Welcome To The April Teleconference

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(Tuesday 20th April 2021)

Welcome To The April Teleconference

P.S. if line goes down…

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This is what I will cover today:

• Random highlights

• Mania 1

• The BIG turning point

• Debt and bonds

• Mania 2

• Charts and performance

• My portfolio review

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Random highlights

• Gold ETF, selling

• Worst quarter for bonds in 40 years

• Premier Miton, no problem for holders

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Market vulnerability unchanged…

Valuations – Debt – Mania

Vulnerability to shock unchanged

war – cyber - health – financial - climate

Mania 1 – turning point – bonds – mania 2 – charts – my portfolio

Journey From Panic to Greed & Mania

Panic

Caution

Optimism

Greed

Mania

Panic?

5Mania 1 – turning point – bonds – mania 2 – charts – my portfolio

Mania

Evidence in the US:

• Robin Hoodies – bored 30 year olds – tragic consequences

• Options – giving a sub-machine gun to a 5 year old

• Debt – “no cash? We can fix that Mr Client”

• IPOs – no profits, no problem

All about over-confidence morphing into mania.


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Mania is about behaviour

Investor behaviour.

Investment industry behaviour?


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Do you recall why the Woodford funds failed?

Illiquid holdings.

i.e. when you want to sell, you can’t.


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Now we have Cathie Wood and her ETFs.

“Disruptive innovation” [tautology]

A relatively obscure fund manager, at the age of 65, is now the darling of the “RobinHoodies”.


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In 3 weeks from mid-Feb it dropped 30%.

Jackson Call, 24 year old US dental student said:

“It got painful”.

Markets only go up. Don’t they???


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Guess what?

Cathie is loaded up on illiquid holdings.

Oh and Tesla. [Can’t make up how bad that might (will?) get]


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Cathies discomfort is an opportunity for some…

…sharper investors making bets on falls in her illiquid holdings (short selling).

Why? When investors sell of her funds, she has to sell…

…and prices of those underlying holdings will plummet.

This triggers more selling of her fund…

A short-selling death spiral.


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Investment industry mis-behaviour…

…Margin Debt.

Basically your broker lends you money to invest…

…at a new record of $813 billion!

And that doesn’t include $billions in derivatives and leveraged funds (e.g. 3x index ETFs).


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Investment industry mis-behaviour…

…Margin Debt.

You got $1m? Broker will give you another $2m.

In the case of the Archegos hedge fund…

You got $10 billion? Fancy another $50 billion?


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Archegos were “emboldened”!

Reckless to you and me.

It’s gambling, not investing.

“So what? Not my money.”


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Closer to home… Greensill

What we used to call “factoring” – not complex.

A harmless chancer with a lot of front (allegedly).

“Continuous and profitable fraud”? (US lawsuit alleges)

Indiscriminate use of debt… suddenly discovered by the banks in March… $7bn value in 2020, gone in days in 2021.


“It is beyond doubt that every speculative mania

which has run its course of

folly and disaster in this country has derived its

original impulse from cheap money”The Economist (1850)

Excessive debt brought the world to its knees in 2008.


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When stuff goes wrong…

…REAL people suffer.

Equitable… Woodford…

RobinHoody suicide, fortunes lost...

Madoff… ditto


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The Inconvenient Turning Point

and its amplifiers


Bonds - Very Long Term (1750 to date)

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Bank of England, Consol (Long-term bond) yields in the United Kingdom [LTCYUK], retrieved from FRED, Federal Reserve Bank of St. Louis;

https://fred.stlouisfed.org/series/LTCYUK, February 15, 2021

Interest rates between 2% and 5% for most of last 300 years, then in 1970s…


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

Bonds - Long Term


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The BIG turning point

• Inflation problem in the 70’s

• Cured by high interest rates

• Inflation fell, interest rates fell…

• …for the next 40 years!


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The problem flipped!

• Low interest rates now the problem

• Debt is encouraged

• Complacency grows

• Savers take on more risk


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The Greenspan Amplifier

“The Greenspan put” invented way back in 1987.

Markets in trouble?

No problem, we have your back.

And, if necessary, we will bail you out, increasing govt debt, and make the taxpayer pay.


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“Greenspan Put” had 4 impacts

1. Encouraged risk-taking

2. Encouraged complacency

3. Kept a lid on interest rates…

4. …encouraged more debt (notably since 2008)


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The Age Amplifier

Ageing populations meant:

• Govt. tax take fell…

• Govt. costs went up.

Meaning govt. can’t pay the day to day bills.


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The Government debt amplifier

The books are not being balanced year on year.

That creates a deficit, and the govt borrows money (Govt Bonds, National Savings, Premium Bonds).

When bonds mature, the money owed is not repaid…

…they are rolled over… debt keeps going up and up.


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Annual deficit/shortfall:

£63 billion

Accumulated debt:

£2,004 billion (bonds held by UK institutions)

Accumulated debt goes up every year by the amount of the annual deficit. Year after year.


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Financial chicanery can only go so far.

Governments must get debt down:

• Dealing with current day to day imbalance

• Reduce current levels of accumulated debt


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Cut day to day imbalance?

• Austerity – cut costs

• Squeeze voters - raise taxes

Neither acceptable – not at the moment.


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Reduce accumulated debt?

• Default

• Grow faster

• Inflation


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Default is the nuclear option.

Developed nations would have to co-operate.

This co-operation will only happen in extremis.

AND there is no point, unless day to day costs are also sharply reduced – otherwise it all starts again.


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Grow faster and/or inflation

This is the US choice right now.Pump trillions into the economy.

What does that mean for you as investors?

Boost for investor confidence, and……massive fuel for markets.


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US Federal Reserve – keeping rates low.

Focus on employment not stability.

US govt handouts going where?

$170bn headed to markets via under-35s.

Money moves markets.

Confidence moves money.


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But hang on!

We already have:

• Record over- valuation

• Record indebtedness

• An extraordinary mania

Not a problem say Biden/Federal Reserve.

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“At time’s this year retail investors have accounted for a third of all US stock market trading…

…meaning they collectively yield greater sway than every single hedge fund and mutual fund in the country combined”

Hmmm.


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Mania

“We have raised a generation playing

adrenaline-charged video games”(John Mauldin)


Mania – the aftermath


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Charts and global performance


Wave 1 Hesitant bounce

Wave 2 Doubt

Wave 3 Increasing confidence.Limited volatility.

Wave 4 Cracks.Buying passes from stronghands to weak.Increasing volatility.

Wave 5 Flaky. Latecomers take hold.

Charts – US long term – since 1974Mania 1 – turning point – bonds – mania 2 – charts – my portfolio

2018“this final upswing could go much further

than even the optimists expect…

With even greater extremes of investor behaviour”

“34,389” or “34,305”

[It was 25,000, it is now 34,077]


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Charts – US long term – since 1974


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US short term, from March 2020

The picture since the pandemic low in March 2020.

Nearly over?Or another manic spike higher?


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New up wave destined for highstowards 8000?

Or is the down wave since the peak of 2018 not yet over? And heading below5000?

UK long view – since 2003

FUNDS - What’s Happened Since Pfizer Monday?

UK OUT OF THE BLOCKS!


Top 20 since Pfizer Monday

What happened recently? (UK)

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My portfolio - It’s review time!


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Why the U.K. focus?

• Attracting money from home and abroad

• Cheap. Lots of “positive surprises”.

• Brexit forgotten, trade bounced back.

• See Dynamic Global Portfolio for momentum.

UK is being rehabilitated.


From Nov 17th 2020 …

25% into:

Artemis UK Smaller Comp. (comms and quality)

Jupiter (Merian) UK Smaller Comp. Focus (Vintage)

Fidelity UK Smaller Comp. (comms and quality)

55% into:

JOHCM UK Equity Income (value and yield)

Franklin UK Mid Cap (Vintage, beaten-up)

Schroder Recovery (value, beaten-up, long term record)

20% into cash




Dynamic UK Blended – 10 year perf.

My selections – Dynamic UK Blended +

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20% Aviva UK Listed Equity High Alpha – UK All

20% Aberforth UK Small Companies – UK Smaller

20% Marlborough Nano Cap Growth – UK Smaller

PLUS

20% JOHCM UK Equity Income – UK Equity Income

Keeping it simple and focussed. Suits me.Stop-loss at 10%.

Probability of your success has increased.

But risks have not changed…

e.g. over-valuation – mania – debt/liquidity.

Another “shock” is always out there.

We don’t know when…

…but we know the vulnerability exists now.


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Stop worrying about inflation

Stop worrying about timing

Stop losses


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Thank you

Q&As this Friday

END

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Documents

Welcome To The April Teleconference