End of an era

[7 min read]

Beginnings are often innocuous. Endings tend to be memorable. Yes, today we’re going to talk about bull markets and bear markets. But we’re also going to talk about US football, Tom Brady and Patrick Mahomes.

Australian readers will be aware that today (Sunday here in Colorado) is the US’ REAL national holiday. It’s the Super Bowl, the Grand Final of US football. The Kansas City Chiefs, led by young star quarterback Patrick Mahomes, play the Tampa Bay Buccaneers, led by the ageless wonder and greatest of all time, Tom Brady.

That’s about all I’m going to say about the game. From my 10 years in Australia, I know that Queenslanders and some New South Welshmen don’t consider US football to be a real sport. ‘But they wear pads!’, ‘It’s too boring!’ ‘Too many adverts.’

And Victorians? They’re a bit more open-minded about it, although it could (obviously) never compare with Australian Rules Football. In sports, like in life, value is subjective; it resides in the eye of the beholder. Or in the heart. ‘The heart wants what the heart wants,’ as Emily Dickinson once wrote.

You like what you like. And in my experience, as long as a sport has speed, skill, lead changes and violence, it usually makes for pretty good entertainment. That’s the key. Speed, skill and violence make for drama. And lead changes heighten the drama. Tragedies and triumphs play out one contest at a time, as the clock ticks down relentlessly.

It should be a great contest today, at least I hope. Everyone likes a good drama. But one way or another, it will be momentous. Either the torch will be passed from one great player to the next, or a great player will go out on top. It’s a nice clean storyline either way.

The same cannot be said for the stock market. After publishing the most recent Trade of the Decade in The Bonner-Denning Letter, I’ve stepped back this week to just look at prices and data. No narratives. No themes. No big ideas. Just the numbers and facts.

Of course, there’s a big caveat there. For the price signals in the market to tell you anything useful, they have to be real price signals. And THAT is a hotly-disputed point, at least among some people. Why?

Because financial asset prices all take their key off whatever the ‘risk-free’ rate of return is. That return is usually attached to a high-quality government bond, lately the 10-year or 30-year US Treasury bond. And of course, the ‘risk-free’ yield on US Treasuries is also influenced by the target policy rate set by the US Federal Reserve, the size of the US governments debt and deficits, and the growth in the US economy.

So yes, there are a lot of variables. But the basic point is still true. If the ‘risk-free’ rate is sufficiently low, you have an incentive to go get a better return in other asset classes, like real estate or stocks. If the ‘risk-free’ rate is sufficiently high, you can (in theory) safely put your money in government bonds, earn interest, and be confident you’ll get your principal back and not lose too much real purchasing power to inflation.

All of which is prologue to bitcoin again crossing over US$40,000 and the big tech stocks in the US (Apple, Facebook, Amazon, Alphabet, and Microsoft) now having a combined market capitalisation of nearly $8 trillion — almost five times the size of Australia’s entire economy. What does that data tell us about where we are in this stock market cycle?

Well, for one it tells us that the fourth quarter was an ideal time to be a technology company. With many people ‘locked down’ by government decree, either working from home or getting ‘free’ money from the government, conditions were perfect for a blowout in earnings for companies that do business online. You have to wonder if conditions will ever be better, in fact.

It’s hard to imagine a better set up. And as earnings season began last week, Amazon kicked it off, reporting over $100 billion in revenue in the fourth quarter alone. I won’t breakdown the numbers here (I’ve done that in the most recent weekly update for newsletter subscribers). But there’s no denying it’s a glowing result.

On the other hands, ExxonMobil’s earnings report couldn’t have been much worse. The company reported its first annual loss in 40 years. It paid out its dividend by reducing capital spending. It took a $20 billion write-down on natural gas assets. And it assessed the long-term impact of oil under $50/barrel and ‘The Energy Transition’, where the entire world moves away from fossil fuels and toward renewables.

When you look at those two financial results, it also feels like the passing of a torch from one generation of market leader to the next. A capital intensive, ‘Old Economy’ industry, battered by the pandemic and a new era of focus on at the board level on Environment, Sustainability, and Governance (ESG) versus a ‘New Economy’ titan with aspirations to become the world’s ‘everything store’, generating huge profit margins on its cloud computing and data storage business.

Makes for a nice tidy story, doesn’t it? Out with the old. In with the new. All of which would justify even higher price targets on tech/growth/momentum stocks. That’s the story Wall Street desperately wants you to believe. Do you?

Most investors seem to, at least for the moment. The market cap-to-GDP ratio for global stocks hit 123% last week. Investors look to the future and see nothing but bigger earnings, a COVID recovery, and cleaner energy. Trump is gone. The Deep State is back in charge. The New World Order has been restored.

Don’t be so sure. The idea that the entire world can seamlessly generate all its power needs from weather-related ‘free energy’ — wind, waves, sun — is what I call giant thermodynamic fraud. It will take factories powered by coal, oil and gas to build solar panels and turbines that turn wind and sun into electricity.

Whatever the future looks like, it’s going to take a lot of oil, gas, and coal to get there. The dirty little secret of the five great tech stocks is that their business would not be possible without coal miners, pipelines, and diesel generators (for back-up power in data centers). Don’t count them out just yet.

Regards,

Dan Denning,
Editor, The Rum Rebellion

PS: My prediction: 34-14 Chiefs. Too much firepower. And for the next 10 years in markets: oil and energy outperforms technology.

Thinking about gold (and gold stocks)?

Read this before you buy anything:

Gold 2021 Outlook Report

Fear and Loathing in Miami
Bill Bonner

Getting from point A to point B is not always as easy as it sounds.

Yesterday, we got tripped up by COVID-19 testing requirements.

If you missed our Diary on Friday, we’ll bring you up to speed.

We’re on our way down to Nicaragua — partly for business, partly for pleasure. To get into the country, you need to prove that you’re COVID-free.

We’d been tested twice — including a rapid test on Wednesday. We thought that would soothe the fears of Nicaragua’s government.

And maybe it would have. But we never got there to find out.

Drive-through testing

Instead, it was the airline — Avianca — that stopped us. They said they had no record of our test results.

We had a few hours before the plane took off, so we rushed from Miami Airport to a nearby clinic that promised a quick test turnaround.

The test centre was a drive-through. We were in a cab, but the driver — Haitian, speaking Creole on his cell phone as he drove — was patient.

The building had been a bank with drive-through tellers. The cab parked in the shade. We got out, sat in a metal chair, and endured the nasal swabbing.

‘That’s $200,’ the tester informed us. ‘And our credit card machine isn’t working. We can only take cash.’

It seemed fishy to us…but what do we know?

They all had their surgical outfits on. For all we knew, they were doing a lively trade in body parts as well as pretending to do COVID tests.

The whole thing took less than five minutes. And then we headed back to the airport, where we awaited the results by email.

Not on the list

About an hour later, the report came in…this one, like the previous two, found no evidence of the dreaded plague.

We wondered: How did they get the results so fast? Was the test legit?

But this is the Age of Miracles. And we had no time to wonder. We had to get on an airplane. We sent the results to Avianca so we could be approved for travel.

Alas, something went wrong. No response.

Arguing with the ticket agents did no good. They merely reported that we weren’t ‘on the list.’ The plane to Managua, if it left at all, took off without us.

Free travel

So, we are still in Miami. And now, with time on our hands, we wonder…

…about what a ‘golden age’ we enjoyed up until 2001…

The US was on top of the world…numero uno by almost any measure.

We could go almost anywhere, almost anytime…

There was no TSA…no security checks…no temperature checks…no face masks…no COVID tests.

We recall once leaving on a trip around the world with only 24 hours’ advance notice…and only $6 (and a credit card) in our pockets…

We were confident that we wouldn’t have any trouble getting money…food…lodging…and transportation.

And we were right. We could travel to Paris…Bombay…Melbourne…

And everywhere, Americans were welcomed. People smiled. Ticket agents smiled. Stewardesses smiled and served drinks. Hotel clerks smiled. Waiters smiled.

Smiling was how you got along with others…it made you feel good and put others at ease.

No smiles

Now, nobody smiles. Nobody. Nowhere. Nohow.

Instead, they all go about with ‘face coverings’…some with freaky designs…some industrial-strength germ-strainers…some just the standard surgical masks…

Many are even doubling up…with two-ply masks…just to make sure no smile escapes.

And some add plastic face shields, another level of protection against a dangerous outside world.

Restaurants are likely to be closed. Flights are cancelled. Plans are put on hold…weddings delayed…meetings postponed…

And see how easy it is to get booted off ‘the list’!

Flynn effect

Meanwhile…

Yesterday, we reported on what appears to be the first drop in IQ scores ever. Until now, each generation — as measured by standardised IQ tests — got a little smarter (or at least, better able to take the tests).

This intelligence creep is known as the ‘Flynn effect’, named after James R Flynn, the intelligence researcher who first noticed it.

We don’t know who will put their name to the current trend — stupidity creep — but it is surely a phenomenon worth noting.

Constant distraction

We write to you from the ‘Margaritaville’ bar and restaurant, the only one open to us in this part of the airport.

It is no wonder people aren’t thinking as clearly as they used to — with so many distractions, it’s amazing that they can think at all.

Loud, mindless music blares from overhead speakers. And three TV screens — each with its own sort of drivel — beckon to us.

The biggest one, directly in front of us, seems on an endless sports loop…another might be showing a Spanish-language soap opera — a telenovela. And god knows what’s going on on the third screen.

Can anyone hold a thought for more than a second amid all these distractions? Can you have a proper conversation? Write a poem? Compose a verse? Understand fake money?

Constantly distracted always interrupted…regularly fed a diet of fake news and insipid commentary, is it any wonder we can no longer think straight?

A year ago…people could at least still smile at one another.

Now, that simple pleasure, too…is gone.

Stay tuned…

Regards,

Bill Bonner,
For The Rum Rebellion