OK, I get it. Trillions in fiscal stimulus, trillions in central bank money printing, vaccinations by the million, a global re-opening, and cash-rich consumers eager to spend and live again. Companies are beating earnings, stocks are going up and inflation is the real risk (lol – see what I did there?). But the talking heads and the allocators are all hypothesising about stocks as a basket, an aggregate. This market does look very dangerous – but not because of how much liquidity is pumping in, but where that liquidity is ending up.
Dizzy, disorientated, euphoric. Those are the symptoms of hyperoxia – when the body is exposed to an excess supply of oxygen. Probably also how you feel if you own anything to do with SPACs, electric vehicles, or commodities right now.
On the other hand, if you are currently suffering from a shortness of breath, anxiety and confusion, it’s probably because you own highly cash generative (i.e. defensive) businesses with attractive dividends and low valuations. And you are, at best, lagging the risk rally. As you may expect, those are also the symptoms of hypoxia – when the body is deprived of adequate oxygen supply.
You can see some of that disparity in this chart here from Morgan Stanley. Investors are expecting a re-opening, inflation, higher yields and thus the cyclical rally has incrementally priced in the building ebullience. Cyclical stocks are aggressively taking the oxygen back from the defensives, despite the overall level of markets rising.
And here’s a great one from the FT showing the abundance of investor liquidity chasing deals well into the future (i.e. paying up for prospective future profits with ‘worthless’ printed money today).
The FT are nicely making a point I wanted to bring up… that the sucking of oxygen away from ‘defensives’ and ‘bond proxies’ into profitless growth, and cyclical stocks priced for cyclical highs, looks a lot like how investors sold tobacco, banks et al. (the ‘old economy’) to ensure they could benefit from (or at least keep up with those benefiting from) the emergent dotcom revolution in the late 1990s.
So whilst the market today is abundant with ebullience, it’s not been a broad-based rally characterised by liquidity flooding the flatlands evenly. Instead, the oxygenation has been uneven, dangerously inflating valuations and enticing new buyers eager to benefit from the consensus ‘trends’ despite most of the economic outcomes reasonably priced in. Investors are no longer talking about valuations, but the stories of ‘electrification’, ‘money printing’ and ‘a vicious return of inflation’. That has left, just as it did in the late 90s, a number of high-dividend, boring stocks starving for oxygen. And just as the euphoria disintegrated in 2000 yet the ‘old economy’ stocks held their nerves and their prices, could we see a similar rotation if the current hyperoxia in certain corners leads to cataclysm?
I actually don’t think this phenomenon has anything to do with the economy (anymore). I agree with the now-consensus view that inflation could rear its monstrous head after many years hidden away under the bed. But the stock market, as it often does, takes a good thing and ruins it. Some commodities are still cheap – I’m looking at you Oil & Gas – but might stay that way given the wall of ESG-concerned money disinvesting and chasing Sleepy Joe’s green dreams. And ‘money printer go brrr’… yeah we know and good to hear Chamath is the new Buffett (eye roll). Its funny how retail participation is now being recast as ‘democratisation of finance’, whereas Mr Keynes would probably tell you the beauty contest has so many judges we forgot what true beauty is.
Glad I mentioned Buffett there – today it was revealed he took some profits in Apple, and reinvested into Verizon and Chevron, which are expected to pay a 4.4% and 5.4% dividend yield respectively. But the show can go on for longer than one thinks – looking at ETF.com’s monthly ETF flow data for January 2021, another $5.5bn went into 2 ARK ETFs (adding 16% to their combined AUM), $3.2bn into the iShares Core MSCI Emerging Markets ETF (adding 4.2% to the AUM), and $1.7bn into the iShares Global Clean Energy ETF (adding 25% to the AUM). On the other hand, $2.8bn came out of the iShares MSCI USA Min Vol Factor ETF (removing 9% from the AUM), $1.5bn from Blackrock’s US Real Estate ETF (taking 41% from the AUM), and $1.5bn from the iShares MSCI USA Quality Factor ETF (removing 7% of AUM).
I suppose that’s why dividends are oft described as a ‘pay you while you wait’ painkiller of sorts. I’m certainly focusing on cash flow and dividends. I expect they will still be there when the party’s over.
All the best and stay safe.