Ingham Analytics Weekly Letter on Sunday - 18 April 2021

Sunday, 18 April 2021

The Ingham Analytics Weekly Letter on Sunday

Welcome to our Ingham Analytics Weekly Letter on Sunday where we take a step back to see wood for trees, taking stock of things that grabbed our attention during the week that was, and with customary tongue in cheek. This is our penultimate Letter for now as we shall be taking a sabbatical from the end of April and will then be refocusing our activities. We've built a strong following, for which we thank you, and we hope to engage again in the future. 

The United States has an exorbitant privilege, at least whilst it lasts, in being able to rack up large current account deficits and even larger government and private debt. This week the US chalked up another debt record of $28.2 trillion. All denominated in USD, still the largest reserve currency having taken over that baton from sterling after World War II.

Talking about the Second World War, this year US debt to GDP and the deficit will be the highest since 1946. This hasn't put off buyers of Treasury's and a third of US federal debt is held overseas. At $400 billion, federal interest payments though are manageable. We estimate interest this year will be around 5% of federal spending thanks to low interest rates - again, whilst they last. Compare this to South Africa, where government debt servicing this year will be almost one rand in every four - if that's not enough of a horror show to drag the ANC government into fiscal reality nothing is. 

What we observe in most developed markets is that a decline in bond yields since the 1980s is accompanied by a rise in the ratio of private and public non-financial debt to GDP. In fact, in the US it is nearing 300% of GDP, doubling in 40 years. The world is spending like a drunken sailor on shore leave but there is less of an increase in interest rates needed now to slow inflation.

But that doesn't mean price inflation won't happen. Inflation may not be seen on the retail high street or on the Amazon website, but it is alive and well in the avenues of American suburbia and elsewhere, such as in Canada, New Zealand and Australia whilst in Seoul, South Korea, a three-room apartment in Gangnam will set you back $3 million - that's Gangnam Style for you.

On Thursday came the news that the median US home price was $353,000 in March, a jaw dropping year-on-year rise of 17%. Even more amazing is that a typical home took just 25 days to shift, 19 days less than in 2020. And 42% of homes sell for above asking price. In New York there were 58% more transactions.

Asset price inflation, including equities, a feature of the post global financial crisis world this past decade, is bubbling along. And this can spill over elsewhere, no wonder bond markets have signalled a need for rates to be tightened. Higher rates on much higher debt doesn't make for a happy combination, as the UK Chancellor of the Exchequer spelled out recently.     

Coinbase, the cryptocurrency exchange, had a direct listing on Wednesday. No new equity issued but insiders were quick to flog stock to eager new-age ETFs like ARK Innovation. We have no clue how to ascribe a credible valuation to this but we're all ears to hear from those who can. As Coinbase has traded within a 30% band we guess others struggle to pin the tail on the donkey too.   

We issued a note last week called "Turkey shoot?" and as we like to be ahead of the curve, we weren't that surprised on Friday to learn that Turkey has banned cryptocurrencies because they are "excessively volatile" (you don't say) and can't be regulated (well, that's why they exist). In fact, even the PayPal online payment system was banned in Turkey a few years back. China has a jaundiced eye toward crypto too.   

Whilst bitcoin is all over the show the Turkish lira has been skydiving for years, making the benighted rand seem like the Swiss franc. This week the rand traded close to R14/$, a far cry from R19/$ a year ago at the height of the COVID-19 pandemonium. Five years ago, you paid R5 for one Turkish lira, this week you shelled out just R1.75 for a lira whilst against the Brazilian real you pay around R2.50 compared with over R5. Not that we can go anywhere but if cheap and cheerful is your thing maybe Istanbul is the future bargain basement travel destination, provided price inflation doesn't erode the advantage.   

Whilst retail transactions often involve digital payment, the real folding stuff is not dead, far from it. Circulation of banknotes is rising - 17% for USD alone in the twelve months to February. In Sweden, noted for non-cash transactions, cash is being stuffed under mattresses.

Cash in circulation globally has doubled in 20 years. Large denomination notes such as the $100 bill are popular. This can't all be ascribed to mafia bosses.

As cyberattacks and hacking of accounts rises, and uncertainty or fear of the future is ever present, a paper or polymer note, these days with anti-counterfeiting technology embedded, can be a reassuring and tangible store of value - not least when in some countries putting cash on deposit means you pay the bank to keep your money by way of a negative yield.

Cryptocurrency has an old-fashioned competitor. Cash. Even bellbottoms come back into style every so often.   

Going back to volatility, our note this week "NOPE, you can make money out of volatility" gives pointers on how to exploit equity volatility but you need to be sharp to make it your friend.

We discussed Alibaba in our Letter last Sunday and this week we issued a note entitled "Slap" which assessed recent regulatory developments and the impact. Whilst there have been investor concerns around Chinese scrutiny of technology firms, we'd not overblow it. And with a trend for more Hong Kong listings of China based firms, either stand-alone or in addition to New York, better transparency and oversight is no bad thing.

For Alibaba, we are forecasting a three-year compound growth rate in Chinese yuan denominated earnings of 22%. Our valuation model references Alibaba to Tencent and on this basis we see relative value in Alibaba. We called Tencent as cooked a while back and despite being 20% or so below the year-to-date high is still too pricey for us.   

We're into earnings season in the US with several banks issuing Q1 figures this week. Bottom lines are boosted by release of provisions, $2.7 billion for example at Bank of America.

However, low interest rates are a challenge when deposits have increased and loans are tepid - as an example, the difference between what JPMorgan makes on loans and pays on deposits was only 1.69% compared with 2.37% at the same time a year ago, a 0.68% difference that adds up when you've got balance sheets so large. 

One bank to do well from heated stock markets in America is Goldman Sachs. Trading revenue grew 47% with share trading revenue up 68% alone. Fees from M&A and share offerings is up 73% in the quarter. And there is more in the pipeline. That's the thing about COVID-19, the haves have more, and the have-nots have less, as we see with both house prices and equities.       

We paid tribute last week to prince Philip, whose funeral it was yesterday. He passed just shy of 100 years old and another British institution to claim a century is the AGA cooker which we discover is as popular as ever, with the extensive range of kitchenware continuing to be made at factories in England at a time when most stuff seems to be offshored to the East.

MBA textbooks tell us that most companies aren't supposed to last so long but AGA not only keeps true to tradition but also has snazzy new stuff too. It'll cost you a pretty penny, but it'll be a well-used appliance, perhaps a useful conversation piece and a family heirloom for the lucky offspring to get first dibs in the last will & testament. For us there is a psychological appeal in long-lived names that come with high manufacturing quality and utility value - that yearning for a bygone time that was seemingly a better time. 

For the advertising buffs among you, David Ogilvy, the name behind the famous Ogilvy & Mather, wrote the AGA sales training manual in 1935.

Mr Ogilvy's AGA manual is a fascinating read back to another era but most of the advice is as relevant today as then, including clever tips on turning interest into a sale. In parts it almost reads like The Art of War by Sun Tzu with a section entitled Attack, another Defense. There is even a small section called "wise-cracking" in which the salesman is encouraged to "pepper your talk with anecdote and jokes" and "above all, laugh till you cry every time the prospect makes the joke about the Aga Khan."   

Out of interest, the standard model in 1935 cost 52 pounds and ten shillings, including delivery and installation, with the posh Model 21 costing 83 pounds and ten shillings, up and running in the home. This at a time when even in pricey London the average terraced house sold for 400 pounds and most houses sold for 750 pounds or less. Annual salaries were 165 pounds.

And you could even get hire purchase terms, all neatly costed so you knew what you were in for. The pitch is in investment terms, the cooker paying for itself from fuel savings and then paying dividends "ad infinitum on a scale unheard of on the stock exchange." All splendid stuff. Unsurprisingly, in 1985 Fortune magazine called it "the best sales manual ever written".

And finally, talking of a bygone time, this week came the sad news that ArcLight Cinemas in America was calling it tickets. After shutting their doors over a year ago, ArcLight Cinemas and Pacific Theatres locations will not reopen having exhausted all options to seek a viable way forward. We mentioned in our Letter of 28 March that box-office revenue in America fell by 80% last year.

Cinemas and live theatres such as the West End and Broadway are bastions of our civilisation and bring thrills, laughter and tears to live audiences. More is the pity that COVID-19 has been taking its toll on the arts and entertainment, indeed on theme parks and cruising. Whilst as investors we can own shares in a Netflix, AT&T or Disney where streaming has taken off there is something special about that cinematic or theatre night out.

Let's hope that much of these entertainment experiences return in a safe yet still enjoyable fashion.     

The geodesic Cinerama Dome in Hollywood, thanks for the memories   

Thank you all for visiting us

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