Juggling Dynamite

Behind all the marketing spin about ‘robust growth’ and demand-driven inflation, the truth is this:  workers x productivity drive economic growth and real income.  These trends remain negative since 2019.

“The economy hasn’t added one single job from the 2019 high-water mark. Not one. All the jobs that we have seen gained is recovered jobs that were lost. We’re not yet producing new jobs,” says economist @NelaRichardson on the labor market. pic.twitter.com/VxHaA8IGpj

— Squawk Box (@SquawkCNBC) January 12, 2022

Good macro overview in this segment recorded on Jan 5…

David Rosenberg believes we will transition away from the current burst of inflation to renewed disinflation. In an interview with Alfonso Peccatiello, author of the Macro Compass newsletter, Rosenberg, president at Rosenberg Research & Associates, lays out his thesis for inflation going even lower than 2.5%. Rosenberg draws on historic parallels to World War II on the current state of inflation and points to price bubbles, housing bubbles, asset bubbles, and quantitative easing as the culprits for the problems we are facing today. He believes investors should own treasuries in the 2022 economy. Holding strong to his contrarian view, Peccatiello asks him what would change his mind about his disinflation thesis. Don’t miss this interview where Rosenberg and Peccatiello discuss the inflation/disinflation story, the aging demographic and debt problem, owning treasuries, and how to position your portfolio and the emerging markets that offer growth opportunities.

You can view it here on the Real Vision site.

Word to the wise, ‘defensive’ sectors are those that typically drop less than others during bear markets; but dropping less does not mean they won’t lose money.

As shown below, the total return of stocks versus treasury bonds since 2020 is some three standard deviations above the long-term mean since 1995.  No time for complacency!
Also, see After years of abstraction, things are getting real for markets:

“…the end of extreme abstraction does not augur well for those arriving last to the party.

As the market switches to other less abstract investment themes, the danger is that a vicious spiral develops. Not only would investors pivot to more “real” investments, but scrutiny intensifies on recent crowd favourites revealing that there was even less than meets the eye in many of them.

We saw both behaviours when the dotcom bubble burst and in the aftermath of the 2008 financial crisis. And therein lies a final overlooked aspect to the past year. If 2021 was the peak of yet another bubble in ungrounded possibility, it will represent the third for this generation of investors. It’s hard to imagine many will take being fooled a third time well.

In November, at around $1700 per share, Canada’s e-commerce superstar Shopify (SHOP) was priced at a crazy 40 x the company’s revenue and was officially the most expensive component of the TSX Index.   Since then, a 36% decline has knocked SHOP out of the top spot and back to where it was in October 2020, but its shares remain some 575% higher over the last three years. We’ve seen this story before.

In 2000, Nortel was Canada’s most widely loved and expensive company. In the 2008 cycle, it was Research in Motion (now Blackberry). Both saw a 90% price decline after reaching this milestone. In the case of Shopify, the company may well have better longevity than either of these predecessors. Still, a drop of more than 70% from its cycle peak (taking the shares back to the $500 area) would be within historic norms from valuation highs.

Believe it or not, a similar potential downside looms for Apple, which has also seen its market capitalization (prices x shares) triple since 2018 (as shown below).

Apple has popular products, and its revenue has increased 42% and net income 62% over the last three years. But the tripling in share prices has been chiefly about multiple expansion and the willingness of share buyers to pay more and more. As pointed out by Charlie Bilello, Apple currently trades at 4x sales and 32.4x earnings, up from 2.8x sales and 12.4x profits just three years ago.

The critical takeaway is this:  just because a company has excellent products or dominates a particular sector does not mean that its shares will be a rewarding investment at every price in the cycle. Even if the company is well managed and continues for decades, this is true.

At the height of the 2000 tech bubble, the five most expensive and widely owned stocks were Microsoft, Cisco, Exxon Mobil, GE, and Intel. These comprised 18% of the NASDAQ index market capitalization before tanking with the rest as the basket fell an average of 83% over the following two years. Today, the five most expensive companies (Apple, Microsoft, Amazon, Meta and Tesla) represent an unprecedented 37.8% concentration in the index.

While average indices are off modestly from their 2021 highs, under the surface, 66% of NASDAQ shares have already fallen by 20%, and 40% are down by at least half.

The concentration in financials (32%) and oil companies (13%) has so far propped up Canada’s TSX within a few percent of its November high–this happened at the start of the 2000 and 2008 bear markets too. The resilience won’t last indefinitely. 

The negative start to 2022 is a step in the mean reversion needed–but much more is yet to come.