[8 min read] The furphy of ‘relative’Intangibles versus tangiblesThe one asset we differ on
Madam Chairperson, as the final (and only) speaker for the affirmative side, I intend to expand on the base case outlined in yesterday’s Rum Rebellion. Before doing so, in the interest of reasoned discussion, we acknowledge there are points of agreement between ourselves and the negative side (Greg). As pointed out by my learned opponent, my argument is based on the impact a 70% fall on Wall Street would have on index fund and index-hugging investors. As my colleague rightly points out ‘while the “market” might appear overvalued, that doesn’t mean every stock is too.’ On this point we are in complete agreeance. Since 2015, value stocks — the boring stuff Warren Buffett buys and holds — have fallen further and further behind the performance of growth stocks (Amazon, Apple, Tesla et al). Growth is the flavour of the decade. Eagle-eyed observers will see the same pattern of disconnect occurred during the dotcom boom. Back then, a good deal of airspace was also created between the blue (growth) and pink (value) lines. The bursting of the tech bubble helped sort that imbalance out. Growth stocks fell much harder than value stocks. It’s a fact that not all stocks (and for that matter, all stock markets) have been lifted higher by the rising tide of investor enthusiasm. Anything glitzy or glamourous or involving gizmos is what’s wowing the crowd. Dull and pedestrian is definitely out of fashion. Which is why, even the one of the very best stock pickers — Buffett’s Berkshire Hathaway (pink line) — has fallen off the pace of the S&P 500 (blue line). We concur with our colleague’s view ‘there are individual stock picks that give you the ability to take less risk than buying the market.’ And therein lies the difficulty for the vast majority of investors…most lack the talent needed to identify and research those ‘value needles in the growth haystack’. My colleague (and speaker for the negative team) has an excellent track record in stock selection and portfolio management. But that’s an exception, not the rule. A quick break while I whisper this away from the debate…please don’t tell him this, but I’ve told my wife that should anything happen to me, Greg is the person she needs to contact about managing our portfolio…true story…just keep that between you and me. OK, back to the topic at hand. The furphy of ‘relative’ From my experience, the average investor lacks the skill, analytical capacity and emotional discipline to continually identify real long-term value. Which is why they leave it to the investment industry to manage. Putting SMSFs to one side, according to the Australian Financial Review (emphasis added): ‘…most Australians have their super in either a “balanced” fund or a lifecycle strategy. Regardless of age, members of balanced funds tend to have about 70 per cent of their money allocated to growth assets [shares, private equity] and the remaining 30 per cent in defensive assets [fixed interest, cash].’ A lot of Aussies have the bulk of their investment capital invested in your garden variety ‘balanced’ super fund…which is basically an index hugger. And as the speaker for the negative side pointed out last week, the same holds true in the US…‘Passive investing now controls over 60% of equity assets, and the majority of that is linked to the S&P 500. A large portion of these assets are in the retirement plans of conservative investors.’ An awful lot of mum and dad investors — here and in the US — are unbeknown to them, standing in front of a runaway train. The only unknown is when the collision is scheduled for. If the US market falls 70% (or more) and our market ‘only’ goes down 60%, then that’s a 40%-plus hit (70% growth asset x 60% loss) to their balanced fund. This is where the furphy of ‘relative’ performance needs to be addressed. If the average balanced fund loses (say) 40%, then fund manager/s who lose slightly less than this will instruct their marketing departments to roll out the press release…relative to our competitors we only went down X%. Fat lot of good ‘relativity’ does if your portfolio goes from $1 million to $650k (a 35% loss). Intangibles versus tangibles The concentration of the S&P 500 Index in a handful of stocks is another fact the affirmative and negative sides agree on. The top 10 stocks account for 27% of the index…and the top five, almost 20%. This is where I start to struggle with shares (in general) being a ‘real’ asset class. Why? Well, what’s really real? According to Bank of America research, 84% of the S&P 500 assets are ‘intangible’… What are intangible assets? This extract is from Investopedia (emphasis added): ‘Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets. Proper valuation and accounting of intangible assets are often problematic. Such is due in large part to how intangible assets are handled. The difficulty assigning value stems from the uncertainty of their future benefits. Also, the useful life of an intangible asset can be either identifiable or non-identifiable. Most intangible assets are long-term assets meaning they have a useful life of more than a year.’ So, what’s an intangible — goodwill, brand name, IP, patents — really worth? At present, it’s a case of ‘pick a number, any number’. People don’t care…it’s all about momentum. The only way analysts can possibly put a ‘value’ on this stuff is using that industry measurement relative. Relative to the value of Tesla’s (mind-blowingly stupid) intangibles, then Amazon is worth X and Apple worth Y. But is any of it real? No. It’s purely subjective. It all depends upon the mood of the day, week or year. Raconteur, the creators of the following infographic, provide this commentary on tangible assets (emphasis added): ‘Tangible assets are easy to value. They’re typically physical assets with finite monetary values, but over the years have become a smaller part of a company’s total worth. Technology disruption continues in artificial intelligence, robotics and cloud computing. As such, intangible assets have grown to represent the lion’s share of corporate valuations. But without a physical form and the ability to easily convert them into cash, working out what these assets are truly worth can be challenging.’ Reread that last bit…working out what these assets are truly worth can be challenging. The infographic is a little hard to read, so here’s the link to the original. The majority of the US glamour stocks have 80–100% of their worth backed by the valuing challenging vagaries of intangibles. One day, first mover investors could wake up and decide ‘you know what, I don’t think this intellectual stuff is worth what it’s priced at…time to sell’. The intangible puffery supporting valuations can easily disappear. So, what’s really real? By the way, you know what’s considered a tangible asset? Good old cash. That boring stuff everyone loves to ridicule. However, when the chips are down, it’s the one asset people are desperate to own. Greg is correct, money in real (genuinely real) assets will weather the coming market storm far better than index funds. However, to sort the fakes from the real stuff, you need to either possess the stock picking skills or outsource this to somebody who does. And even then, only allocate an amount you feel comfortable with being belted around by a market in full-blown panic mode. The one asset we differ on There is one ‘real’ asset Greg and I do differ on…bitcoin. If ever something was valued purely on intangibles, it has to be this very clever piece of computer code. It’s backed by nothing other than blind belief. The cultish fervour in this fabricated-out-of-thin-air stuff completely baffles me. What is it worth? Basically, what some other sect member thinks (or more to the point, doesn’t think) its ‘value’ is. Ah, but this is another debate for another day. However, I will leave this for you to ponder. Gold has been a store of wealth for thousands of years. Will it still be here in another 10, 20, 100 or 1,000 years? I think so. Bitcoin has been (and I’m experiencing a tightness of the throat as I type this) a store of wealth (there I got it out) for 10 years…will it still be here in another 10, 20, 100 or 1,000 years? Or will an even smarter programmer come up with a crypto that’s even better? And we won’t even mention what desperate governments might or might not do. Until next week… Regards, Vern Gowdie, Editor, The Rum Rebellion ..............................Advertisement..............................How to spot stocks with ‘COVID immunity’ As you might know, small-caps as a whole have been outperforming larger stocks by some margin on the ASX this year. And micro-caps have been doing even better. The star attraction of small-caps is, if you find the right ones, you can make great gains even if the economy is getting shellacked...and if the wider market is falling. Both are the case for Australia this year. But there are small-caps out there with ‘COVID immunity’. You just need to seek them out. Click here for more. | ..........................................................................
A Man of Distinction, So Refined By Bill Bonner ‘The minute you walked in the joint ‘I could see you were a man of distinction ‘A real big spender ‘Good looking, so refined ‘Say, wouldn’t you like to know what’s going on in my mind?’ ‘Big Spender’, by Shirley Bassey Here’s the nation’s new go-to person for everything that concerns money. Reuters reports: ‘Janet Yellen, U.S. President-elect Joe Biden’s nominee to run the Treasury Department, will tell the Senate Finance Committee on Tuesday that the government must “act big” with its next coronavirus relief package. ‘“I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time,” she said in the statement, which was obtained by Reuters.’ Who are these people who have been struggling? American household income (thanks to the feds’ bailouts and giveaways) was at its highest point ever last year — with $1 trillion more in earnings than the year before. And we need not remind dear readers that the US government is broke — with a $2 trillion deficit already on the books. Acting stupid But acting ‘big’ is rarely the same as acting smart. In this context, it means acting stupid. There are two important tasks for an American president. He is meant to protect Americans’ freedom and their wealth. Everything else is detail. But already, the incoming jefe is promising to squander more of both. (I’ll come back to how he will squander Americans’ freedom later in the week...) But hey…give the guy a chance. It’s his turn! Donald Trump acted ‘big’, too. He set a record for wasting wealth — with the largest budget increases in history. He followed Barack Obama, who was no slouch at dissipation either; he added $8.5 trillion to the national debt during his eight-year term, a 73% increase. He also put in place the ‘Obamacare’ plan, an open-ended ‘entitlement’ that is sure to bankrupt the country as Americans grow older. Then of course, there was George W Bush, whose ‘big’ act was the wacky War on Terror. It will cost $7 trillion. (We’ll get to his ‘Patriot Act’ later this week, when we look at the loss of freedom I alluded to above.) Act bigger But Mr Biden seems to want to act bigger than any president before him. That is, he wants to out-retard them all. This is not necessarily his fault. You get to hell one step at a time. The road is well trod and he’s already far along. All he has to do is keep walking. One foot after the other. Left after right. A is followed by B…it doesn’t matter who does the hauling. The ankle bone is connected to the shin bone… And when you’ve got an aging, degenerate empire…led by an aging deep state hack…what do you expect? Permanent stimulus And, by the way, the American people will whoop and holler…lining up behind him like a yahoo mob going to watch an execution. Then, thanks to the hard work of the public schools and the mainstream media — two pillars of the Elite Establishment — the poor knuckleheads will gladly salute their own firing squad. Look at this, reported by MassLive.com: ‘Nearly two-thirds of Americans are on board with a progressive proposal — backed by some Massachusetts lawmakers — calling on the federal government to cut monthly $2,000 stimulus checks to Americans over the course of the COVID-19 pandemic, a new poll shows. ‘Data for Progress, a progressive polling and advocacy group, asked 1,166 likely voters across the country last week if they’d support or oppose the idea of a “$2,000 per month direct cash payment to every person for the duration of the pandemic.” ‘Sixty-five percent of respondents say they’d support recurring $2,000 checks, an idea still advocated by Sens. Ed Markey and Bernie Sanders, who along with Vice President-elect Kamala Harris proposed a bill for monthly checks back in May. Forty-one percent of respondents “strongly support” the idea, while 24% “somewhat support” it.’ Note that this is not a one-time ‘stimulus’ of $2,000 they are calling for, but MONTHLY cheques…a permanent stimulus plan. It would function as a kind of monetary pacemaker…giving consumers a jolt every month just to keep their greedy little hearts pumping. Does anyone ask, ‘Where will the money come from?’ Does anyone worry about the expanding federal deficits…or the tilting tower of debt? No? Why not? Because they don’t have to. Something for nothing That is the wonderful magic of the post-1971 money system. It corrupts federal spending…it distorts and weakens the economy…and it also eats away at the brain. The Federal Reserve has multiplied its balance sheet (the foundation of the US’ money supply) by nearly 10 times so far this century. That is what paid (indirectly) for the War on Terror…Obama’s debt…the Wall Street boom…Trump’s tax cuts…and the COVID-19 ‘relief’ boondoggles. And now, brains all across the country are abuzz about the great things coming down the pike. ‘Something for nothing’ is no longer a joke; it’s a fact of life. People expect to get a free lunch every day. And $2,000 a month will soon seem miserly. Regards, Bill Bonner, For The Rum Rebellion ..............................Advertisement..............................Energy’s great pantomime villain steps out from the shadows… Whether a Green Nuclear Deal materialises under Biden or not…you can expect a major resurgence here in the coming years. As the IEA says, ‘Without nuclear power, the world’s climate challenge will get a whole lot harder.’ There will be second-order effects on uranium supply chains…and one Australian company is already getting a major foothold… | .......................................................................... |