Monday Morning Musings

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January 16, 2023
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We are re-introducing two regular posts, Monday Morning Musings and Friday Market Thinking to book-end the week, on the basis that regular postings are appreciated by readers, as well as providing a good discipline for ourselves. Other posts will continue obviously. The idea of ‘Musings’ is that while none of the following might merit a full post of their own, they might perhaps add up to some interesting observations (of sorts).

Davos Man is back

This week, it is all back to ‘normal’ as Davos man hops on a Private Jet and returns to their snowy ancestral home to talk once again about climate change and world poverty for the World Economic Forum. With barely a chance to catch their breath, let alone change their powerpoint slides, between the, Covid delayed, WEF in May and the November COP27 jamboree in Egypt, the self appointed ‘leaders of the free world’ are back to promote their utopian/dystopian vision of ‘The New Normal’, where “you will own nothing and be happy” (while presumably they will own everything and be happier?)

However, we think that their top down utopian (some would say dystopian) agenda for a New World Order is going to be overtaken by a bottom up, real world vision based on, well, a return to ‘Normal’. A Normal New Normal if you will. By this we mean a world where the cost of capital returns from abnormally low levels way below the natural rate to a ‘normal’ level, where normal companies make normal profits from normal activity. A world where bonds are for yield and equities for capital gains. A world where you pay people to lend you money, not to borrow money off you. As the chart from our friends at Redburn illustrates, at one point there was over $17tn of negatively yielding debt, now it’s back to zero. Back to ‘Normal’.

Back to Normal – we don’t pay you, you pay us to borrow.

Source Redburn.

This then, is not a credit cycle where rates are going to be hiked well above the natural rate to deal with inflation such that interest rates are a lead indicator of a coming slowdown in the money supply and a credit crunch. That slowdown has already happened and lower inflation and lower growth are ‘baked in’. The crunch will be concentrated in those areas that thrived under the abnormal conditions of a shadow banking system with nigh on free money, feeding ‘disruptors’ whose only business model was…free money. As we said in our year ahead piece, the first leg of the bear market – deleveraging and de-rating – is over. The second leg, where a credit cycle collapses earnings is not as certain as many are saying, because while most things are returning to normal, this is not a normal credit cycle.

Technology

The new ChatGPT programme from open AI has been causing quite a buzz in techy circles over Christmas. Using a chat interface it can help quickly write, fix and improve code, which obviously has implications for the value of programmers – junior programmer plus free open source AI chatbot = better outcome than expensive senior programmer.

As the saying goes ” You won’t be replaced by AI. You will be replaced by a human….using an AI.

For the non technical, the chat interface is really accessible and takes ‘googling’ to the next level. Essentially you can just ask it a question like “why are Croatia so good at football for a country the size of Wales?” and it will give you a highly plausible answer, albeit, as Rory Stewart pointed out on his podcast, an almost identical one to the one it gives for “Why are Spain so good at football….”. As such, the first people it will put out of business will be plausible BS artists. Like PPE graduates (As Rory himself admitted!)

More interesting, in our view, is its ability to ‘create’ things, such as “write an article about Xmas in the style of Alan Coren” (one we tried), which more usefully should allow it to rapidly produce a lot of technical and fact based text – and presumably recycle press releases into ‘news articles’ – if it isn’t already. It should also be able to rapidly produce a lot of other standard ‘code’ – we are thinking in particular of legal documents here, which will have some meaningful implications for ‘senior’ white collar workers. If a junior, likely to be a lot more tech savvy, can combine with an AI to be better than an experienced (but a lot more expensive) practitioner, then that presents a significant threat to the incumbents.

Some educationalists are already alarmed at ChatGPT’s apparent ability to write essays without being detected by plagiarism filters, while others are pointing out its ability to rapidly outdo Doctor Google. Of course, as previously mentioned, both these professions have been very quick to tell the public that their job can be done remotely and online, without thinking through that if it isn’t important to have a real person in the room, it might not be very important to have one remotely either. ChatGPT GP?

Currently, probably the best way to assess which areas Chat GPT might be the biggest threat to is to check what it currently isn’t ‘allowed’ to do; it can’t search recent news items for example and it can’t comment on individuals, so it can’t replace Google. Yet.

Speaking of Google, they must be somewhat nervous that ChatGPT has just done a deal with Microsoft, valuing the company at $29bn and exactly the sort of deal Google itself used to do. Meanwhile, we noticed that currently, almost every time we type a query into safari on a mobile, Google pops up one of its “I am not a robot” pages, requiring the user to complete a captcha image check. The images are, curiously, always of Traffic lights, taxis, bicycles, motor bikes, crosswalks and fire hydrants. What do these all have in common? They would, coincidentally help to train a driverless car. We asked ChatGPT (of course) if this is what Apple and Google appeared to be doing and it replied that while the primary purpose of Captcha was not to train AI, it could be used to do so. So we presume that is AI speak for “yes, that is exactly what they are up to.”

Economics by anecdote; Tesla and Apple

So will Apple and Google now make cars and compete with Tesla? Just as Elon Musk is saying that if Apple block Twitter he will make his own phone? (Although to be fair there has been talk all year about a ‘Tesla’ Phone.) The reality is that by switching products, big Tech is acknowledging that Moats are there to be breached – including their own. While being clear that we are not making stock recommendations (this blog is for information and entertainment purposes only), we would add that back in November 2021 when we described Tesla as a Crypto Coin with a car company attached and noted that, thanks mainly to the crazy behaviours in single stock options, Tesla was on the sort of inflated multiples of forward sales that Vodafone had been on back in 1999, our thesis was, and remains, that just as Vodafone stopped making equipment and became more of a utility, so we wouldn’t be surprised in Tesla had stopped making cars in 5 years time, but was similarly a utility (power) supplier. Nothing wrong with that, apart from the multiple; a move similar to Vodafone implied a 75% drop in the share price. Full disclosure, I bought a model S in 2014 and still have it, but the reality is that while in 2014 it was, quite literally, peerless, there is now a lot of competition, to put it mildly, and also the replacement cycle is a lot longer. The real value is now in the batteries and the charging stations. In the US it has cut prices by 20%, primarily it looks like to qualify for some government subsidies for buyers, while in China it has just cut prices for a second time in a few months such that a Tesla in China is now 40% cheaper than the US. This could partly be down to the fact that while China is Tesla’s biggest market, its market share has been steadily dropping and is currently under 10% of the EV market, with a raft of well financed competitors.

Apple meanwhile feels somehow similar. Ten years ago it really was ‘the only game in town’ courtesy of its ‘platform’ and its positioning as affordable luxury tech. Even as recently as 2018 with the launch of the airpods, it was the system that ensured the margin (and the rating). Indeed it was pointed out that in 2021 Airpods alone had a revenue stream similar to Netflix. Of course 2021 was a great year for the iPhone too, thanks to lockdown and working from home and all those zoom calls. But in the spirit of economics by anecdote, rather like cars, the replacement cycle is extending and instead of every other year, people are keeping phones longer and in our household a Christmas present of replacement airpods was still ‘affordable luxury’ but was for the ‘basic’ model, at half the price of the airpods pro, while the next phone upgrade (after perhaps 5 years) will be for the XR, which is 30% less than the iPhone 13. And that’s before we think about reselling and competitor products which are now all compatible on Bluetooth. Growing volume and price is really difficult in a competitive market, especially when a lot of other things competing for the ‘customer wallet’ are going up in price but have a faster replacement time and less competition. Last year, one of the biggest sources of ‘easy alpha’ was to be long the equal weighted SPX versus the market cap weighted traditional benchmark which is skewed to exactly these stocks struggling to maintain margins. As it did in the 5 years post the Dot Com era, this is one trend that looks likely to extend into 2023.

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Political Cicadas - no change in the product, just the sales team

The habit of spending long periods underground before re-emerging is not limited to the Cicada, for while this year sees the coincidence of the 13 year year Cicada cycle and the 17 year one, something that last happened 221 years ago, it is also 17 years sine Tony Blair was last in power and 13 since Francois Holland (likely PM in the French Hung Parliament) was. Both now look to be re-emerging to ensure continuity of policies that never really went away. The key sources of protest across Europe - crippling expensive wars against Russia and Climate change as well as uncontrolled immigration have only been addressed in the doubling down - the first thing UK PM Starmer did was fly to Washington to offer more money to NATO, while his Chancellor promised more money for Net Zero. Meanwhile, the left alliance put together to thwart Le Pen is even more pro immigrant than Macron. For markets, there is no prospect of lower spending and every prospect of higher taxes - the only 'Change' visible but not the one promised. The Technocrats and Globalists expecting this 'democracy' means that the populous will go quietly will be disappointed, especially with the arrival in the Autumn (once the Cicadas have gone) of the great populist, anti open border, anti net zero and anti war populist Donald Trump.

Market Thinking July 2024

The scorecard for the first half puts Equities, commodities and Gold in the top half of the table, with cash and fixed income in the lower half. This is consistent with the steady but uninspiring macro backdrop and positioning ahead of a tricky H2 from a political perspective. The anomaly of the Market Cap weighted SPX out-performing the equal weighted SPW by over 10% points tells us both that the SPX is no longer telling us anything about the US economy and that this excess return is for taking (considerable) concentration risk. Meanwhile, with Bond analysts 'pivoting from the Pivot' the fixed income markets have calmed down a little and leaving The Donald' rather thna 'The Fed' as likely the biggest policy influence on Markets over the next 12 months. In particular, we would look out for a 'Trump Plaza Acord" early next year, 40 years after the last one- something the FX markets aren't talking about, but the asset allocators seem to be (at least subconsciously) pricing in.

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