"If most traders would learn to sit on their hands fifty percent of the time, they would make a lot more money."
Bill Lipschutz

TINA revisited

Spending almost three weeks in Denmark this summer, I finally got to see friends and family I hadn’t seen since last Christmas, which was fab. On top of that, when your great friends from California (who are also Danish) happen to be there at the same time, it only gets better.

Jesper used to be a client of mine. Now, Anne and I have to settle for his and Louise’s friendship. If you know them, you will know what a great trade that is. Sitting in our Danish holiday home one evening in early August, enjoying one of Anne’ spectacular dinners, Jesper suddenly asked: “What do you make of Tina?” Being the fool I am, I thought he was referring to a former colleague of his, whom I also used to do business with, so I fell right into his trap: “Tina? Are you still in touch with her?”, I asked. Jesper laughed. “I am not talking about Tina but about TINA – There Is No Alternative”.

Suddenly the penny dropped. All evening, we had made regular references to the (perceived) insanity of the ongoing bull market in equities, and I suddenly realised what he was referring to – the extraordinary low yields that bonds offer at present, and how that has driven investors to buy equities despite the rather lofty valuation levels.

Considering the extraordinarily difficult circumstances for almost all corporates apart from a small number of tech giants that stand to benefit greatly from the current mayhem, it is hard to understand that logic for somebody like me who wants to apply a reasonable amount of fundamental analysis to the investment process.

Exhibit 1: Probability of US recession as currently priced in by various asset classes
Source: J.P Morgan.

That I am not the only one scratching my (thinning) hair is evident every morning when I open the newspaper. The chart above (Exhibit 1) was sent to me last week and, as you can see, J.P. Morgan is now of the opinion that investors are pricing the S&P 500 as if the probability of a US recession is nil. Quite extraordinary!

The worst example of mis-pricing I have ever experienced was the Japanese bull market of the late 1980s which ended in tears. That this one will also end in tears I have no doubt about, but there is a fundamental difference. Whereas the Japanese bull market in the late 1980s was very much driven by rising valuations in various service industries and an extraordinary bull market in real estate, especially in Tokyo, the US bull market of more recent times is driven by big tech (Exhibit 2).

Exhibit 2: FANGs vs. S&P 500 ex. FANGs*
Note: The term “FANG” to be defined below.
Source: Yardeni Research Inc., Standard & Poor’s.

Whilst the upswing in Japanese fortunes in the 1980s had no effect whatsoever on productivity and only caused even more capital to be misallocated, the bull market in big tech now is very much about increased digitisation and the productivity improvements that can be derived from that (although US valuations, as Japanese valuations in the 1980s, are also rising fast). For that reason, it will probably not be as tearful in the US as it was in Japan, but there will be tears nevertheless.