Is it healthy for capital markets to be absolutely fixated on Team USA?
Henry Jennings | Marcus Today
This is worrying. Everyone you talk to says that the place to be is the US for equity markets. It is 75% of global markets. We could see that increase to above 80% as other markets fade and the US becomes a vortex sucking money in. But think about that for a while. If you want to invest in equities, go East young man (or woman). Just buy the USA. That is fine, in principle, but don’t forget the US has had its share of problems over the years. The Dotcom boom. The whole GFC thing. That didn’t start in Pitt Street. I remember going back into the mists of time, the junk bonds that Michael Milken devised. That ended well. Not. Mind you, now all is forgiven. He even has his own institute. But really, is it healthy for capital markets to be absolutely fixated on Team USA?
The stock market was not devised as a speculation vehicle. The idea behind the markets when they started out in Europe, in coffee houses and on street corners, was to raise money for business. It enabled ship owners and people, which funded those ships, to sell some of the risk and buy into other ships to diversify risk. It wasn’t about doubling down and buying another ship with the same cargo going to the same place and following the same course. It wasn’t about inventing a way to leverage the ship and speculate on the outcome. Mind you that came later. Risk management and risk mitigation was the name of the game. Having 80% plus of money following US business makes it tough for the rest of us. It makes it hard for other countries to raise money. It makes it difficult to float a new company on the stock exchange. Not that anyone cares anymore as Private Equity is becoming the only game in town. But how does PE crystallise the uplift? Who does it sell the business to? Another PE outfit? Musical chairs. Who ends up without a chair?
We are seeing such concentration risk in investing. Never seen it before. Is that healthy? It’s funny or maybe prescient that the only one who seems to be betting against Team America is Warren Buffett. What would he know anyway? More to the point what does he know? He is usually the biggest Team USA cheerleader.
If 80% of equity markets are US based, wouldn’t it be nice to have policy that makes sense. Not policy from the administration by ‘tweet’. Or whatever a ‘Truth’ post is called. This adds a significant risk to the US. Not every utterance will work. Not every thought bubble will have the right intended consequences.
The US is sucking money in. We are starting to see signs that some silliness is breaking out. The banana duct taped to the wall. The MicroStrategy rise. I watched that CEO on CNBC the other day. That was frightening. Issue convertible notes to allow you to gear into buying more Bitcoin. A mathematical formula that everyone tells everyone else is going to the moon. Absolutely no fundamentals at all. The cost of electricity perhaps. No cash flow. No income. Just a decentralised ledger. I mean really! The reason it is going higher is that some ‘finfluencer’ on Instagram said so. Good a reason as any, I guess.
And against all this froth and frivolity, the VIX index is back to the complacent reading. Records fall daily in the US. Trump is going to ‘Trumpocharge’ corporate America. His measure of success is how high the market goes. Meanwhile, the deficit is ignored. That is going higher! If he measures his legacy, and success, you can bet that he will do everything to pump it up. His second in command is the ‘pumper in chief’. Elon Musk. The guy is a genius for sure, but he does have a tendency to play a little fast and loose with the Truth. Or in his case the ‘Twitter’. The disparate views on Tesla remain. The bears would have it valued as a car company. The bulls and there are more of them, would have you see it as an AI and robotics company, that just happens to make cars. Almost a by-product. Especially when the Chinese can make better and cheaper. Same as it ever was!
It really all comes down to ‘‘Groupthink’’. It is pervasive. It creeps into every investment decision. Team USA is the only game in town. That is the ‘Groupthink’. It is never going down again. ‘Groupthink’. Buy the dips (BTH) is a guaranteed way to make money. Team Trump will add even more juice to the markets. ‘Groupthink’. AI is a wonderful tool for mankind. ‘Groupthink’. Do not bet against the US or Trump. ‘Groupthink’!
This ‘Groupthink’ is all consuming! It is why we have high priced market darlings like TLX, PME, XRO, WTC, CBA, WBC, QAN. Every bull market has its own talismans. I remember the lithium boom. The Infant Formula boom. The Dotcom boom. Enron. Japanese real estate. Trophy homes. Humans are very good at these sorts of irrational manias. Even the inventor of gravity, Sir Isaac Newton, lost a fortune on the ‘South Sea bubble’. It can happen to the best of us.
Sometimes it pays to take a step back and smell the tulips. Maybe the sensible way to diversify your portfolio, is not with US investments, but with local ASX listed companies. Radical, I know, but given the performance of the banks and biotechs this year, it has paid off in test tubes.
Just a thought!
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