Private Equity/Credit: The Bubble and its Implications

My last few blog articles have been on the private equity industry, and further digging in recent days led me to the discovery of Dan Rasmussen. He has some excellent insights on private equity and has made a number of useful podcast appearances outlining his thoughts on the subject (available on YouTube), which I have spent the past day or so devouring. They come highly recommend.

His conclusions broadly mirror my own more intuitive conclusions, but he is in possession of more hard facts and data; has first-hand experience working in the industry (at Bain); and was able to put some extra nuance around various issues I was previously lacking. I appreciate his important contributions. I have incorporated many of his insights with my own into this narrative take on where we are, and how we got here, and what the future may hold for the PE/PC industry. I hope you enjoy!

Tertiary PE LP buyout funds scale new heights of absurdity

In a recent post (as well as some from yesteryear), I discussed how many private equity (PE) funds have been systematically overvaluing their assets/NAVs, and that this is the real reason why they are struggling to realize assets (including via IPOs) and deliver cash distributions to their LPs (limited partners aka investors).

Where are all the IPOs? The great private equity ruse

Consider that both of the following claims appear to be simultaneously true:
*Stock markets are expensive and therefore ought to be receptive to IPOs, and yet there are relatively few.
*Private equity funds (including venture capital) are struggling to achieve "exits" and return meaningful capital to their increasingly-impatient investors - to such a degree they are resorting to shuffling assets into "continuation funds" and taking on margin loans to fund distributions.

Artificial Intelligence or Authentic Stupidity?

Over the past three years, the AI/LLM boom and its associated capex supercycle has been having a profound effect on the economy, financial markets, and society (though not on corporate productivity, as we’ll discuss). However, as unrestrained AI optimism and its financial market manifestations have continued to mushroom, evidence has been quietly mounting that many of the boom’s foundational assumptions are starting to buckle. The divergence between the two has become so stark that there is a strong case to be made that the boom has now morphed into a fully-fledged bubble, and of a size that makes the dot.com bubble look positively quaint.

What is really going on in Georgia

As you'll be aware, I haven't posted in a while. I've been busy managing my fund and attending to other priorities. I didn't/don't have any explicit plan to reboot the blog near term. I have, however, been doing some research on Georgia of late, and felt passionately enough about my ideas and the potential contribution I could make to the issue (and its importance), that I started to pen a twitter thread about it. That thread inadvertently grew into a long blog-worthy essay (brevity is not one of my attributes), so I thought I might as well post it on my blog as well, for what it's worth. Thanks to all my readers, and keep a look out as I may be back one day! LT3000

Russia update - the road to war

I thought it would be worth penning a few further thoughts on the current Russo-Ukrainian situation, as my thoughts have evolved somewhat in recent days, coincident with recent events which are changing rapidly. While the situation in the Donbass has now been (somewhat) resolved - though the potential for disputes about the resultant borders remain a potential source of near term conflict - the longer term issues have not yet been resolved, and indeed there is a growing risk of an escalation into an all out Russo-NATO hot war. These issues may or may not lead to a major short term escalation extending up to the point of a nationwide Ukrainian invasion, but irrespective of that, they will continue to linger and lead to potentially longer term escalation and conflict. Given the graveness of the situation, it believe it is important the issues are properly understood. (please read footnote)* 

Neil Young vs. Rogan/Spotify, Meta Values, and Pluralistic vs. Authoritarian Societies

This will not be a long blog article, as I only wish to make one simple point, and doing so does not require a long exposition. However, I believe the point to be of absolutely vital importance, and is too frequently overlooked in today's tortured political discourse and latest skirmish de jour. And its import extends well beyond the proximate instantiation at hand. 

Demystifying Putin: US vs. Russia geopolitics - the real story

In recent months, Russia has once again been in the headlines for all the wrong reasons, with the US and Western media loudly proclaiming (since November) that Russia is planning an imminent invasion of the Ukraine, though Russia has repeatedly denied that fact and it's not exactly clear what Russia is waiting for, or what advantage it could expect to derive from lying about its intentions at this point (the whole Western world expects an invasion and the US has pulled embassy staff from Kiev). 

Taking (slight) issue with Graham's "weighing machine"; and unpacking "intrinsic value"

In this post, I thought I'd kick off the new year with some minor sacrilege, by taking slight issue with some of Ben Graham's most-quoted ideas. Ben Graham very famously asserted that "in the short run, the stock market is a voting machine, but in the long run, it is a weighing machine". However, when subsequently asked what the specific mechanism was by which stocks were, in time, pushed towards their fair, weighted value, Graham was unable to specify one (though a quick Google for the specific quote did not yield a source I can supply here).1 He also advocated for the disposition of positions after a specified holding period, should the said appropriate re-weighting fail to transpire (2-3 years from memory).2 As I will discuss, this is not a policy/framework I agree with. 

Tech, inflation, and the tyranny of the numerator

Over the last three months, market inflation fears have increased - and not without good cause, given the increasing number of companies reporting supply shortages, cost pressures, and price increase, and the recent US CPI print coming in at 4.2% - which has pressured the share prices of tech/growth stocks in particular (and to a lesser degree, the broader market). US 10 year treasury yields have risen from 0.9% to 1.7% this year, in fits and starts, and tech and other narrative-driven growth stocks have come under pressure with sell-offs correlating with higher inflation concerns and rising treasury yields.

Elon Musk; Simulated Universes; Moore's Curse; The Fermi Paradox; Mars colonization; and Technological Hubris

Overall, I'm a fan of Elon Musk. He is smart; articulate; a great innovator, engineer, and entrepreneur; an incredibly hard worker; and in many ways a very inspirational figure - someone willing to try bold new things and tackle difficult problems. Oftentimes controversial, to be sure, but a net force for good in the world. The world needs more people like Elon Musk. As I've commented in the past, Musk is the virtual embodiment of George Bernard Shaw's quote: "The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man". Musk is the paradigmatic unreasonable man.

Crypto-mania is back: Crypto vs. Fiat, and why newer isn't always better

After a multi-year hiatus, cryptocurrency has recently stormed back to the fore, with Bitcoin breaching new highs above US$60k, along with a resurgence in a multitude of other crypto currencies, whose aggregated market capitalization has now run up to some US$2tr.

Unravelling value's decade-long underperformance (and imminent resurgence)

In a recent (generally excellent) podcast with Inside the Rope with David Clark (#78), John Hempton discussed (amongst other things) value's past decade of underperformance, and opined that the primary driver was the fact that the pace of technological change had accelerated, such that we have seen an unprecedented level of disruption to traditional business models. Value investors have apparently spent a decade naively riding doomed low-multiple companies like the Myers of this world into oblivion. 

Market inefficiency, liquidity flywheels, asset class arbitrage, and Hong Kong Land

Conventional economic theory holds that the marketplace in financial assets ought to be 'efficient'. Large numbers of intelligent and diligent investors have access to largely the same pool of information, and are highly motivated to root out and exploit any underpricings that exist. It is believed this competitive process will inevitably drive assets to their fair value - i.e. those that accurately reflect their risk and reward characteristics, and also price assets correctly relative to one another.

Coronavirus update: From an unknown unknown to a known unknown

On March 17th, I blogged some thoughts on the coronavirus outbreak; its significance; and how I was seeing the outlook. While we are still far from the end of this crisis, at this stage events appear to be playing out largely in line with the analysis and predictions outlined in that article, so I haven't felt much need to pen an update. My views were generally considered wildly optimistic at the time, but recent events suggest it was more a case of investor sentiment being unreasonably bearish than my views being unreasonably optimistic.

Coronapocalypse - some thoughts

Over the past few weeks, markets have witnessed a legitimate 'black swan' event with the emergence of the covid-19 pandemic, which has resulted in a catastrophic collapse in global equity markets of a speed and severity that has rivaled - if not exceeded - that seen during the GFC panic.

Dynamic vs. static analysis, and what the US shale and technology sectors have in common

Over the past decade, few industries have incinerated as much shareholder capital as the US shale oil and gas (O&G) sector. Attracted by the substantial technology-driven structural growth opportunity the sector promised, and its putatively low costs and attractive well-level IRRs much-touted by management, investors initially flocked to the sector, but have since been badly burned, as losses have mounted; debt levels skyrocketed; and share prices plummeted.

Afterpay Touch: a more expensive solution to an existing, solved problem

Afterpay Touch (APT AU) is a stock that has acquired a cult following in recent years. The shares have risen spectacularly, and catapulted the company's market capitalisation to an astonishing A$10bn - almost 40 times trailing revenues (there are no earnings - the company lost about A$40m last year on revenue of $260m).*

Facebook - the bear case

Facebook is currently a stock beloved by both growth and value investors alike. It is an esteemed member of the FANG club - an aristocrat of the modern digital era. Everyone seems to own it. I don't like it. I think the stock is much riskier than most investors appreciate - particularly at this point in the cycle. (I am a day late in publishing this article, as the stock is down 6% to US$210 post its 4Q19 results - albeit this is small fry compared to the aggregate potential downside; I tweeted the WSJ Casper article referenced below over the weekend, and in related comments referenced the risks to Facebook, and began writing this post on Sunday. Unfortunately I was too slow to complete it).

Learning the wrong lessons; style drift; and why smart value investors underperform

There are many things that separate the great value investors from the poor to mediocre, but aside from simply being better or worse at valuing companies (table stakes for a good value investor), one of the most important is that the former tend to reason from first principles - i.e. from things that are true by definition in the long term - and implement a disciplined and consistent process informed by those principles; whereas poor to mediocre value investors attempt to draw far too many 'lessons' about how to invest from recent market experience/outcomes. Quite often, the belated incorporation of these 'lessons' into investment decisions results in untimely 'style drift', with a shift towards strategies/sectors/stocks that have worked well in the recent past, rather than those that are most likely to work in the future. This untimely vacillation all but ensures long term underperformance.

Extrapolation; Technology One & SaaS; Affiliated Managers Group; margins of safety; and growth bubbles

Of the many causes of market inefficiency and investor misjudgement, there is perhaps no more important contributor than investors' tendency towards excessive extrapolation. This is borne - I believe - of investors' general overconfidence in their ability to predict the future (a theme I have discussed in many past blog entries).

Demystifying post-GFC economics; the problem with scarcity; interest rates; long political cycles; and the end of history

The post-GFC era has given rise to widespread investor confusion, as macroeconomic and market outcomes have deviated from the received economic wisdom about what 'ought' to have happened. Old hands have been particularly wrong footed, as their tried and true mental and financial models about how the world operates, which worked so well during 1980-2007, have failed them. Traditional monetary policy has stopped working, and many economies (e.g. Europe) have remained sluggish and unresponsive to very low, or even negative, interest rates. Low rates were supposed to stimulate investment and consumption, and yet both have remained weak. "Unprecedented" unconventional monetary stimulus (in quotation marks as very similar policies were tried - with similar results - in Japan during the 1990s) in the form of QE has been undertaken, but despite this vigorous 'money printing' which was expected by many to result in inflation, we have had disinflation bordering on deflation, with inflation stubbornly refusing to rise towards central bankers' 2% trend-rate goal.

How much cash should you hold? The case for being fully invested

Over the past decade, a number of highly-regarded value investors with attractive long term track records have lagged the major benchmarks, and not just over one or two years, which can reasonably be expected to occur to any investor from time to time, but over stretches as long as 5-10 years.* There have been many reasons for this, including the much-discussed outperformance of 'growth' over 'value'; the rise of index funds; and markets becoming more competitive. In some cases, it has also been due to previously celebrated investors having only assembled their prior robust track records through a combination of luck and concentration, and having been subsequently revealed to have been far less proficient investors than previously believed (e.g. Berkowitz; Tilson; Ackman). However, one important contributor to many quite excellent investors' underperformance has been the simple fact that global indices have risen more than expected (by many) over the past 10 years, and these investors have held high levels of cash throughout this period - often 20% or more.

Free speech; Mark Zuckerberg; and online 'misinformation'

I've been intending to write a post on free speech for quite some time. I've made several attempts, but it never quite crystallised in the manner I had hoped (I find that if I do not write a post start to finish in a single sitting, it never quite seems to get completed; my curiosity moves on to other matters, my thinking evolves, and when I return to the issue my preferred means of expression changes and necessitates a re-write). There was so much I wanted to say, but I struggled to find a way to present all of my arguments in well-structured manner that was not overly contorted or lengthy.

Contrarianism; ESG investing; coal; and climate change

It is widely acknowledged in the investment world that one need think and act in a contrarian manner in order to achieve outsized returns and differentiated results. However, despite many claims to contrarianism and 'going against the crowd', its actual practice is vanishingly rare, and the core ingredients that drive effective contrarianism are also often misunderstood. It is not simply a matter of having a disagreeable personality, and disagreeing for the sake of it, or buying a stock simply because it has gone down. Much of what passes for contrarianism these days is actually what I describe as 'faux contrarianism' - buying expensive stocks that have recently become slightly less expensive, but where the fundamental view on the company remains very much in accordance with recent mainstream opinion (and often fails to comprehend new, emergent negative developments which have driven the recent share price decline, but are not yet apparent to all).

A duration-bubble or a low-volatility bubble?

I'm a fan of Antipodes Partners, and always find their commentaries insightful. In the company's latest investor update (see below), founder and CIO Jacob Mitchell provides a number of useful insights, but one of the arguments he makes is that investors have been 'chasing duration' to an unprecedented extent in the post-GFC era. Slide 7 is quite revealing. Mitchell's full presentation runs from 5.50 to 22.00 (all of which I recommend), with the relevant section for this article on duration running from 10.05-14.45.

How worried should we really be about an inverting yield curve?

In an interview a few years ago, Elon Musk responded to a question on what had enabled him to innovate so effectively by saying: "I think it's important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. [With analogy] we are doing this because it's like something else that was done, or it is like what other people are doing. [With first principles] you boil things down to the most fundamental truths... and then reason up from there". (He might also have added that, unlike many others, he has not been constrained by the need to generate a positive return on capital, but I digress).

Investing in low conviction stocks; jumping the gun on EVs; and Tenneco

It is fashionable amongst the value investing community these days to hold a concentrated portfolio of high conviction ideas. Indeed, any other approach is usually greeted with suspicion, if not outright disdain. And yet, in my experience, often some of the very best investment opportunities exist in areas of the market where one is intrinsically capable of only low levels of conviction, extending to situations where a zero is a reasonable possibility. Obviously, smaller position sizes and a more diversified approach is warranted with such situations, but on a portfolio basis, they can yield a portfolio with very agreeable risk/reward characteristics - indeed uniquely so I would argue, given how few value investors are adopting such an approach in today's world.

Why P/E multiples are (justifiably) lower in periods of high inflation

The history of financial markets makes it abundantly clear that empirically, P/E multiples have sharply compressed during periods of high inflation. This has confounded many observers, who argue that stocks are real assets, and therefore that P/E multiples ought not change during periods of high inflation. Indeed, seemingly confirming the theory, nominal EPS growth has been significantly higher during periods of high inflation. US Market EPS growth, for instance, was much higher in the inflationary 1970s than the relatively low-inflation 1980-90s, despite much poorer economic and financial market performance. The latter occurred because multiples sharply compressed. Is this a major inefficiency?

Why profits matter (and value investing is not dead)

We have currently reached the point in this (unusual in many respects) cycle where many investors/commentators have started to question whether profits no longer matter, and also whether value investing is dead. As is often the case, the arguments put forward in the affirmative derive mostly from recent market experience/outcomes, rather than reasoning from first principles. Hyper-growth (and generally loss-making) tech companies have seen outsized share price gains (or when privately-held, significant valuation up-marks), with many recent IPO vintages also seeing triple digit gains, despite the absence of any profits either in the past or foreseeable future, in echos of the dot.com bubble. Meanwhile, many profitable and cash-generative companies with low growth, and especially with (even marginally) falling earnings/revenues, have been absolutely massacred.

Greek update #3: The narrative flips; selling Piraeus

Late last year, I wrote a blog post on the Greek banks, with a particular focus on Eurobank. I discussed how the popular narrative at the time had completely crushed Greek bank share prices, despite clear evidence existing that the economic and banking-industry fundamentals were actually markedly improving, not deteriorating. I took a meaningful position in Eurobank (2.0%), and eventually also about a 50bp position in Piraeus, mostly in the 0.60-1.15 range.

The (real) way to solve the (real) US trade deficit problem

Last year, I wrote a piece (here) opining that Trump had a point in objecting to the US's large and persistent trade deficit - even if he may have arrived at that conclusion through a different intellectual route than I. I continue to hold that view. However, what I do not support is the means by which Trump is seeking to address the problem, which are both unlikely to solve the problem, and also quite likely to create significant costs in the process - albeit that the US economy could well still end up a net beneficiary of the policies.*

The problem with Ben Thompson's 'aggregation theory'

Ben Thompson, via his website Stratechery ('Strategy' and 'Tech'), has made a name for himself over the past decade popularising the concept of 'aggregation theory'. I invite readers to check out his material directly for a fuller explanation, but in short, his argument is that tech platforms have become so powerful (and profitable or potentially profitable) because in the internet era, the game has changed, and it has become far more important for companies to aggregate (and control) demand than to control supply (the latter of which Ben argues was the case in the past). Organisations that now control demand are the ones destined to prosper, and those companies are the large tech platforms.

Berkshire Hathaway succumbs to the tech bubble

We have currently reached the point in the cycle where investors are once again questioning whether traditional value investing is dead. The last time this occurred was in 1999, and much like in 1999, it has also resulted in many self-described value investors caving in to the pressure of years of disconfirmatory market outcomes (high growth, high quality businesses sharply outperforming - particularly hyper-growth tech names); abandoning traditional value discipline; and rationalising a move towards more growth-oriented investing, which feels much more comfortable (being with the crowd, and doing something that has worked very well in recent history).

Uber, delusion, and ride-hailing's structural economic inefficiency

Uber's much-anticipated IPO occurred on Friday, and to the surprise of almost no one (sensible), the stock ended the session down 7% (despite the offer having already been priced at a discount to initial ambitions, after Lyft's weak post-IPO showing). In my view, the stock likely has much further to fall, and in many respects the Uber story is the perfect exemplar of this cycle's excesses.

Turkey update, Lira outlook, and keeping one's eye on the ball

In recent weeks/months, Turkey has again been making headlines for all the wrong reasons. This time the focus has been on the acrimonious outcome of local elections; the further recent weakening of the Lira from about 5 to more than 6 vs. the USD (after having recovered from over 7 in August last year, touched on the day I first blogged about Turkey); controversy about the sufficiency of the Turkish central bank's foreign currency reserves; a March spike in overnight Lira swap rates; and the debate on the willingness or otherwise of the CBT to tighten sufficiently to ward off seemingly intractably high inflation (19.5% YoY at present - down from a peak of 25.5% in October 2018, but still elevated).

The great bribe-the-distributor US drug pricing scam

The US Senate Finance Committee recently conducted a hearing investigating galloping list prices for US drugs, quizzing the chiefs of a number of pharmaceutical giants. One of the key messages from these drug companies was that their 'net' received prices, after paying significant rebates to PBMs (Pharmacy Benefit Managers) and insurance companies, are considerably less than 'list' drug prices, and that furthermore, their net prices had been rising at very modest rates, in comparison to spiralling list prices, or even falling. They blamed middlemen for escalating drug prices.

Is another tech bust coming?

The technology sector (referring to online services, and to a lesser extent, SaaS, which is somewhat different in the B2B space) has been one of the strongest stock market performers over the past decade. Growth rates in users and top-line have been incredible, but with a relatively small handful of exceptions (Facebook, Google, Tencent, Alibaba, Expedia & Priceline, and a few others), profitability has been vanishingly rare. However, managers with heavy technology exposure - either in the listed or unlisted space - have nevertheless made a tonne of mark-to-market/capital-raising-valuation profits, as valuations have escalated alongside galloping top line and user growth.

Flawed thinking on buybacks, and why buybacks are still underutilized

Something I encounter repeatedly in the world of investment commentary/analysis is a lot of flawed thinking and fundamental confusion about the issue of dividends vs. corporate buybacks. You'll often hear people say things like "I would prefer the company reduce the dividend so it can increase buy backs, as the shares are undervalued", or "management shouldn't be buying back stock at current elevated prices; they should instead be returning excess capital to shareholders via dividends".

The value of what is vs. what could be, and the economics of disruption redux

In the past, I have blogged about both the often-tortured debate on the growth vs. value investing dichotomy, and how in my assessment, many self-described value investors are today practicing strategies more akin to growth investing than value investing. Meanwhile, I've also outlined some thoughts on how the economics of disruption is often misunderstood (see here). I hope to pull together these strands here, and offer some additional insights.

The real reason populism is rising in the West

In recent years, we have seen the emergence of 'populist' movements across many developed countries, from the US (Trump) to the UK (Brexit), to Italy and now even the Yellow Vest protests in France (not to mention the rise of what are sometimes described - often unfairly - as 'alt right' parties across Europe). This has given rise to much confusion and concern amongst the elite, but if the issues are properly understood, it shouldn't. I feel the underlying drivers are very poorly understood and often misdiagnosed, and I hope to shed a little light on what is going on with this post.

The Road to Serfdom: How identity politics and socialist-communist ideology are intimately linked

In the world of investing, politics is a little bit like economics. Despite all the incessant media chatter, most of the time it doesn't matter very much. However, occasionally, it matters a great deal (e.g. during the US housing bubble and the ensuing GFC). Politics generally doesn't matter too much, as long as policies do not swing to the hard left (not to be confused with the center-left), where property rights and economic freedoms start to get seriously undermined. Those that say buy and hold always works, have clearly never invested in a country overrun by socialism/communism. Buffett has a strongly-held view that the US "has a system that works", but it never malfunctioned in his lifetime, and so is potentially outside the range of his contemplated experience.

The art of worldly wisdom, smoking, and British American Tobacco

When students study either undergraduate finance or an MBA, they are taught various methods of valuing companies - primarily discounted cash flow models, utilising appropriate discount rates (or inappropriate ones - CAPM has been long debunked). The problem with this valuation education is that the mathematics involved in valuing a company - given certain cash flow and discount rate assumptions - is trivially easy. The hard bit is figuring out what the likely cash flows will be. And finance degrees/MBAs offer virtually no useful instruction in this regard.

Apple's strategic dilemma

After a heady run, Apple has been a poor performer over the past several months, and has de-rated to levels that have started to attract value investor interest. Peters-McGregor, for instance, recently purchased shares, outlining all the traditional strengths the bulls have historically identified with Apple (brand, customer lock-in, growing services), and that the stock is now on only 13x (and 11-12x ex cash).

Fishing where the cod is, and Munger's stunning rebuke of many 'value' investors

I've been thinking a lot over the past few years about some of the things I seem to be doing differently to the vast majority of self-described value investors. I just look at companies all day and try to value them, and I buy the ones I think are the cheapest. Presumably, most other value investors are doing the same thing. And yet, for years I have seen many self-described value investors complain incessantly that they can't find anything to buy - often organisations stocked with large teams of people. Some of them have closed shop as a result.

The capacity to suffer, LCV/CAC, and Capital One Financial

Earlier this week, Capital One Financial (COF US) - a stock I own - announced a 4Q18 result which, while above expectations at the EPS line on a reported basis, was below expectations after excluding various 'one-off' items. Markets sent the stock down 6.2%.

Is Netflix screwed?

Netflix has become a darling stock over the past decade (despite a moderation in the euphoria of late), and is an honourary member of the FANG club. It is seen as one of the new breed of incumbent online monopolies, and trades at more than 100x current earnings. However, to my mind, many investors seem to be ignoring some fairly important realities/risks, and believe it can be argued that Netflix is more akin to a Tesla than an Amazon - i.e. a company that is set to become 'just another media (auto) company' that will soon have to compete with many seasoned competitors in possession of far greater financial resources. It's going to be interesting to see what happens.

US cultural breakdown, and identity politics run amok

Fairly extraordinary things are currently happening in US popular culture. A short clip of a native American man banging a drum near the face of a smirking 15 year old white kid, who appeared to many to be taunting the man with his expression, set off a firestorm of controversy over the weekend, in both the mainstream media and twittosphere, with the level of vitriol directed at the kid reaching almost unimaginable levels.

Worst marketing campaign ever...?

Ominous music plays. "Women, is this the best we can do, really?", booms a voiceover. Scenes play in the background of women being hysterically emotional, falsely accusing people of rape, bickering & bitching amongst each other, being ditsy blondes, and exhibiting all sorts of the worst cliched 'toxic femininity'.

Greek bank update: The importance of regulatory forbearance

In November of last year, I blogged about the Greek banks, and specifically Eurobank. Since that time, Greek bank prices have remained under pressure, falling about 20%, although Eurobank has bucked the trend somewhat, rising 10%. It is nevertheless down about 10% YTD after rallying in late 2018, underperforming what has been a strong rally in global bank share prices this year.

WSJ exposes corrupt hospital practices that inflate healthcare bills

Last year, I discussed how corrupted incentives have acted to inflate drug prices well above what would have occurred in a properly functioning market. As noted at the time, this is just one small piece of the complex puzzle of why US healthcare costs remain so absurdly high (18-19% of GDP, more than twice the OECD average, which is itself far from optimised, and continues to rise).

In December, the WSJ ran an excellent article/expose on another feature of the system that is well worth discussing. I highly recommend the article be read in full (paywall). The article highlights how increasing market consolidation and 'vertical integration' amongst hospital networks into the provision of primary healthcare services, coupled with a third-party payer system and a lack of price transparency, have all contributed to the cost of labs tests and other tests & procedures all being grossly inflated.

Eurobank addendum: Merger with Grivalia

The very next day after the publication of my recent piece on Eurobank, the company announced a merger with Greek real estate investment company Grivalia. The merger will be destructive to Eurobank's per share value long term (by about 30% in my assessment), but the deal does have some benefits, including reducing downside tail risks (regulators forcing another recapitalisation). This arguably makes a larger position now more feasible, as the level of upside is still material. The stock has so far rallied about 10% to €0.50.

Stories, Greek myths, and Eurobank

Human beings love to tell stories. It is thought by anthropologists that throughout much of human evolutionary history, large amounts of time were spent sitting around the camp fire in the evenings relaying stories to one another (there wasn't much else to do). To this day, social gatherings amongst human beings are replete with stories, which are not just pleasant to relate, but are also a form of status competition, as humans compete to one-up each other with better and more interesting stories.

Pessimism on global growth reaches November 2008 levels; is it justified?

The WSJ reported this morning that, quoting BoAML data, "fund managers are the most pessimistic they have been on global growth since November 2008".

Now I find this very interesting. Global markets were a day ago down more than 6% MTD, and outside of the US, markets have been pummelled this year across EM (emerging markets) and Europe. Investors have been gripped by trade war fears, rising short and long rates in the US alongside tightening Fed policy, a rallying USD (harming EM, and creating fears around USD-denominated indebtedness in some of these nations), as well as rising nationalist politics in countries such as Italy. This has created a pervasive sense of malaise, and sent markets into a tailspin.

Activist excess, incentives, and the undersupply of grievance

In recent times in the West, we have seen a trend towards outraged activism being taken to sometimes absurd extremes. Furthermore, we have seen unprecedented steps taken to silence dissenting voices pushing back against these excesses, from the de-platforming (sometimes violently) of speakers in universities; silencing of the media; contrary voices on social media being blocked; and academic research - including in the hard sciences/maths departments - being quashed on account of its non-politically-correct conclusions.* Record numbers of people are also being publicly called out and shamed for apparent racism/sexism where no evidence of it exists. This 'culture of outrage' and PC authoritarianism has seemed impervious to the forces of reason, and the institution of free speech has also come to be seen as subordinate to the primacy of sparing people from offense or discomfort.

When reason fails: Mitchell's damning report; media bias; and disillusionment

I really hate to write another piece on the Kavanaugh saga, as I really do not wish to unduly politicise this blog. However, this is entirely a non-partisan issue for me (I don't even particularly like Kavanaugh - he is too conservative for my tastes), and the situation is simply so important, and so instructive about so many things, that I have been unable to contain a minor obsession with the issue over the past several days, and believe some of these insights need to be shared. And it's not really a story about Kavanaugh, Ford, and #metoo. It is instead fundamentally a story about the failure of both human reason, as well as our media institutions/journalistic traditions, which we rely on to sustain the health of our democracy.

The Venezuelan economic policy manual (satire)

For the good governance and prosperity of the Venezuelan people, we recommend policymakers adhere to the following policy framework:

Kavanaugh-gate and human irrationality

I'm going to wade - perhaps unwisely - into some fraught and controversial territory with this post, but I can't help myself because I think there are so many interesting things to be learned from the ongoing Kavanaugh saga with respect to the psychological fallibility of humankind. And, believe it or not, it does have investment implications.

The Australian housing bust: Why this time is different

In recent months, media articles have begun to surface highlighting the fact that Australian property prices have started to fall, and indeed in some suburbs of Sydney, have already fallen about 5-10% from their peaks. The response from the establishment has been predictable - there is no need to worry; prices will moderate somewhat, but a crash is far fetched. We have heard all this doom-mongering before, they argue, and the doubters have always been proven wrong. This time will be the same.

On China's (putative) real estate construction bubble... facts vs narratives

The consensus opinion in many parts of global financial markets is that China's economy is little more a giant leveraged real estate and infrastructure construction site at present, coupled with an export manufacturing sector that is soon to have its competitiveness undercut by US tariffs. Most value managers will not touch iron ore stocks, for instance, despite low valuations, believing that it is only a matter of time before steel and iron ore demand collapses as an unsustainable pace of Chinese debt-fueled real estate and infrastructure construction comes to an inevitable end.

The correct way to think about risk

In my opinion, most stock market investors fundamentally misunderstand risk and think about it in the wrong way. Most investors abhor risk and see it as their goal to minimise their exposure to it, to the maximum extent possible. They try to pick companies to invest in which have the most assuredly positive and low risk outlooks. They want strong businesses, and stable earnings/cash flows/dividends, and so abhor cyclicals. They want good management and pristine corporate governance. They want strong balance sheets, and they don't want any sort of uncertainty about the company's future, including risks from new competition or technological change. And they want to invest in countries where the macroeconomic and political outlook appears strong and stable. They want all these things because they want to avoid risk, because the absence of any of these factors does, in fact, increase the chance of subsequent investment losses. They don't mind paying a higher price, because it's all about investing with (seeming) assurance of a decent outcome.

The ethics of ethical investing

In recent years, there has been a trend towards the launch and promotion of 'ethical' funds, that forbid investment in companies engaging in various activities considered unethical. Common exclusions include 'sin' stocks involved in industries such as gambling, tobacco, and alcohol, and companies considered to be occasioning harm to the environment (such as coal miners). In addition, even outside of 'ethical' funds, it is sometimes argued that it ought to be incumbent on investment managers to take into account the ethics of the activities undertaken by the companies they invest in, and avoid companies engaged in 'unethical' activities.

Is Elon Musk's attempted Tesla privatisation a covert bail-out?

I've been a long time follower and admirer of Elon Musk. I've listened to all his interviews, watched many of his presentations, and read the excellent biography written by Ashlee Vance. The serial entrepreneur has achieved feats of growth and innovation over the past 15 years that ex anti most (myself included) would have considered impossible.

A capitulation point in Turkey?

If the media and financial market consensus is to be believed, Turkey is currently in the midst of a veritable financial crisis. Yet in truth, there is no such crisis at present - at least not yet - and although one is certainly possible, that outcome is far from assured. What we actually have at the moment is merely a crisis of confidence (and, perhaps, in domestic civil/political liberties), and for the former, is one that may already be close to peaking. While it is impossible to definitively call any sort of capitulation point, the below chart of the USD/TRY certainly appears to indicate to me that we are either at or very close to the proverbial capitulation point.

The (real) cautionary tale of David Einhorn

Greenlight Capital's David Einhorn was recently the subject of a widely-circulated hit piece by the Wall Street Journal, which came a few weeks in advance of Einhorn reporting a truly disastrous 18% loss in the first half of 2018 (in rising US markets). This result capped a abysmal 30 month stretch of performance, which has seen the former star's cumulative losses mount to some 30% (during a bull market) - a fall from grace that has attracted considerable media attention.

Trade wars, economic ideology, and why Trump has a point

Trade has become a hot-button issue this year, with Trump having already implemented several rounds of tariffs targeted (primarily) at China, and threatened to continue ratcheting up measures should China follow through with retaliatory measures. The policies have created fears of a brewing trade war, and Trump's bluster has bewildered and dismayed many observers. However, the issues are in my opinion poorly understood and almost never properly articulated.

New valuation metrics for tech companies, and Spotify

There is a very old saying in markets - that the four most dangerous words in the English language are 'this time is different', and that is particularly true when the bulls start advocating for the use of new valuation metrics over tried and tested favourates, as prices outrun anything remotely resembling what can be justified by the old. This sort of soothsaying is long discredited for good reason - is has often accompanied major market tops, and been revealed to have been folly in the cold, sober light of the ensuing bust.

Why value investing works and will continue to work

I am often asked why I expect value investing (traditionally defined as focusing on buying sectors of the market trading at relatively low multiples of earnings, assets/book value, and cash flows*) to continue to 'work' in the manner it has historically, given that we now live in an age of advanced computing power and widespread information dissemination. Surely, it should be a simple matter these days for algorithms to screen for quantitatively cheap stocks and buy them up, quickly arbitraging away any excess profit opportunity. Low multiple stocks must now all be ones fully deserving of such a low rating, and the opportunity which existed in the past in Ben Graham's day was a function of highly inefficient and unsophisticated markets, and is thus no longer relevant.

Gold's hidden risk

Gold has been a longtime investment favourate of many investors, despite its lackluster long term track record,* and not just for perpetual merchants of doom, who view the shiny metal as an attractive call option on financial disaster. Joining their ranks are a number of 'value' investors that have promoted and owned gold in the post-GFC era, with the bull case usually centering around the metal being a hedge against hyperinflation or other unintended consequences emanating from experimental central banking policies seen in the post-GFC period. Reference is also often made to the significant underperformance of gold over the past decade vis-a-vis central bank monetary base expansion.

Motivated reasoning and the root cause of intellectual intolerance

To anyone who has been paying attention to issues of free speech and radical liberalism in places such as the US (and increasingly in most Western countries) - particularly on US college campuses - an intriguing and troubling trend has become increasingly evident in recent years, to an extent I have hitherto struggled to fully understand. Acrimonious and often violent opposition (particularly at the hands of the ironically-named ANTIFA - an 'anti-fascist' activist group happy to use fascist means to support their cause) to many conservative viewpoints seeking to counter the liberal consensus, has found expression, with speakers often being forcibly de-platformed.

Samsung, and how to make money without a crystal ball

It is popular in markets to make definitive predictions about the future, and then position one's portfolio to benefit should those predictions come to fruition. Superficially, this approach seems to make sense - after all, future outcomes will be dictated by future events, and so surely you should try to predict what is going to happen, because what happens will drive future outcomes.

Why Russia public display of nuclear strength is paradoxically comforting

In his recent state-of-the-nation address, Russian president Vladimir Putin demonstrated new nuclear capabilities the nation has been developing, including a fleet of missiles capable of evading the US's anti-ballistic-missile defenses. This is not brinkmanship of the reckless North Korean variety, but is nonetheless a public display of nuclear force and ambition that has alarmed many observers. Some have concluded that that the world might be quickly heading towards a nuclear confrontation.

Favouring the specific over the general; Tinkoff and Washington Prime Group

In markets, there is a frequent biasing of the general over the specific, and it is a recurring source of opportunity for investors that are prepared to set aside preconceived notions; dig a little deeper; and favour the specific over the general in their investment process.

Does money make you happy?

It's an age-old question, and is one that is usually answered a lot less well than it should be. As is usually the case for questions like this, the truth is much more complicated than a simple yes or no answer, and I hope to shed a little bit of light on the issue below.

Expedia and dodgy accounting

I took a quick look at Expedia (EXPE US) last night (yes, this is indeed how I like to spend many of my Saturday evenings). Expedia is one of the world's largest online travel agents (OTAs), and owns a bunch of lodging platform websites you've probably heard of/used - both its namesake expedia.com, as well as hotels.com, Travelocity, Orbitz, Wotif, and HomeAway, as well as air ticket, rental car, and cruise ticket booking operations, and travel media site Trivago. The company's primary competitor is Priceline (owner of booking.com and various other sites), as well as - to a lesser extent - AirBnB and TripAdvisor.

Life expectancy and the cost of capital

It is popular in many financial circles to compare the level of asset prices (which is the inverse of the cost of capital) to 100-year market valuation averages (or sometimes even longer - I heard some hyperbole the other day that asset prices were at '2,000 year highs').

Bargain stocks in HK/China; no-brainer investing; and Dongfeng Motor

Despite the putative universal overvaluation of global equity markets at present (although the current correction, which Jim Grant would describe as the 'value restoration project', is starting to mitigate that), there are still in fact a large number of extraordinary bargains to be had for the industrious stock-picker. One just has to be prepared to look a little harder for them, in unusual and out-of-favour corners of the market. Obvious bargains have disappeared; non-obvious bargains have not.

Some thought's on the market's recent volatility

It's been a eventful week for markets. After a long period of subdued volatility and steady (and accelerating) gains, global markets suffered a pronounced setback, led by the S&P, which fell 7% in two trading days. Global markets followed, as did oil and commodity prices, while emerging market currencies fell and safe-haven currencies such as the Yen and USD rallied. The selling was indiscriminate, with everything dropping in unison, with few places (on the long side) to hide. What is going on, and how should investors be responding to it?

Market efficiency and Telecom Italia Savings Shares

The market is supposed to be efficient. There are a lot of smart and hungry investors out there competing vigorously with one another to feast over whatever bargains the market happens to be offering up, if any. These efforts are supposed to neutralise each other, and drive a high level of market efficiency. And yet, in practice, I continue to be confronted on an almost daily basis with the most bizarrely obvious mispricings, and sometimes to a degree I can scarcely believe.

Bitcoin holder alert: financial libertarians beware

A few days ago, news emerged that Japanese cryptocurrency exchange Coincheck had been hacked, with more than US$500m worth of digital tokens reported to have been stolen. This is just the latest in a string of cryptocurrency exchange hacks. Back in 2014, for instance, Mt Gox - then the largest Bitcoin trading exchange in the world, handling an estimated 70% of all global Bitcoin trading - reported that 850k Bitcoin had been stolen (about 4% of the total amount of Bitcoin that will one day be on issue, and 'worth' some US$9.0bn at today's prices). If you were one of the unlucky customers that held Bitcoin or other affected crypto custodised by these exchanges, then tough luck. Your money is gone, and you have no recourse.

Which job offer would you prefer? A value vs. growth allegory

Suppose I was to offer you two job opportunities. For one, I would pay you a flat US$500k a year, in perpetuity (the value option). For the other, I would pay you US$100k a year to start, but would increase that by 20% per annum thereafter (the growth option). Which one would you prefer?

Bill Miller & the coming equity bubble

There is currently a generally held view that one of the biggest risks global equity markets face at present is that interest rates rise more rapidly than expected (perhaps triggered by inflation stirring). I have, to some extent, shared that view. However, Bill Miller - an investor I rate very highly* - has just posted his 4Q letter to investors, and in it, he weighed in on this issue with an interesting perspective:

Finding investment ideas, Brighthouse Financial; Dignity plc; and favouring breadth over depth

I am often asked how I source my ideas - particularly operating as a one-man band running a global equity fund. I currently have approximately 150 stocks in my portfolio across more than a dozen countries, and typically generate about 4-5 new ideas a month. This month has been particularly productive - I have unearthed 10 ideas, or nearly 1 every 2 calendar days, and if I work in a focused manner, I am sometimes able to go at a rate of 1 a day (so much for global markets being devoid of value opportunities).

Why US drug prices have been rising, not falling

The US pharmaceutical industry is fundamentally broken. As has now been widely publicised, drug prices have been rapidly rising for several decades now, and the pace of increase has accelerated in recent years, with the price of a number of low-volume highly-specialised drugs in many cases increasing by several hundred percent. Valeant Pharmaceuticals and Martin Shkreli have been obvious offenders, but the practices have been systemic right across the industry (Shkreli's main mistake was putting up prices a lot in one go instead of steadily over a decade, and doing so with such repulsive smugness).

Exit humility; enter mental flexiblity

It is often said that successful investors require a paradoxical blend of confidence and humility. Confidence, it is argued, is essential so that an investor is able to maintain the courage of their convictions, and have the fortitude to go against the crowd when necessary. Humility, though, is said to also be an important counterweight, because a willingness to change ones views and admit that they are wrong is also absolutely essential. It is argued that too much unchecked confidence can lead to disastrous outcomes - too much risk taking, and an inability to correct mistakes.

Why is society becoming so polarised?

We are currently living in an era of increasing societal polarisation, in which the level of popular angst, outrage, and disagreement over various social issues has reached fever pitch proportions. As has now been widely publicised, in the putative Land Of The Free, free speech has been under assault on college campuses for some time, attracting often violent opposition to guests speakers (Ben Shapiro recently required US$600k of security to be able to speak at Berkeley). Defenders of those speakers argue that freedom of speech is an essential institution that needs to be defended (and if not on college campuses, then where?), and that in many cases those speakers have valuable contributions to offer. Meanwhile, opponents claim that these speakers are actually just smuggling in racist, sexist, or otherwise objectionable views and hate speech under the guise of 'free speech'. What on earth is going on?

Multi-disciplinary thinking; the gender wage gap; and amoral markets

I am a big fan of multi-disciplinary thinking. I think it leads to vastly superior judgement, and in the field of investing, superior judgement is the cornerstone of generating superior returns. Investing is a competitive pursuit that requires one to have superior insights to one's competitors in the market, and multi-disciplinary thinking - because it is so rare and difficult - can act as an important competitive advantage in this regard. It is also important in the field of policy analysis and in many other fields where complex judgement is required (but unfortunately, is too frequently lacking).

The real (and misunderstood) economics of disruption

We are currently living in an era of putative radical disruption. New players such as Elon Musk's Tesla Motors are - it is argued - disrupting the automotive industry; online e-commerce is disrupting bricks and mortar retail - some would argue mortally; solar is disrupting the conventional power generation industry (so it is argued); Netflix is disrupting the media distribution and content industries; and WeWork the office space industry. I could go on. It is now reported that hundreds of privately-funded 'Unicorns' with mark-to-capital-raising valuations in excess of US$1bn now exist, all promising to uproot formerly incumbent and highly profitable established 'old world' businesses.

Bitcoin addendum: Running out of oxygen; the 'money of the internet' fallacy; and bitcoin futures & systemic risk

I really can't resist a quick addendum to my recent bitcoin post. I thought I had said all that needed to be said. But as Bitcoin's price has escalated to new highs of nearly US$20,000, there has been a commensurate rise in the degree of folly and fuzzy thinking, and I can't seem to keep my thoughts on the matter to myself. I have three additional points/observations to make:

Bursting the Bitcoin Bulls' Bubble

I really hate to do this. There has already been an inordinate wastage of humanity's collective time spilling ink on Bitcoin in recent months - something I contributed to with my first relatively-long post on the topic here (200% ago). But with the digital 'currency' having recently hit US$10,000/coin, I can't resist a follow-up. So permit me a brief indulgence.

The economics of blogging, and the challenges for traditional media & content creators

I started this blog nine months ago, and have since published 30 articles (excluding this post). On average, each article takes me about four hours to produce - typically about one hour to blast out my thoughts in one go (in an occasional burst of writer's inspiration), and then about three hours to iteratively re-read and edit the text (it is amazing how many times this must be done to remove typos and ensure the text flows smoothly and logically from one point to the next - as a general rule, the easier something is to read, the harder it is to write).

All set for the biggest equity bubble in history?

Back in February, I wrote about how my biggest fear in markets was not a melt down, but rather a melt up - a risk I felt investors continued to underestimate. The post - which is one of my best to date (if I may say so), can be found here. Nothing that has occurred in the nine months that have elapsed since that post has assuaged those fears, and indeed, we have seen global markets rally some 15-20% since that point in time, with Bitcoin and other speculative asset classes vastly exceeding that. Events seem to be unfolding in exactly the manner I had most feared.

Why I (and the market) are not worried about nuclear war with North Korea, and why Richard Thaler is wrong

Nobel Laureate Richard Thaler was recently reported as expressing bemusement about why global stock markets continued to levitate, and particularly given what he considered to be a material and growing risk of nuclear war. He noted:


"We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.... I admit to not understanding it". 

The (real) truth about our debt

Livewire Markets today posted an article by Stephen Koukoulas from Market Economics, entitled "The Truth About our Debt". The full article can be found at the link below.

However, in my interpretation, the crux of Koukoulas' argument is that we need not worry about the high level of Australian household debt - now approximately 200% of GDP - because looking at the debt is only half of the equation, and the level of household assets has also risen significantly. Australian households, on a net basis (assets less liabilities), are in fact as wealthy as ever, and so - it is argued - fears over Australia's high indebtedness are misplaced.

James Damore vs. The Google Archipelago

I was distressed and saddened this week to learn that Google had decided to fire James Damore for his circulation of an internal memo that dared to question some of the more extreme elements of the social justice warrior (SJW) inspired workplace equality/diversity movement.

Michael Kors +21.5%, and why value investing is so hard

Overnight (I reside in Asia), Michael Kors (KORS US) announced an above-expectation fiscal 1Q18 result, which sent the stock up 21.5% to US$45.25. Comp sales still declined by about 5-6% YoY, but this was better than the c10% decline the market was expecting. Earnings declined by about 20% YoY as operating margins fell from about 18% to 15%, but EPS declines were only in the mid single digits, because the company has bought back so many shares over the past 12 months at such low prices (the stock has been trading at 5x EBITDA and a mid-teen FCF yield for most the past 12mths).

BMW & bargains in plain sight

If the bears are to be believed, we are living in a world of overvalued global markets inflated by excessive central bank stimulus, that offer investors the torturous combination of scant opportunity and substantial systemic risk. I do not see this narrative in my portfolio. Sure, there are parts of global markets that are expensive - notably yield-proxies, and parts of the tech industry. However, there are still plenty of bargains in other parts of the market hiding in plain sight.

Deflationary delusions, the wealth effect, and the direction of causality

Of the many absurdities traditional economic theory has served up, one that I find particularly bemusing is the following: that deflation is an economy's mortal enemy because it causes consumers to defer consumption on the expectation that prices are likely to decline in the future, hobbling economic activity. The idea emerged after a multi-decade period of deflation in Japan which saw concurrent weak consumption/growth.

Seeing through the stock-based compensation ruse

A large and perennial frustration I have when researching companies in the US is the propensity of many companies to add back stock-based compensation to headline 'adjusted earnings'/'adjusted EBITDA', coupled with the propensity of many analysts and investors to take those adjustments at face value. In many cases, I believe the practice to be contributing to material overvaluation, as headline PE and EV/EBITDA multiples are often meaningfully understated.

Why I think digital currencies will go to zero

In 2011, my girlfriend at the time, who knew next to nothing about finance and investments, asked me out of the blue if she should buy some gold. She produced a bouchure she had procured from somewhere offering for sale small ounce-sized gold bricks. I was already bearishly inclined towards the metal at the time, but that comment cemented my bearishness. It called immediately to mind the depression-era saying that "when the shoeshine boys start telling you what stocks to buy, it's time to sell" (paraphrased). Sure enough, gold, which was at about US$1,800/oz at the time, was within a hare's breath of peaking. Gold now trades at closer to US$1,200/oz - a 33% loss over a 6yr period where the S&P500 has continued to surge to record highs.