'Buy the Umbrella' - Issue #42
Hi there!
Here is your latest dose of ‘Buy the Umbrella’, a short list of interesting things we’ve been reading and thinking about during the week.
If you missed our prior issue, you can find it here.
Quote
"I think one of the things people might be getting wrong is the assumption that disruption is new, or that the scale of it is greater than in the past. We are very prone to recency bias."
— Terry Smith (Fundsmith CEO & CIO)
Charts
US equity market valuations
If we look at the US equity market capitalisation as a whole, relative to GDP, we are now re-testing the prior peak during the technology bubble in March 2000. Probabilistically, how likely is it that the market would bottom at a prior bubble high?
World Container Index (WCI) rapidly declining for some routes
The media has extensively covered supply chain challenges and shipping constraints over the last 2 years. During this time, the WCI Shanghai to LA container freight benchmark increased to over $12,000 per 40 foot box. Since then, costs have declined close to their prior decade range.
The reverse route, LA to Shanghai, has seen meaningful declines too however, shipping costs are still 114% higher than February 2020 levels. Likewise, Shanghai to New York costs remain 122% higher.
Hong Kong emigration accelerates
Strict covid-19 controls and an uncompromising new national security regime have driven a reversal in Hong Kong's net migration flows since 2019.
Many of the 113,000 residents who left in the first half of 2022 were higher earning professionals, resulting in further pressure on the local housing market, where prices are now down 11% from their August 2021 peak.
Population dynamics in Hong Kong are being exacerbated by the declining birth rate (black line) and the rising death rate (orange line). The death rate has now exceeded the birth rate for over 2 years.
Adding to Hong Kong's troubles is the ongoing strengthening U.S. dollar as a result of the Federal Reserve's drive to stamp down inflation by raising interest rates.
The Hong Kong Monetary Authority (HKMA) has to follow the fed in raising rates if it wants to maintain the Hong Kong dollar's long-standing peg to the U.S. dollar. The HKMA is trying to follow a more gradual increase in interest rates to reduce the burden on property owners and the wider local economy.
Back in July, Financial Secretary Paul Chan said the city's "huge" reserves are enough to maintain the linked exchange rate, despite capital outflows. These outflows are a result of investors seeking to earn higher interest rate returns offered by the U.S. dollar. The exchange reserves balance is currently down 16% since the start of 2022.
Despite all the bearish factors highlighted above, there has not (yet?) been a significant surge in bearish wagers against the currency:
Articles
Uber expands advertising business globally, targeting $1 billion in ad revenue
Uber’s CEO Dara Khosrowshahi said the company was targeting $1 billion in gross ad bookings by 2024, on an annualised basis. As of Q2, the existing ad business had an annual gross bookings run rate of $350 million.
The business unit formed earlier this year and run by former Amazon advertising executive Mark Grether, plans to display promotions within its apps, on top of its cars and on the back of seats. Brands will also be able to have emails sent to Uber's 122 million active users.
Self-driving cars: $100 billion to go no-where
For the last 10+ years, we have seen exciting demonstrations from companies including Alphabet's Waymo, GM's Cruise, Ford, Tesla, and Zoox that have promised cars capable of piloting themselves without any human input or oversight. Repeated promises and timelines have lapsed, with the goal of transforming the $2 trillion global automotive industry. According to Bloomberg, it seems like there is still a long way to go.
Anthony Levondowski, the engineer who co-founded Waymo and then Ottomotto, stated that “You’d be hard-pressed to find another industry that’s invested so many dollars in R&D and that has delivered so little". He goes a step further: “Forget about profits—what’s the combined revenue of all the robo-taxi, robo-truck, robo-whatever companies? Is it a million dollars? Maybe. I think it’s more like zero.”
Trafigura warns global copper inventories have fallen to perilously low levels
Speaking at an FT conference, Kostas Bintas, Trafigura's co-head of metals and minerals trading, said the copper market is currently running with inventories that cover 4.9 days of global consumption and is expected to end the year at 2.7 days. Copper inventories are typically counted in the weeks.
“While there is so much attention being paid to the weakness in the real estate sector in China, quietly, the demand for infrastructure, electric vehicle-related copper demand, more than makes up for it,” Bintas said. “It actually not only cancels completely the real estate weakness, but also adds to their consumption growth increase.”
Earnings Commentary Insights
Freeport-McMoRan: Physical copper market is strikingly tight, globally
CEO: "Higher prices will be required to bring on new suppliers, much higher prices than we have now. Simply because the current price is not sufficient to incent new supply development on the scale that will be required to meet this increasing demand [driven by the ongoing global electrification and the energy transition]."
Hermes: Will hike prices by 5-10% in 2023, no signs of any slowdown
EVP of Finance: "For the moment, we don't see any sign of slowdown in any of our markets". The company plans to accelerate a hiring drive, after adding 800 people in the first six months of the year and increased salaries for all European employees in July.
J.P. Morgan: Loan performance remains solid
CFO: "We just don't see anything that you could realistically describe as a crack, in any of our actual credit performance. [...] but we've done some fairly detailed analysis about different cohorts and early delinquency bucket entry rates and stuff like that. And we do see in some cases some tiny increases, but generally in almost all cases, we think that's normalization and it's even slower than we expect, so."
ASML: Semiconductor demand continues to be strong
CEO: "Growth in semiconductor end markets & increasing lithography intensity are driving demand for our products & services... Based on market developments we are looking... [at] further increasing our capacity beyond what we presented during our Sept 2021 Investor Day."
Until next time...
Thank you for reading this week’s issue. If you found it interesting, consider sharing it with someone who would enjoy it.
Do you have any questions or thoughts? Please feel free to reach out.
Have a wonderful week.
Why ‘Buy the Umbrella’?
Individuals, many of whom also run businesses and governments, tend to not think of the downside when the present is stable, and the future is looking positive (usually when we feel most in control).
Just because it is currently sunny, does not mean it will never rain. If we are not prepared, once it does begin to rain, we will end up running around looking for an umbrella in the middle of a storm when they are typically in short supply. We therefore need to ‘buy the umbrella’ before it rains.
Simultaneously, we cannot allow our awareness of risk to make us fearful, pessimistic, or paranoid, as this too works against us over the long-term.
Having the right mindset in advance is critical. The challenge is getting the right balance between being optimistic about the future and being able to not only withstand future crises, but in fact grow stronger due to the opportunities they tend to present.
It is not enough just to be conservative. One needs to be willing to put cash to work when others feel least comfortable doing it. To do that with confidence, we need to have a foundational understanding of history, business, markets and human psychology.
Our mission at BTU is to learn as much about the world as possible, and in doing so, to try to find investment opportunities with favourable risk/reward characteristics. These should, over the long term, help build sustainable wealth.