Dark side of the Boom
Dark side of the Boom
We think the world’s equity markets can rally for all this year and keep running into 2022.
Under pressure
Essentially, over many years central banks have tried to stimulate the world economy. This has largely been unsuccessful. However, its our view that the most recent injections to the US economy, together with the reserves of pent-up capital of US citizens, following the Coronavirus period, will now usher in a strong economic rebound for at least the next 18 months.
Cats in the Hat
I’m reminded of a wonderfully fun children’s book, “The Cat in the Hat comes back”. If you don’t recall it, the tale is all about how to clear up a spot of pink. The cheery and naughty “Cat in the Hat” recruits a whole slew of assistants, in the form of mini cats, alphabetically listing cats A through to V, who, as fate would have it, ensures the pink covers everything. Finally, cat “Z” delivers the solution by releasing “Voom” and clears all the pink away.
Has Jay Powell and Congress, playing the cat, just released cats A to V? Hope springs eternal. Every time the pink problem appears, they’re coming up with more cats from their hat of tricks that spreads the pink even more. Right now, the analogy fails at the last in that, we’re still probably only with cat V and not cat Z and more importantly, we’ve very little idea what Voom could be.
So, the Pink is likely to continue to grow ever larger. The same flooding of debt in its various forms to keep GDP growth going regardless that it’s becoming less effective to generate the same amount of growth as it did even ten years ago. We need cat Z and Voom to arrive soon.
Not to worry…?
Today however, as inflation is at extremely low levels and the Fed shows support for real rates to be higher than market rates for a prolonged period of time, its quite possible the USA is heading into a “goldilocks economy” where most economic indicators are likely to be, not too hot or too cold. The dark
side of all this munificence is that, if we let something run in an uncontrolled way, then who knows how far it can go. To paraphrase Jay Powell from last April, “now’s not the time to worry about the debt!”
Humanity has received a number of heavy blows of late: Covid-19, climate change, the US-China trade dispute and the Brexit debacle to name a few. As a result, “just in time” production solutions are materially affected. Supply push inflation looks ready to take centre stage. We note this weekend’s ‘FT’ (09/01) page 13 article on Auto makers struggling to get hold of microchips along with other stories of delayed delivery times across the globe, as per the US ISM data from last week.
What to do?
Our supply push inflation view means that pricing power and managing capacity is going to get very interesting. Will global companies increasingly integrate their most cherished suppliers or take ownership of prized IP, the way Apple is doing? Contrast that with a prior generation market leader, Vodafone and its intention to sell off its towers business.
Even with oil, it’s the same story in that, the 40$ price tag for oil back in April 2020 sent marginal players out of the industry, tightening supply and forcing the price up. Our “Oilly Christmas” piece back in November highlighted the opportunity for that sector and the views expressed there are still valid. In fact, now that the future economic prospects are clearer the outlook appears better still and the slick black stuff is up 20% since then.
The inevitable problem is where do you find value in a market which has been rising for the past 9 months. The below image is an excerpt from this week’s S&P model and the companies are ranked and weighted across the fundamental, technical and volatility levels to arrive at this table’s results. We find this table a useful starting point to look for investable opportunities.
Interestingly, within this list, there are a number of US homebuilding companies: Lennar, Pulte Homes and Dr Horton. Given Europe has gone into variants of lockdown en masse, is it reasonable to assume the US may do the same? In which case, companies like Clorox, Kimberley Clark, Home Depot and Old Dominion may be appealing, just as they were during the first lockdown.
©Simon Abel
simonabel@gatecapitalgroup.com
The views expressed are those of the author alone.
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