for those that chose to bet against it. Short selling can be a very lonely path and often a financially ruinous one too.

Nicholas Peart

January 3rd 2024

(c)All Rights Reserved

LINKS:

Financial Time article: Jim Chanos: ‘We are in the golden age of fraud’ July 24th 2020 (https://www.ft.com/content/ccb46309-bba4-4fb7-b3fa-ecb17ea0e9cf)

Image: https://pixabay.com/photos/reading-glasses-book-read-4330761/

WHEN GOLD BEGINS TO SHINE

Posted on by Nicholas Peart

So much has been written about gold. Over the last decade it has been a frustrating asset to own. My own view on gold is that it is currently an unfashionable and misunderstood commodity. I also find that a lot of what is written about gold to be cliched and the truth is more nuanced.

Many say that gold is a hedge against inflation, but this is far too simplistic. It is also not enough to say that gold is a hedge against the US dollar. Although, generally speaking I find the latter point to have more truth in it than the former.

I also find it interesting when people compare gold with prominent cryptocurrencies like Bitcoin; the main argument being that Bitcoin has the same scarcity properties as gold. In the case of Bitcoin, it has a supply cap of 21 million coins – thus it can act as a store of value; a kind of ‘digital gold’.

I think this digital gold comparison is flawed. Although gold can be volatile, it has nowhere near the same levels of volatility as Bitcoin. During the last decade Bitcoin as an asset has performed extremely well. If you had purchased some Bitcoin in 2012, today you would still be sitting on an eye watering return. The period from around 2009 to 2021 has seen assets, notably many technology and growth stocks, increase exponentially in value. It is also no coincidence that during this same period interest rates have been at mostly rock bottom levels. This period of loose monetary policy and cheap and easy money has resulted in a dazzling stock market boom in the USA. If you look at the chart of the NASDAQ index, which is full of tech and growth stocks, you will see that in 2009 it was trading at less than 1500 points. Towards the end of 2021 it had reached an all time high in excess of 16000 points. That is some unbelievable asset inflation in a period of just over a decade.

Although many staunch Bitcoin supporters will deny this, it also seems to do very well when interest rates are low and money is cheap and abundant. Rather than being a safe haven against financial meltdowns, it behaves like a speculative technology stock that goes to the moon with interest rates at 0%. A vast proportion of Bitcoin supporters are young people whose only real experience of the financial markets is the landscape over the last 12-13 years since the Financial Crisis. They have never experienced high interest rates or any long lasting bear market. I think this point is very significant; many Bitcoin holders have never experienced a prolonged bear market and high interest rates. They have never been in the eye of a catastrophic financial meltdown.

Although the returns of gold and other precious metals like silver have been poor compared to Bitcoin and many high profile growth stocks over the last decade, it should also come as no surprise. When markets are performing well and there is abundant liquidity in the financial system, gold is not one of the primary assets that tops investors lists of assets to invest in. It is more enticing to invest in speculative high risk assets that are going gangbusters. When Bitcoin and some flavour of the month tech stocks are on a tear in this loose financial environment, positive feedback loops are created as more and more investors pile in. Investors see the returns being made on these assets or they see some of their friends making a fortune and they want in too – thus the FOMO (Fear Of Missing Out) bug enfolds them.

So when does gold shine? Gold will begin to shine when feelings of total despair and hopelessness are at it’s zenith. Since the beginning of this year, the more speculative areas of the market that have been performing very well for many years until 2021 have now been experiencing dramatic falls in their market values. Inflation has roared towards double digits in the US, the UK and the Eurozone and central banks have had to increase interest rates. Yet, interest rates are still nowhere near current inflation rates. If central banks were to dramatically hike interest rates to match inflation rates I believe this would cause a financial meltdown like no other – it would far eclipse the carnage of the Great Financial Crisis of 2008-9. Although markets have fallen, they are far from this stage. There is still lots of speculation going on and inexperienced investors still playing foolish games. Inflation may have reached 40 year highs, but because interest rates are still low lots of speculation continues. The price of gold has actually been drifting downwards over the last few months and this has resulted in some commentators stating that it is a poor hedge against inflation. Yet, these commentators are missing the point. Although inflation is at high levels, there is still a lot of liquidity in the markets. There is no real urgent reason to hold gold. However, there may just come a time when interest rates increase to unforeseen levels and liquidity begins to totally dry up as money becomes more expensive. Investors panic and thus begins an amplification of negative feedback loops and FUD (Fear, Uncertainty and Doubt) kicks in. It is the moment when investors swear that they will never invest in the stock market again and that they will never ever again touch cryptocurrencies that I believe gold and by extension other precious metals like silver and platinum etc will begin to perform very well.

By Nicholas Peart

24th September 2022

(c)All Rights Reserved

Could Now Be A Good Time To Buy Twitter Stock?

Posted on by Nicholas Peart
The Twitter bird logo.

Disclaimer: The following article is not investment advice. It simply only states my opinions.

Twitter is an interesting company to observe. For a long time I have had very mixed feelings about this social media platform. It is very easy to write it off and there are many reasons to it; chiefly one could argue that it is a toxic platform and has a negative effect on one’s mental health. From an investment point of view, there are additional reasons to be cautious. The company currently doesn’t have strong fundamentals and is not a cash generating machine in the same way that say Meta Platforms or Alphabet are. Even with its current share price more than 50% down from it’s $80+ high reached in February last year, it is a highly speculative stock.

However, when I look at Twitter objectively, I do think it’s model as a social media company, specifically how it’s designed, is unique and I would probably argue that Twitter is one of the most effective and powerful social media platforms to use if you want to get your voice or message heard instantly and to make some kind of noise. Traditional newspapers and journals will always have their place and there will always be a demand for quality content, yet for writers and journalists, Twitter is a much more powerful platform to get one’s message across than solely via a newspaper or blog. Twitter is the ultimate vehicle for someone not only to have their voice heard but to have it amplified in an exponential way.

The other thing that is interesting about Twitter is that almost every public figure uses it. Most people that matter and have something important to say are on it. Almost every person in government has a Twitter account. Almost every writer and journalist also has a Twitter account. The bottom line is that nearly every person who is outspoken is on this platform. For me, this is a very important sign and it reveals to me how powerful and disruptive this particular platform is.

Often I will value a company on its fundamentals in order to see what the company’s margin of safety is. Valuing something like Twitter is much more of an art. It requires truly understanding the platform, specifically it’s power and how it will develop as the internet continues to evolve. The fact that so many public figures, businesses and entities use the platform tells me that this platform clearly provides a lot of value and has very strong network effects.

Meta Platforms, which comprises of Facebook, Instagram and WhatsApp, currently has a market cap of just under a trillion dollars. Alphabet, the parent company for Google and YouTube, has a market cap of nearly $1.8tn. Twitter, on the other hand, has a market cap of just under $30bn. Some people may say that for a company that lacks the cashflow generation of Meta or Alphabet, a $30bn market cap is still very high. And they are not wrong. However, what if Twitter were really able to harness it’s power and become a huge cash flow machine? It is often said that it is important that a company still has its founder/s on board to steer the ship and provide a unique vision of how the company should be developing and operating. However, in the case of Twitter it is not unreasonable to say that it’s founder Jack Dorsey may not be the right person to really take the company to even greater heights. He was instrumental in the beginning phases of the company’s growth. Twitter still needs someone who is visionary and completely understands the company to take it forward, yet it also needs a mature, resilient and pragmatic leader and one who is able to realise and, more importantly, monetise all the company’s untapped potential.

Recently, Dorsey stepped down as CEO of Twitter. He was replaced by Parag Agrawal, who has worked at Twitter as software engineer since 2011. In 2017, he became the chief technology officer of the company before replacing Dorsey as the CEO in November last year. I could be wrong, but I sense that Agrawal will have a lot of success in cleaning up the image of the company and improving its credibility by cracking down hard on fake accounts and accounts where individuals and entities spread disinformation. I also think Agrawal will be serious in establishing ways to further monetise the platform and increase its user growth which has been sluggish.

Anyone who has studied the market performance of Twitter stock since it first IPO’d back in 2013 will know that the stock hasn’t really punched above its weight. Yet I think even if user growth continues to be a challenge, at least in the short run, I think the company has the potential to vastly increase its revenue. In Q3 21, the company generated $1.28bn in total revenue. I think there is the potential for the company to at least quadruple it’s total revenues from that point whilst still maintaining a healthy sized gross profit margin and keeping other costs like R&D, sales and marketing, and administrative costs at a reasonable level. If the company successfully pulls all this off, I would not be surprised if it grew into a market cap quite a few multiples from its current market cap of just under $30bn. I think in the next five to eight years, it is entirely feasible for the company to command a valuation of at least $150-200bn provided it makes big changes and succeeds.

By Nicholas Peart

(c)All Rights Reserved

1st February 2022

Is One Of The Longest Bull Markets In History About To End?

Posted on by Nicholas Peart

The month of January has been a rather volatile one for financial markets. In particular, in the USA, where the markets over there are heavy with technology companies with enormous market valuations; a few of these companies, including Apple, Microsoft, Amazon and Alphabet, currently have market valuations in the trillions of dollars. Already back in 2019, when the NASDAQ index, which includes those megacap tech names, was hovering around 8000 points I wrote an article where I expressed my concerns that I thought the index was looking very frothy. In 2009, toward the end of the Financial Crisis, the NASDAQ was below 1500 points. In a decade it had increased over five times in value. At the height of the 1999-2000 dotcom bubble, the NASDAQ hit an at the time all-time high of over 5000 points. It would be another fifteen years before the NASDAQ would breach 5000 points again.

Back in 2019, some analysts expressed concerns about the heady valuation of several US tech stocks and that with the NASDAQ trading at over 8000 points, it was ripe for a correction. Towards the end of February the following year, those analysts got their wish when global markets began to dramatically correct in response to the outbreak of the COVID-19 pandemic. Investors began to panic and growth/tech heavy indices like the NASDAQ began to drop in value. In January of 2020, the NASDAQ had reach an at the time all time high of over 9000 points. By March of that year, it was trading in the 6000s.

Although, those who had been predicting a crash the previous year may have felt vindicated for a brief moment, very few could have foreseen the response by the Federal Reserve (Fed) and how it would promptly intervene with a dramatic increase in the US money supply and an enormous expansion of the Fed’s balance sheet. As a consequence, the NASDAQ duly rebounded from March 2020 and would embark on a mind-blowing run lasting many months. By November 2021, the NASDAQ hit a fresh all time high of over 16,000 points; more than doubling from it’s mid March 2020 level and almost doubling from it’s 8000+ level from back in 2019 when I wrote my article expressing concerns about it’s then heady valuation.

When the pandemic began to sink in and the Fed reacted via it’s huge financial stimulus programme essentially flooding the US economy with lots of new money, investors began to favour a certain group of stocks that became all the rage as they thought would thrive in this new pandemic environment. Governments around the world imposed multi-month long lockdowns and for many people at the time, there was a feeling that this pandemic would never end. Thus investors turned to technology stocks; stocks investors concluded would benefit the most from a stay-at-home environment. These stocks, already commanding rich valuations before the start of the pandemic, began to get even more crazy. At the same time, boring old school blue chip value stocks began to sell off even more. The travel and hospitality sector suffered greatly by global lockdowns and travel restrictions. The oil and gas industry too had a tough time with the price of a barrel of crude oil briefly entering negative territory. Sentiment in both those two sectors was completely shot to pieces, whilst the technology sector was in full on mania mode. But it wasn’t just the big tech names like Microsoft, Apple and Alphabet that were doing well, a new crop of technology stocks that became darlings during the pandemic, such as Zoom and Peloton, went on an epic tear.

As 2020 turned to 2021, this madness showed no signs of abating. In fact it all reached a brand new level of craziness. With many in the US receiving their COVID-19 financial stimulus cheques, which were originally intended to alleviate the financial burdens of those affected by the pandemic, a large portion of those cheques were used for speculation in the markets. A handful of stocks began to command valuations that just simply made no sense. One example was the struggling video game retailer, Gamestop. At the time it was one of the most heavily shorted stocks in the country. Until a group of investors from the social media site Reddit began to drive up the price of the stock massively with the intention of sticking it to the hedge funds who had large short positions on the stock. In the month of January 2021, Gamestop stock rocketed in value from just under $20 a share to over $300 before crashing to around $40 the following month. Many naïve and inexperienced investors got suckered into this micro rally and got badly burnt on the way down. It didn’t matter that this was fundamentally a worthless stock with no credibility.

In addition to those shenanigans, the beginning of 2021 saw another heady bull market emerging in the cryptocurrencies space with the price of Bitcoin entering the new year on a new high. But the increase in the price of Bitcoin during this period paled in comparison to other even more speculative areas of the crypto space. One of these was the booming popularity of NFTs or Non Fungible Tokens. These tokens are digital files that can be bought and sold with certain cryptocurrencies. During the first few months of 2021 this area of the market reached a complete fever pitch with a some individual NFTs even fetching millions of dollars. An NFT by an artist called Beeple fetched over $60m – an eyewatering amount of money; the kind of money that would exceed even the kind of money fetched for some of the best known and highly prized paintings by the most famous old masters of the ages.

Yet by the end of the year, cracks were already starting to appear. The last 13 years since the Financial Crisis has been dominated by a period of extremely loose monetary policy. It is no surprise that such a long period of rock bottom interest rates has led to one of the longest and most spectacular bull markets in history. And because of this it feels artificial. Wages have not gone up anywhere near the same level during this time period. In fact they have been rather stagnant. This has resulted in the USA experiencing a level of inequality not last seen since the 1920s. Or more specifically, the end of the 1920s. The so called Roaring Twenties ended with an epic stock market crash leading to a brutal multi-year long Depression. The Dow Jones Industrial Average (DJIA) hit a high of over 6000 points in August 1929, at the apex of the 1920s stock market bubble. In December 1920, the DJIA was just over 1000 points. When the this near decade long bubble burst during the last few months of 1929, the DJIA continued to crumble over the next few years during the Depression reaching just 910 points in May 1932. This was less than the low breached by the DJIA in 1920. In a little under a few years, all the gains the DJIA had accumulated had been more than wiped out. The next time the DJIA went over 6000 points was in 1959; a staggering thirty years since that level was last reached.

Many investors and analysts like to compare the current stock market boom, especially over the last few years, with the dotcom boom of the late 1990s. Whilst there are many similarities, namely with all the exuberant valuations of many tech stocks with poor fundamentals, I find the stock market boom of the Roaring Twenties a better comparison. This is especially true when measuring inequality in the USA over a 100-120 period. The incredibly loose monetary policy over the last 13 years had made this current bubble not only one of the largest in financial history, but also one of the most dangerous. Total US government debt before the 2008 Financial Crisis was already very high. However, between Q1 2008 and Q3 2021, total US government debt has near trippled from $9.4tn to $28.4tn. This is an astonishing increase for such a comparatively brief time period in US history.

During the last year, inflation has began to rear its ugly head. Some have been taken by surprise by this inflation, but I am anything but surprised. This was a long time coming. It is amazing that it has taken so long to appear. Of course, the super lax monetary policy of the last 13 years has seen incredible asset price inflation, but not so much consumer price inflation. But this all began to change last year when the US rate of inflation hit 6.8%, it’s highest level since 1982. The Federal Reserve now finds itself in a difficult position as even just a very modest raise in interest rates can have reverberating effects on the US stock market and economy as a whole. Over a decade of rock bottom interests in the US has, as already stated, almost tripled the total amount of US government debt and created a stock market bubble of absolutely epic proportions. In November 2008, the NASDAQ was trading below 1500 points. In November 2021, exactly 13 years later, the NASDAQ traded above 16,000 points. This is a more than ten-fold increase of absolutely dazzling asset price inflation. So much is now at stake, yet this bull market has never looked more fragile.

As of now, US interest rates still stand at zero. However, the last month has seen the NASDAQ fall quite sharply in value. By the end of last week, the NASDAQ was trading at 13770 points. Whilst this is a not inconsiderable drop from the 16,000 points plus high of last November, it is still more than double the low it reached during the brief stock market correction of February-April 2020. Moreover, it is still more than 9 times the value that it was in November 2008. What has been interesting is that the NASDAQ falls of the last month occurred before any interest rate hikes. The Fed intends to raise interest rates in tiny increments. However, the real question here is how much of a problem will inflation continue to be? This is where the Fed under Jerome Powell has really been asleep at the wheel completely underestimating the long term consequences of a decade plus of uber low interest rates, quantitative easing and cheap and easy money. Some economists make forecasts as if their projections will come into fruition with complete certainty. Yet the truth is no one can predict the future, regardless of one’s credentials and brain power. Not so long ago, the prevailing narrative was that inflation would be ‘transitory’. I didn’t and still today don’t agree with this narrative. I also don’t believe that the sole root of this inflation is the supply side shocks induced by COVID-19. As I have already mentioned, I am simply just surprised that, after over a decade of very loose monetary policy, it has taken so long to rear it’s ugly head.

What can really cause the current bubble to unwind much more is precisely if inflation continues to be a much longer term headache. The Fed may want to only slowly increase rates by small amounts, but what happens if inflation were to get worse and go into double digits? If inflation were to get out of control, I suspect that the Fed would have to increase interest rates by much more than it originally intended. This would bring an abrupt end to the cheap money era that has prevailed for so long. The biggest winners of this era have been growth stocks – particularly those in the technology sector. Invariably, companies with weak fundamentals would be trading on gargantuan market valuations. These companies would not be making any money and would be burning through cash. Yet often investors would be attracted to them by the story they projected rather than doing a deep dive into their financial statements. The cheap money era has been particularly favourable for startup companies not even publicly listed yet. It wouldn’t matter whether or not these companies were making any money. With so much cheap money sloshing about Venture Capitalist funds would throw ever more money towards them. In such an environment valuations do not seem to matter. And this is why I find this current rise in inflation very interesting as there is every chance that it will force the Fed to raise interest rates by much more than it was expecting thus bringing an end to this party. All of a sudden valuations will actually start to matter and all those companies that had heady valuations without ever making a profit will be in real trouble.

Already some of the darling stocks of the pandemic have had drawdowns of more than 50%. The video teleconferencing platform Zoom, which became increasingly popular as the pandemic unfolded, saw it’s stock motor from $76 at the beginning of January 2020 to a peak of over $550 in November of that year. Last week the stock traded below $140. The other darling of the pandemic, the exercise equipment and media company Peloton, saw it’s stock increase from around $30 at the very start of 2020 to over $160 just before the end of that year. Today it currently trades at $25 more than wiping out it’s 2020 gains.

The larger and more robust tech titans like Apple, Microsoft and Amazon have also experienced drops during the last month but they have overall still managed to hold on to their mega valuations. Apple recently hit a market cap of $3tn making it the most valuable company by market cap on the planet. At the beginning of the year it traded at over $180. Today, it’s trading at $170 with a market cap of nearly $2.8tn. It was only in 2018, when Apple became the first company to reach a $1tn market cap. In just a few years it has trebled its market cap. This is simply amazing growth for such a juggernaut of a company. Yet Apple is not cut from the same cloth of the more speculative tech stocks. Where Apple substantially differs is that it is a colossal cash generating machine of a company. Apple has a very rock solid moat and phenomenal pricing power. Even with at a near $2.8tn market cap, it currently trades on a not unreasonable PE of 28. Apple and the other tech stocks with solid cashflows that don’t need to raise money, will likely fare much better, despite their rich market caps, than the more fundamentally shaky tech stocks that still don’t generate adequate cash flows. However, Apple is not completely immune from any future shocks. I suspect that a continued rise in inflation will not only put a bigger strain on the finances of consumers, it will also further inflate the prices of important raw materials that are integral to Apple products. There could also be unforeseen future problems in China that severely affect the manufacturing capacity of Apple products.

Over the last 13 years whenever there has been a sharp correction in US equity markets it wouldn’t last for very long. The Fed would promptly intervene by pumping liquidity and thus causing the markets to sharply recover all it’s lost gains. The bull market would continue to just hit new highs. It is because of this that the USA still hasn’t experienced a prolonged bear market since the last Financial Crisis. For some time investors have simply taken it for granted that the Fed would just simply come to the rescue whenever there was any major market turbulence and stocks would duly rebound. But what if this time, the Fed finds that it has limited options to calm a plunging stock market? Higher than predicted inflation will almost certainly force the Fed to substantially increase interest rates. Money at much higher rates will cease to be cheap and the market, like a raging drug addict, will find that it is unable to get it’s usual fix of central bank stimulus. I suspect this will all have the affect of leading to markets being volatile and plunging to bigger lows over a much larger time frame leading to a bear market of many months or even years.

Don’t think the tech heavy US markets could experience a painful multi-year long bear market? Well, think again. It took almost 30 years for the Dow Jones Industrial Average to reach it’s all time high reached at the height of the Roaring Twenties stock market boom. When the dotcom bubble of the late 1990s burst in 2000, it took the NASDAQ 15 years to reach it’s all time high reached at the height of that bubble. Some stock market indices never again reach their all time high. Japan in the 1980s experienced an absolutely wild stock market and real estate boom. At the very end of that decade, the Nikkei 225, was trading at an all time high at over 38,000 points. Over the next year in 1990, the Nikkei 225 almost halved in value and over the next several years drifted downwards eventually bottoming below 8,000 points in 2003. The Nikkei has since recovered and as of today trades at around 27,000 points. Yet this is still short of it’s all time high it reached more than thirty years ago.

By Nicholas Peart

January 31st 2022

(c)All Rights Reserved

LINKS:

https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

https://fred.stlouisfed.org/series/GFDEBTN/

https://fred.stlouisfed.org/series/M2SL

US Stock Markets Are Looking Frothy

https://www.theguardian.com/business/2021/dec/10/us-inflation-rate-rise-2021-highest-increase-since-1982

Image: nck_gsl

The Future Could Be Very Bright For Song Rights

Posted on by Nicholas Peart

Some big names in the music world in the last few years have sold the rights to their songs for mega bucks. In 2020, Bob Dylan sold his back catalogue to Universal Music Publishing Group for a reported $400m. Then more recently last month, Bruce Springsteen sold the rights to his songs to Sony for half a billion dollars. Other names like Neil Young and the estate of David Bowie have also sold their song rights or at least a percentage of their rights for big money.

I’ve thought a lot about all this. On one hand, these may be shrewd moves especially with that kind of money offered. Yet alternatively, one could argue that song rights/publishing may over time end up being an increasingly desirable asset class. The last decade has been very rough on artists and the music industry in general. The growth of the internet and streaming platforms has had a huge dent on physical record sales. Even though there has been a revival in vinyl sales it is a small market and gone are the days one could make a comfortable living on CD sales or any physical record sales alone. To exacerbate this, the disruption created by COVID-19 over the last couple of years, has dealt a huge blow to arguably the most crucial source of income for music artists, which is playing live. All in all, the last few years have been pretty rough for music artists.

Yet I believe that the future is bright for music artists and the music world in general. I think the last decade was the nadir point, but I am optimistic that things will get better. And this all comes back to my point about the value of song rights. When the music industry was really growing in the 70s, 80s and 90s, record sales made up a huge part of the total revenue of this industry. So much so, that it would not be uncommon for the record label of a major artist (or sometimes even a new artist) to spend hundreds of thousands of dollars on a new album.

When upstart streaming sites like Napster started to appear and be increasingly adopted in the late 90s with the then recent rise of the internet, it was already a sign that in the future consumers would turn increasingly more to digitally downloading and streaming their music over buying physical records. By the early 2010s, it was clear that this trend had already had a huge effect on physical record sales.

Yet what the internet may have taken away, it may also give back generously. I believe that the full potential of song rights as a serious source of money generation has only barely been scraped. There will be so many new ways for songs via the internet to generate money. It is well known that streaming platforms such as Spotify pay artists very little every time a song of theirs’ is played on their site. And there may eventually be growing pressures or new laws passed to ensure that these platforms pay artists more fairly. However, music streaming sites will just be one way out of many other new ways for artists to make money from their songs.

Whenever a song is played on the radio or in a film/TV programme or advert, the songwriter receives royalties. With the growth of film and TV series streaming sites like Netflix and Amazon Prime Video, there are new opportunities for songs to be licensed to shows and films on those platforms.

I think for new and up and coming music artists, sites with oceans of video content by all kinds of people and entities (known and unknown) like Alphabet owned YouTube offer lots of opportunities for songwriters to earn additional royalties on their songs when content creators on those platforms use their songs in their videos. In the case of YouTube, some of the statistics are off the charts; 720,000 hours of content is uploaded to YouTube daily of which 500 hours of content is uploaded every minute. This simply phenomenal and abundant growth and with that immense opportunities for songwriters to earn income from their songs if their are used in any of these videos.

It is also important to see where the internet may be going and how it will develop in the future. Currently, there is a lot of hype over something called the ‘Metaverse’. And I can see why. To put it simply, this is a kind of ‘Virtual Reality’ stage of the internet. We already spend a large portion of our lives on the internet, yet it is a 2D experience – via our smartphones and laptops. In the so called ‘Metaverse’ it is a more immersive 3D experience. Although there is a lot of noise about the Metaverse and it is generally impossible to make predictions, it is possible to spot trends and I think the next stage of the internet will be a much more immersive one were people will be living in more virtual worlds via Augmented Reality (AR) and Virtual Reality (VR) technologies. I think this could grow exponentially, especially once it experiences mass adoption.

This will again create lots of new opportunities for songwriters as well as music artists/performers in general. In the case of the latter, I can see a huge growth in revenues for so called ‘hologram’ concerts where the artists don’t have to be present but the viewers receive a fully realistic and immersive live music experience where they can even interact with the artists and others in the virtual audience. But I digress. To get back to the point of song rights, I see lots of new income streams from songs to be made in these new worlds every time a song is used. Plus there will be lots of new opportunities and demand for songs to be licensed.

This is why companies like Universal, Sony and Warner Brothers have been paying huge sums of money for the catalogues of these blue chip artists as well as lesser known artists too. They are playing a long term game. Even though the sums they paid may seem like a lot of money, when these new digital platforms and worlds develop and grow exponentially, these catalogues could be worth even more money. So much so that it may end up being much more expensive for those artists to buy back the rights to all those songs they sold in the future.

By Nicholas Peart

27th January 2022

(c)All Rights Reserved

Image: NikolayFrolochkin 

UNCUT GEMS: Somebody Shoot The Dog

Posted on by Nicholas Peart

Uncut Gems is a high-octane anxiety ridden trip of a film. Yet, whenever my body tells me to turn off the film, I keep feeling compelled to watch it all the way through until by the time the film is over, I need the peace and tranquillity of a white room with no external objects or fast moving stimuli. A ten day Vipassana meditation course may be needed!

The main protagonist of the film, a Jewish New Yorker jeweller named Howard Ratner played by Adam Sandler, keeps unnecessarily falling into tricky and at times dangerous situations. On one hand, I want to sympathise with him and his misfortune, but on the other he ultimately creates his own problems. It’s like he wants to spend his life swimming in quicksand when it would be less painful just to take the smooth plain vanilla road.

What’s more he is a father with kids to support. If he were single, hell, get into any kind of hot mess you want. But if you have a family, that is beyond selfish. Ratner’s mind is like a fast flowing river. There are seldom any moments of peace in his frantic dome. It is a gamblers mind he possesses and the thrill of it all seems to be his raison d’etre. A pretty pathetic one. He’s like the quintessential stock market speculator who never does any thorough due diligence on a stock and gets excited simply by a hot tip or any kind of hype. He will be the first to catch the FOMO (fear of missing out) fever.

Even when he wins big, like towards the end of the film, there is no grace in his behaviour. His gamblers’ mind simply glows more red hot. And if his life weren’t abruptly cut short, you can bet your bottom dollar he would keep gambling with whatever money he has left until he’s back to a no money situation or worse, further deep in debt.

People close to him find him draining. Especially his long suffering wife who bears the bulk of his chaos. One night she tells him to his face; ‘I think you are the most annoying person I have ever met’. And she’s right. He’s an exhausting and draining motherfucker. An impulsive, low grade hustler bereft of wisdom. I think any woman in a relationship long enough with Howard would get so beaten down to the point where a boring but dependable relationship devoid of even a modicum of drama would seem very attractive.

As ghastly and shady as the people pursuing him may be, they ultimately do him a favour by gunning him down. Throughout the film he is a hazard to himself and those around him. He’s like some insufferable stray dog constantly barking. A broken record. In the end someone somewhere was bound to lose patience and say, ‘Somebody shoot the dog’.

By Nicholas Peart

(c)All Rights Reserved

3rd December 2021

Why Going For That Big Short May Not Be So Smart

Posted on by Nicholas Peart

The economist John Maynard Keynes said it best with his immortal words about financial markets being able to stay irrational longer than one can stay solvent. I think it was Keynes who said those words yet it doesn’t matter. What matters is how important and powerful those words are. I personally think these are some of the most important words of advice for any investor whether they are a novice or seasoned. One may have complete confidence and conviction in a security they are investing in yet there is always the chance that things don’t go according to plan regardless of how much due diligence they may have done on it.

The Big Short is a well known book by Michael Lewis, which was later made into a successful film. The book is about an investor and fund manager named Michael Burry who places an enormous bet against subprime mortgage bonds. He was one of a small handful of investors who at the time discovered how rotten those bonds were and how they had the power to create an enormous financial crisis, which they eventually did in 2007-8. He placed his bet relatively early in around 2005. At the time, it was seen as a rather contrarian thing to do as the majority of people in the financial world were amazingly unaware of how toxic those bonds were.

Although Burry would eventually be vindicated and handsomely rewarded for his bet, I personally think that the way he went about it wasn’t so smart. To be clear, I am not for one moment knocking his deep research and analysis. In fact, I applaud his diligence and ability to discover serious flaws in that corner of the market whilst everyone else it seemed was asleep at the wheel. Yet I don’t think it was a smart move for the following reasons. Firstly, his move to short those bonds represented a very high percentage of his total fund, which made a lot of investors very nervous. If you are a fund manager or work for a fund, it is quite common for an individual security to not represent more than 10% of the total fund. Anything higher than that percentage has the potential to create a lot more risk and volatility to the fund. What’s more, it was expensive to hold such a large short position as large payments to service it were due every month. It was understandable why those investors and others at his fund were nervous and had very little patience. Secondly, and more importantly, I don’t think Burry ever familiarised himself with Keynes’ quote. Although it took about two years for his bet to come good it could have taken much much longer. It is entirely plausible that had his fund had to wait even longer for his bet to come good there would have been so much pressure on Burry to finally close his short and thus cut the loses the fund was making by holding it.

You see it doesn’t matter whether Burry was fundamentally right in his analysis. He was completely correct. These bonds were a train wreck waiting to happen. But that’s not the point. The point is that timing the markets is very very difficult. Alternatively, Burry could have done the following. He could have still made his bet yet it wouldn’t have represented more than 10% of his total fund for example. That way, there would be less tension and pressure on Burry to close his position in the event that it was going to take so long to come good. What’s more, it would have still made him and the investors in his fund a lot of money when that day would eventually arrive.

This brings me to another well worn adage in the investment world of never having all your eggs in one basket. Although this may be a cliché it is so very true. Although enormous fortunes are made by putting all one’s huevos in one single basket, it is also the fastest way to blow up a portfolio. Burry’s enormous bet came good and he was rewarded, but he could also have been fooled by randomness by some unusual twist of fate.

Over the last few years many investors, including some well known names, lost a lot of money shorting Tesla. Although the rationale behind their decision to short the company was completely understandable, namely that the market capitalisation of the company was not reflective of it’s fundamentals, the share price has nonetheless continued to climb even higher. This right there should be a warning in the perils of going for that ‘big short’. As I already stated, it is ok if such a position is not so great that it poses a serious risk to an entire portfolio. But one can only imagine those legions of investors having a Michael Burry style moment with Elon Musk’s company.

Interestingly, it seems that Burry himself has now thrown his hat in the Tesla Short ring. I may be wrong, but it appears that his fund is betting against Tesla to the tune of 40% of the entire weighting of the fund. I wish him luck. Will his bet come good again? Or will he join the scores of other investors who got badly burnt betting against Elon?

By Nicholas Peart

10th August 2021

(c)All Rights Reserved

Image: thewrap.com