Quotidian Investments Monthly Commentary – March 2021
At the risk of sounding like a broken record we have to report that, for the third month in succession, March witnessed continued excessive volatility in global equity markets. Whilst we all recognise that stock-markets are dynamic and price action is intrinsically changeable the current scenario, where prices are being regularly and significantly marked upwards and down again in as large as a 5% range on a daily (and occasionally an intra-day) basis, clearly has little or no obvious relationship to our interpretation of economic reality. It is absurd to purport that the intrinsic value of a successful company could mutate so often, so quickly and by such extreme latitudes in such short periods of time.
Market-makers are fond of using the terms “risk on” when there are seemingly more buyers than sellers and “risk off” when the converse applies. In an ideal world that concept should be true but any intelligent analysis of the relationship between risk and reward cannot possibly reach the conclusion that a company’s shares can be priced downwards by 5% in the morning, priced upwards by 5% at teatime and be marked down by 5% again in the last half-hour before the closing bell.
I fear we at a loss to explain this current phenomenon and the explanations, rationales and narratives put forward by market-makers to justify these price manoeuvrings are, in our opinion, little more than hot air. To quote Homer: “words empty as the wind are best left unsaid.” Clarity will no doubt emerge.
Despite the frustration and irritation caused by the continuation of this extended (but temporary) period of false markets we can, however, offer three items of positive news that one can take from this disconnect with reality.
Firstly, we have taken advantage of unremitting and seemingly endless opportunities to top up our holdings at bargain prices in businesses that we trust. In the longer term this is a winning strategy.
Secondly, the Nasdaq market in particular has now completed a correction (which is the term formally used to describe a 10% fall from a market’s most recent high) but the effect on the Quotidian Fund’s performance has been negligible (and is measurable more in terms of opportunity cost that in any meaningful loss of actual profits). The extra good news here is that this correction should have created some headroom to allow for some steady and reliable upward momentum in the tech-heavy components of this index.
And, finally, we have bottomless reserves of patience with which to await the return of realistic equity pricing. In the absence of any economic-based imperatives which could indicate a need to move into the safety of cash, we are looking forward to analysing the first quarter results season which will be upon us from the second week of April onwards.
We anticipate that these latest corporate results will be far more positive than market analysts and the usual Wall Street pessimists, doomsters and fearmongers are predicting.
On 31st March 2021 the FTSE100 index closed the month at 6,713.63 (a rise of 3.55% in the month of March) and it stands at up 3.92% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st March shows a rise of 0.27% for the month and that means that the Fund is now up 0.45% for the 2021 year to date.
As we write this (in the early afternoon of 29th March), news is breaking of a major sell-off in the US markets and the cause of this makes very interesting reading. It seems that a very large investment fund has failed to meet its margin calls and has therefore been forced into immediately liquidating a substantial part of its holdings. These “block sales” amount to the not insignificant sum of $20 billion and so are clearly market moving. The negative effects, though, are related largely to the fund’s prime brokers, the individual companies this fund has invested in (which seem to be restricted to the banking and media sectors) and, of course, all of their shareholders will take a hit too.
The Fund is called Archegos Capital and is the family office running the investments of the immensely wealthy Hwang family. From the details released thus far this appears to be a highly speculative venture which has highly leveraged its chosen investments through the use of derivatives such as options, swaps and futures. Clearly it has made a number of decisions which have proved to be speculations rather than sound investments.
In themselves, these derivatives are perfectly valid vehicles with which to construct an investment portfolio but if the investment manager has a casino mentality or is simply untrustworthy then badly chosen or badly timed decisions can quickly come back to bite. In this particular case it seems that the managers (apparently led by Mr Hwang himself) decided not to pay the margin calls and so defaulted on what at that point were losing positions. This breakage of good faith has had severe consequences. Those prime brokers who were quick to react (Goldman Sachs, Morgan Stanley and UBS) have escaped relatively unscathed but two others (Credit Suisse and Nomura) have taken substantial financial hits. Nomura’s share price has already fallen by 16% in Far Eastern markets this morning and Credit Suisse’s shares have already fallen by 14% in the USA this afternoon. Their investors will be thrilled.
As more details have emerged it is interesting to note that Mr Hwang was convicted of insider trading in 2012 and banned from trading in Hong Kong. Given the global nature of today’s investment world, the real questions, therefore, are how on earth (in these highly regulated times) he was ever able to hold a position of trust again and how can Credit Suisse possibly defend the quality (or lack of it) of its risk management systems.
Extending a huge line of credit to a man of dubious provenance, disreputable character and with past form is quite difficult to justify and criminal negligence might not be too strong a description, especially if this matter can be linked to excessive and otherwise unjustifiable volatility in equity pricing generally.
Perhaps this episode can cast some light on the trading styles and good faith of individual managers that might better explain the period of exceptional volatility mentioned earlier in this report. Naturally, we don’t have enough evidence to reach a viable judgement but clearly there have been other forces at play beyond basic economic reality.
We are obliged to Ruth Dudley Edwards (Irish historian, writer and alumna of the University of Cambridge) for lighting the spark that led to my covering the following topic (and which eventually relates to investment).
Whether remainer or leaver, we have all now become familiar with the EU’s spite-laden determination to undermine Brexit and the UK’s ability to make a huge success of the opportunities it has created now that Britain is no longer under the dead hand of Brussels.
Following Macron’s dullness and duplicity in trying by lying to discredit the Astra Zeneca vaccine (quel un plonkeur) and Von der Leyen’s pathetic attempts to deflect blame away from herself (and the EU commission) for her and their catastrophic handling of the EU’s Covid vaccine programme, her threats to confiscate private-sector businesses and her flagrant attempts to flout the law and ride roughshod over intellectual property rights. The EU and its clown-like leaders (in name but not in intelligence or by actions) have good cause to be grateful to Micheal (the correct Irish spelling) Martin, the new Irish Prime Minister and his voice of intelligence and reason.
In a speech on 23rd March he pointed out some salient facts that corrected the invective we had been hearing from the EU’s self-appointed grandees. Mr Martin reminded those who had preferred to deal in baloney that the Astra Zeneca vaccine comprised 280 raw materials which had been sourced from suppliers in 19 different countries around the world. Far from ‘belonging to the EU’, the reality is that these vaccines remain the legal property of the manufacturer until such time as they have been paid for and taken delivery of by the end-user.
A generous interpretation of Macron and Von der Leyen’s actions (acting on behalf of and with the full authority of the EU) is that they were reckless and self-serving. Macron refused to take professional advice to put France into lockdown in January following another spike in its Covid infections, with the result that he has now been forced belatedly into that very course of action. Too little, too late according to a number of our contacts in that country. Covid is now out of control in large swathes of France and the negative economic effects of that will be dire. Macron himself has moved from slight odds-on favourite in the forthcoming French general election to significant odds against. How apposite that he, like Covid, will likely be out of control too. Von der Leyen’s child-like outbursts have also been naïve acts of deflection of blame and self-protection. Her political career has been a masterclass of King Midas in reverse. Everything she has been involved in has turned to dust. She is inept and her past record has been one of utter failure; the word from Germany (where she was a hopeless defence minister) is that she was moved to the EU to get her out of the way.
A less generous view of Tweedledum and Tweedledee’s recent actions is that they demonstrate the heights of stupidity. I’ve seen jellyfish with more backbone, alumni of the Arthur Scargill School of Charm with better manners, ants with a greater sense of purpose, rolling drunkards with a better sense of direction, chimpanzees with superior leadership skills, a troop of monkeys with better organisational abilities and darts players with a better grasp of mathematics.
The theme of this section of our report is protectionism and we’ve used the examples of Macron and Von der Leyen as a proxy for one of the central tenets of the EU itself. This is relevant simply in terms of its actual or potential effects on our investments.
Protectionism leads directly to inefficiency, low quality and ultimately to poverty. In turn, poverty leads to little or no demand for products and services, a situation which subdues the supply side of the economy and, therefore, any potentially profitable commercial activity. It becomes the slow and lingering death of a country’s economy together with its self-reliance and freedoms. The EU faces the complete failure of its ‘project’ and it doesn’t have the will to change in a more positive direction, the leadership to do so nor the belief in capitalism that would be its route to profitability and future success.
Proof positive of the negative economic impact of Macron and Von der Leyen’s inabilities and harmful actions comes in the form of an analysis and report on Germany’s current economic status. Germany, of course, is the largest economy in the EU and this report was prepared and issued in March by the IFO Institute in Munich (one of the country’s largest and most respected economic research and think-tanks).
It states that Germany’s budget deficit this year is expected to rise to 250 billion euros, which is equivalent to 7% of its GDP. The longer lockdown lasts (and Merkel is currently pushing fiercely to impose a hard lockdown through to the end of June in Germany) the higher the risk of “catastrophic levels of bankruptcies”.
As Churchill once said, socialism is the philosophy of failure, the creed of ignorance and the gospel of envy. He also described the ultimate socialist nirvana of communism as simply the equal sharing of misery. That is the path that the EU still chooses unbendingly to follow and with such idiots in positions of power its continued existence is only a matter if time.
Having quoted from Homer at the beginning of this report I return to him towards the close. This time, though, it’s not the poetic Greek chap but the sage de nos jours, Homer Simpson, who can always be relied upon for insightful wisdom.
This Homer’s ironic mantra for strong leadership is “It’s everyone’s fault but mine” which, by sheer co-incidence, perfectly suits Von der Leyen’s ‘management’ style. And having listened to recent speeches from Macron, Homer’s phrase: “Aren’t those the sort of things that dumb people say to try and sound important” hits the nail right on the head.