2021 Q1 Review

Matthew: Hello again, everybody, and welcome to this long weekend edition of Under the Macroscope. This week, we will refer to a very relevant topic to the week that has passed, and that being the additional stimulus package that Joe Biden announced in the U.S. More on that later, as well as the vaccine program and its rollout around the world. We’re going to use this podcast to reflect on Q1 of 2021 and how things have played out globally. I’m joined as usual by Skybound Capital’s Chief Strategist in the U.K. office, Jabir Sardharwalla. Jabir, on reflecting on one of Skybound Capital’s colleague’s, “Week in Review”, and looking at the 12-month numbers of the major indices around the world, the FTSE, the S&P500, the NASDAQ. Staggering numbers compared to precisely a year ago. The percentage rise in those indices — is this reality or is it fantasy?

Jabir: Look, it’s a great question, and on that point, actually only yesterday I was looking at the year to date numbers because given the way the world has gone, rising yields and all the volatility anyone would be forgiven for thinking it must be quite a rough market out there. Here just a handful of numbers, Matt. The Dow Jones year to date up nearly 8%. S&P up just 6. FTSE up 4.5. DAX, Germany’s stock market up, almost 10. Where the hell did that come from — especially with all the European vaccine stories? The French market, the CAC 40, up also nearly 10. And so on and so on it goes. There are some impressive numbers out of Europe. Is it fantasy? Reality?

I think we’ve got to be careful here because I came across an interesting article that breaks down the performance by various sectors, for instance. This was an analysis done by Rebeka, but the source comes from many different areas. They look at three different categories, the percentage of stocks experiencing negative absolute returns over a long period, 1980 to 2020, so that’s 40 years. Likewise, the percentage of stocks experiencing negative excess returns. Then, the percentage of stocks defined as mega winners over that same period. It’s startling. In the first two columns, you’re looking at percentages between the 40–60% range; remember negative returns, absolute and excess. But when you look at the mega winners, it’s only around 5–10%. So I think it gives you an idea of how skewed and distorted this rally has been. If you weren’t in the one arguably most important sector, technology, you missed it. It’s as simple as that. You just missed it.

There are others, of course. I’m generalising there. It just shows you don’t try and time the market. It’s not worth it. You’ve got to be damn good. You really do. Just stay in there, be patient. Patient capital, as we’ve often spoken about. That’s what you have to do to get these returns and capture the market.

Matthew: As we’ve started this podcast series during the first quarter of 2021, cryptocurrencies have been a fairly regular theme. They’ve come up in various guises on the podcast, but in the last two weeks, we’ve seen quite a lot of noise from several quarters around tax revenue services getting interested in how they are going to tax gains. It’s brought another element of regulation to this debate.

Jabir: Exactly. I think that’s bedding down the big issue going forward that all central banks and governments will face: how do we pay our way out of this debt? They’re setting the scene for what they can get their hands on. It really is the single biggest issue.

Cryptos are no different. We’ve seen some significant dances here. We spoke about this last week in terms of the E.U.’s new digital currency exploits. We know that China has been very active in this space. I think it’s paving the way now to encompass a wide range of different securities that people can trade.

The authorities are picking up on the fact, and you can see this in Bitcoin price, which has remained remarkably steady. The authorities are picking up on the fact that there’s huge pent up demand now. I saw that Elon Musk, a week or two ago, has started accepting payment in Bitcoin. So I think they want to be there, i.e., the authorities, to collect the tax revenues that they need for when these payments start.

Matthew: At the start of that answer, you said pay our way out of this debt. It gives me a seamless link to our next topic, which is the announcement this week of a further stimulus package in the U.S. by Joe Biden. Now, as with many of these things, the payment terms are over 12 years. So beyond any possible presidential term. Is this a case of “I’m going to put some plans in place, but I’m going to leave it for somebody else to clean up after I’ve gone”?

Jabir: Yes, exactly. I think it is just that. It’s a famous adage — just kick the can down the road. That’s all we ever seem to do, and it’s come to define certainly western democracies where time as president or prime minister ranges from 4 to 5 years roughly. It’s so easy. For instance, if you look in the bond markets, the advent of the 30-year and especially the 50-year. I mean, let’s face it, who’s going to be around that long? It’s easy to package something up into a period that doesn’t span an entire lifetime but certainly goes halfway through. It’s a great soundbite. That’s what we see now. By contrast, as critical as the world may be of, let’s say, administrations that are seen as perhaps more dictatorial just because they don’t conform to western standards. You have regimes like those in China, for instance, where it’s all about planning — planning for the long game. Critically they are around to see it through. This is a fundamental difference as far as I’m concerned.

We see now the next phase of U.S. politics, particularly spending. Biden wants to take it down the infrastructure route. We knew that was coming. Big sums being advertised, I think, in the order of $2 trillion. We’ve just had a nearly $2 trillion fiscal stimulus. Another one on infrastructure will incorporate part of the Green bill that could also extend into a separate Green bill. Who’s going to be around?

The risk! The risk is what if a newcomer then comes along and decides we’re going to call it a halt there and we’re going to have a complete change. Possibly a usurp. It’s no way to manage as far as I’m concerned, but that’s all it is. It’s just cosmetics.

Matthew: Shall we call it the nature of politics globally?

Jabir: Yes. I think so.

Matthew: We cannot finish a brief review of the first quarter without mention of the vaccine program, which has been critical to every country over the past three months, the rollout of vaccinations. With some big announcements in South Africa earlier this week around Johnson and Johnson. Just your thoughts on where we’ve come from this quarter and the prospects that we face heading into Q2.

Jabir: For me, the whole thing highlights how one should never listen to the mass media because when we started it, people were saying, “God, it’s going to take decades to vaccinate the whole world.” When I look at the situation right now, the most recent stance, nearly 600 million doses of various vaccines have been distributed worldwide. Yes, it’s a distorted picture. Those that have committed to it have done incredibly well. We know about Israel. We know about the U.K. now. Nearly half the adult population. Incidentally some good news yesterday from one of the big vaccine makers in their trials on children. It seems like it’s incredibly effective on them.

I think what this teaches us is that we are now at the exponential part of the curve. The rollout here is massive. More vaccines are coming on supply and at 600 million doses already from a world population of around give or take 8 billion, that’s very good progress. I think this year, even with all the setbacks that we’ve had, the negative media around the Oxford AstraZeneca vaccine, the rather feeble rollout by Europe, I think we’re going to see quite a lot of the globe vaccinated this year. I very much believe that’s on the cards.

Matthew: More positive news than perhaps you expected three months ago on vaccinations. Another topic in recent weeks has been some really impressive growth forecasts from some of the world’s major economies for 2021.

By way of finishing, I have to ask you your views on inflation now. Even pre-pandemic, you were warning of inflationary fears 2021 into 22. So what has what’s happened in the last 12 to 18 months to change your view or not?

Jabir: No change in views, Matt. I think, if anything, it’s made my conviction even stronger. That inflation is going to become a permanent problem. Where we are now is pre-pandemic. I always felt that this year we would start to see inflation creep in. That was for a range of factors. The pandemic has introduced so much more money into the system that it has done a couple of things.

One is that it’s put money back into people’s bank accounts, and we know that. We spoke about this last week in the U.K. An estimated £150 billion now available for consumer spending. Imagine if only a percentage of that finds its way back into the market.

The other thing is to look at the impact that it’s had on supply lines across the value chain. We’ve seen the problems, hiccups like the Suez Canal situation most recently can have. We know, for instance, from freight and shipping indices just how acute the problem is. Supply is lagging demand, and demand hasn’t even really kicked off yet. By the middle of the year, people are back into full flow, which I believe will happen; how will we keep up with that demand?

I’m not for a moment advocating that we’re going back to the Weimar Republic or we’re going back to a Zimbabwean or Venezuelan, Argentinian style inflation era. Not at all. But I think we are moving towards an elevated inflation environment where everyone has agreed to so far. We’re coming off a low base, and yes, there will be a rise in inflation. The big debate is, is that temporary? Or does it then become more longer-term? I believe it’s the latter. We’ll find out.

Don’t forget that it wasn’t long ago that everybody was saying, “No, it’s not going to be an issue at all.” The needle has moved. Even for those who are against the idea of inflation, the needle has moved to “no, there will be some issue”.

Okay, we accept that. So let’s see.

Matthew: Well, it seems that the only certainty at the moment as it has been for the last year is relative uncertainty, so plenty to keep our eyes and ears on as we move into Q2. Jabir, as always great to catch up with you. Thank you to those who have subscribed to the podcast. It is available on Apple, Spotify, and the Google podcast platform for Android. And all the past podcast episodes available at Skybound Capital’s website, www.skyboundcapital.com. Until next time on Under the Macroscope, have a great week everyone.