Beginnings are often innocuous. Endings tend to be memorable. Yes, today we’re going to talk about bull markets and bear markets. But we’re also going to talk about US football, Tom Brady and Patrick Mahomes.
Australian readers will be aware that today (Sunday here in Colorado) is the US’ REAL national holiday. It’s the Super Bowl, the Grand Final of US football. The Kansas City Chiefs, led by young star quarterback Patrick Mahomes, play the Tampa Bay Buccaneers, led by the ageless wonder and greatest of all time, Tom Brady.
That’s about all I’m going to say about the game. From my 10 years in Australia, I know that Queenslanders and some New South Welshmen don’t consider US football to be a real sport. ‘But they wear pads!’, ‘It’s too boring!’ ‘Too many adverts.’
And Victorians? They’re a bit more open-minded about it, although it could (obviously) never compare with Australian Rules Football. In sports, like in life, value is subjective; it resides in the eye of the beholder. Or in the heart. ‘The heart wants what the heart wants,’ as Emily Dickinson once wrote.
You like what you like. And in my experience, as long as a sport has speed, skill, lead changes and violence, it usually makes for pretty good entertainment. That’s the key. Speed, skill and violence make for drama. And lead changes heighten the drama. Tragedies and triumphs play out one contest at a time, as the clock ticks down relentlessly.
It should be a great contest today, at least I hope. Everyone likes a good drama. But one way or another, it will be momentous. Either the torch will be passed from one great player to the next, or a great player will go out on top. It’s a nice clean storyline either way.
The same cannot be said for the stock market. After publishing the most recent Trade of the Decade in The Bonner-Denning Letter, I’ve stepped back this week to just look at prices and data. No narratives. No themes. No big ideas. Just the numbers and facts.
Of course, there’s a big caveat there. For the price signals in the market to tell you anything useful, they have to be real price signals. And THAT is a hotly-disputed point, at least among some people. Why?
Because financial asset prices all take their key off whatever the ‘risk-free’ rate of return is. That return is usually attached to a high-quality government bond, lately the 10-year or 30-year US Treasury bond. And of course, the ‘risk-free’ yield on US Treasuries is also influenced by the target policy rate set by the US Federal Reserve, the size of the US governments debt and deficits, and the growth in the US economy.
So yes, there are a lot of variables. But the basic point is still true. If the ‘risk-free’ rate is sufficiently low, you have an incentive to go get a better return in other asset classes, like real estate or stocks. If the ‘risk-free’ rate is sufficiently high, you can (in theory) safely put your money in government bonds, earn interest, and be confident you’ll get your principal back and not lose too much real purchasing power to inflation.
All of which is prologue to bitcoin again crossing over US$40,000 and the big tech stocks in the US (Apple, Facebook, Amazon, Alphabet, and Microsoft) now having a combined market capitalisation of nearly $8 trillion — almost five times the size of Australia’s entire economy. What does that data tell us about where we are in this stock market cycle?
Well, for one it tells us that the fourth quarter was an ideal time to be a technology company. With many people ‘locked down’ by government decree, either working from home or getting ‘free’ money from the government, conditions were perfect for a blowout in earnings for companies that do business online. You have to wonder if conditions will ever be better, in fact.
It’s hard to imagine a better set up. And as earnings season began last week, Amazon kicked it off, reporting over $100 billion in revenue in the fourth quarter alone. I won’t breakdown the numbers here (I’ve done that in the most recent weekly update for newsletter subscribers). But there’s no denying it’s a glowing result.
On the other hands, ExxonMobil’s earnings report couldn’t have been much worse. The company reported its first annual loss in 40 years. It paid out its dividend by reducing capital spending. It took a $20 billion write-down on natural gas assets. And it assessed the long-term impact of oil under $50/barrel and ‘The Energy Transition’, where the entire world moves away from fossil fuels and toward renewables.
When you look at those two financial results, it also feels like the passing of a torch from one generation of market leader to the next. A capital intensive, ‘Old Economy’ industry, battered by the pandemic and a new era of focus on at the broad level on Environment, Sustainability, and Governance (ESG) versus a ‘New Economy’ titan with aspirations to become the world’s ‘everything store’, generating huge profit margins on its cloud computing and data storage business.
Makes for a nice tidy story, doesn’t it? Out with the old. In with the new. All of which would justify even higher price targets on tech/growth/momentum stocks. That’s the story Wall Street desperately wants you to believe. Do you?
Most investors seem to, at least for the moment. The market cap-to-GDP ratio for global stocks hit 123% last week. Investors look to the future and see nothing but bigger earnings, a COVID recovery, and cleaner energy. Trump is gone. The Deep State is back in charge. The New World Order has been restored.
Don’t be so sure. The idea that the entire world can seamlessly generate all its power needs from weather-related ‘free energy’ — wind, waves, sun — is what I call giant thermodynamic fraud. It will take factories powered by coal, oil and gas to build solar panels and turbines that turn wind and sun into electricity.
Whatever the future looks like, it’s going to take a lot of oil, gas, and coal to get there. The dirty little secret of the five great tech stocks is that their business would not be possible without coal miners, pipelines, and diesel generators (for back-up power in data centers). Don’t count them out just yet.
Editor, The Rum Rebellion
PS: My prediction for the Superbowl: 34-14 Chiefs. Too much firepower. And for the next 10 years in markets: oil and energy outperforms technology.