BentinPartner Weekly
Dear Reader,
As 2020 draws to an end, I wish to thank you for your readership and wish you and your loved ones the very best for the new year with lots of success in your investment decisions.
- The first risk going into 2021, is not the fact that we are in a policy induced serial bubble expansion phase but that everybody thinks the same, comforted by an overwhelmingly bullish consensus, confirmed by countless market indicators. The level of cash held in mutual funds and put/call ratios are at 10-year lows (implying that nobody feels the need to hedge risk …or that their hedges have been squeezed); call buying by retail investors has become a frenzy since the summer till today; the IPO market is red-hot (with an average one-day gain this year of 40% and even 100% for the most recent ones); Tesla share price was multiplied by 7 this year, morphing into a mass phenomenon triggered by little else than a non earnings accruing stock spilt and an S&P500 inclusion (which all by itself led to a 70% gain in Tesla’s stock price since November 16th decision to add Tesla in one shot in the S&P500 as of December 21st); Bitcoin’s exponential rise illustrated the rising power of the crowd, relayed by Wall Street and Hedge funds (which as opposed to active equity mutual funds, collectively delivered disappointingly flat results this year, including most famed quantitative funds).
Investors are closing their ears to bad news. Bad news become good news, heralding ever more public fiscal and monetary support while good news remained just that…good news. In the meantime, we are in the eye of the storm of a very serious pandemic with far reaching and long-lasting consequences. The overwhelming sentiment is that next year will be easier and should bring us to the other side of the hill, no later than H2 2021. That being said, when everybody thinks the same, nobody thinks.
Risk #2: Global Debt Explosion
- Another risk derived from the first one is the global debt expansion/explosion. The amount of US debt has been doubling with each passing two-terms serving President over the past 25 years. This had already set US public finances off the rails before the pandemic. In that respect as well, Covid only accelerated an existing trend and with the (relative) remuneration of US Treasuries mostly eroded, foreign financing will become harder to come by, exposing a further devaluation risk of the USD for 2021, in our view.
We wrote extensively about the risk of dollar weakness since June of this year.
More stimulus will get rolling (similarly to the USD900 bn agreed and presented this week end as a down-payment for much more to come), which the Federal Reserve will monetize to a large extent, having already increased its balance sheet from USD4trn to USD7trn in less than one year.
Why should the dollar drop, considering that the world is applying the same universal covid related money printing recipe?
-The US fiscal imbalance is way larger than the European efforts in % terms of GDP while the US trade balance keeps deteriorating.
-International trade may be going down and is increasingly taking place in other currencies than the dollar whilst the purpose of holding a given currency as reserves is very much linked to conducting trade in this specific currency). The emergence of other investable reserve currencies like CNY and EM currencies imbed the additional benefit of cheaper valuation and higher yield.
Risk #3: Tesla & Bitcoins
-Bitcoins and Tesla by the nature and extent of their excess constitute a third and more systemic risk for the market in 2021. We have never shorted or invested in Tesla or Bitcoin. Neither did we invest in them which makes us poor advisers on what to do next.
However, it is our belief that the introduction of Tesla in the S&P500 may not have been a mistake (as it fitted the inclusion criteria) …but will be regretted because, all by itself, the inclusion of a company that only makes money by selling CO2 credits to its competitors, and bears a PE of 1200 to 1500 into the S&P will, as of today, price the S&P500 in terms of PE uncompetitively vs. the rest of the world. At 26 the PE of the S&P was already one of the highest among developed markets because of the influence of a few highly valued Fangs. Adding a stock with a 1.6% weight (or the largest weight ever added to the index) and a PE of 1200 will -all by itself- add 19 points to the PE ratio of the S&P500 (which should go to 35 if things are reflected correctly). This will constitute a deterrent for many investors in terms of valuation of the whole index. To put things in perspective, at its current share price, Tesla is worth USD1mn of market cap by annually sold car, which is another way to say that its valuation is lofty (to say the least).
In our view, Tesla and bitcoins have always been two sides of a same coin. They are the expression of the same reality i.e., that of a massive liquidity push provided by central banks that saved the world in March, but also induced, as perverse side effects, serial bubbles of which bitcoin and tesla are the major illustrations.
Little were we surprised to hear over the week end, that E. Musk was talking about considering to price his company …in bitcoins, going full circle in a mania that will go in history books without any possible comparison. The reality is that E. Musk knows (and has actually said) that Tesla is only worth a fraction of its current price (probably closer to 150), that its recent gains are fully traceable to the stock split and S&P inclusion. For this reason, he might be ready to surf the bitcoin mania on top of his own, knowing that the S&P500 inclusion effect will soon taper off…forcing Tesla to earn a lot of money or to land back to earth safely (or not). Let’s imagine (if that is allowed, this market would have to prepare for the worst) that bitcoin becomes the new base currency of tesla and the company would have to buy billions of BTC worth to “reduce” its currency risk vs. its putative new balance sheet currency. That is why BTC pushers came up with this idea to E. Musk and why Tesla’s CEO seemed ready to give the idea at least some consideration.
Risk #4: Social Disorder
- Another possible risk is to see social injustice (so called Gini effect) rising and possibly boiling over into social disorder.
- Social disorder could also arise from people refusing to abide to strict social distancing rules for much longer that are seen as imperfectly applied in function of who edicts the rules and does not apply it to him or herself. The situation remains acute in the US, also as regards the transition to the new administration which is not yet guaranteed to go smoothly.
- The euthanasia of the annuitant talked about by Keynes is a new reality that affects small savers but not the one meant by Keynes who was referring to more socialist rules of repartition of wealth. What the current system encourages is a more imbalanced repartition of wealth between the “have’s” and the “have not” via inflation asset bubbles on the one hand and rising inflation on the other that transforms cash into thrash but only for the poor and working poor.
Investment Outlook for 2021
Our job as investors is less to forecast than to adapt.
Theme #1: Go Greener…
The silver lining of today’s prospects is that the world is going to get greener and probably clean earlier than we ever thought possible, thanks in part to the covid situation which will drive massive public investment and rising public awareness in this field.
Objectives are going to become more ambitious every year. And hydrogen cars will also come faster than we think. The electric car concept as it exists today is a transitory one that might never work in practice for the majority of people in most countries due to insufficient refueling infrastructure, recycling problems, and external electricity producing constraints. The future of the car is the Hydrogen and anything related to that theme will reward investors handsomely in our view.
Europe has the possibility to get there first.
Theme #2: Prepare for Higher Inflation…
That will imply for us remaining under-weighed and mostly uninvested in bonds and credit with still a preference for EM and CNY debt in particular.
Stocks will not necessarily go bad in this context (supported by continued flows and the promise of keeping rates low for another 2 years at least) but we will be seeking value and dividends, cyclicals more than growth stories. We expect the shift from growth to value to continue.
Precious metals such as gold, silver and platinum will continue to have our strong preferences but also basic commodities and the mining sector.
Theme #3: Pop Tesla and Bitcoin Bubbles…
Just a thought with no timing…
Theme #4: More FX volatility
We expect more dollar weakness and reserve diversification away from the USD. Accordingly, we favour CNY and other EM short term local currency debt and currencies.
Over The Past Week…
Over the past week, the S&P500 gained 0,8% (14,7% YTD) while the Nasdaq100 rallied 2,7% (45,8% YTD). The US small cap index rallied 2,6% (17,9% YTD).
Cboe Volatility Index sold off by -7,5% (56,5% YTD) to 21,57.
The Eurostoxx50 gained 1,7% (-2,9%), outperforming the S&P500 by 0,9%.
Diversified EM equities (VWO) gained 1,6% (12,5%), outperforming the S&P500 by 0,8%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -1,1% (-6,6%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,1% (3,1%).
10Y US Treasuries dropped 5bps (-97bps) to 0,95%. 10Y Bunds climbed 7bps (-39bps) to -0,57%. 10Y Italian BTPs climbed 1bp (-85bps) to 0,57%, underperforming Bunds by 3bps.
US High Yield (HY) Average Spread over Treasuries dropped -8bps (40bps) to 3,76%. US Investment Grade Average OAS dropped -6bps (5bps) to 1,06%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -5bps (6bps) to 0,58%.
Gold rallied 2,3% (24,0%) while Silver rallied 7,8% (44,6%). Major Gold Mines (GDX) rallied 4,3% (24,9%).
Goldman Sachs Commodity Index rallied 3,6% (-18,9%, Z-score 2,2). WTI Crude rallied 5,4% (-19,6%).
Have a nice week ahead and stay safe.
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Marc Bentin, BentinPartner GmbH
Founder, Chief Investment Officer
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