Some thoughts for 2022 – bearish edition
Doom - War and Stagflation
I think markets are severely underpricing the risk of a full-blown conflict in China/Taiwan and Ukraine/Russia. Let’s not forget the significance that each of these has in markets. In a way we got a taste of how life is without the two most important exports out of these regions – chips and gas. Taiwan is one of the most important countries that powered almost everything electrical. If you think this year’s chip shortage was bad, imagine 20% of world’s supply being disrupted.
I think this year the green gang got a taste of what life is without proper planning without nuclear/LNG.
Eventually we will be 100% green, but it’s almost certain not in our lifetime without nuclear and/or LNG. Look at this graph below. It may not be impossible, but it is not as realistic as people make it out to be.
While these two on their own would be a disaster, it is worse because it is eerily similar to what unfolded during the stagflation years – high inflation with energy crises that fucked the US economy. Even more frightening is that people have started calling for price controls, right when our biggest problem is supplying stuff, commies want to remove the production incentive.
Anyone that reads history, knows that in every generation there are charlatans who claim that “this time it’s different”. It is not, it never is. If one reads Money for Nothing – the South Sea bubble, you will read how much of it relates to today. There are many interesting stories, one how during the peak, even during church the people were talking to each other and saying, “how goes the stock” and that became a very common saying as everyone had put money in them. Not saying that it is the same this time around but look at this:
Household Ownership of Stocks
2021: $44T 2011: $11T 2010: $9T 2009: $7T 2008: $10T 2007: $17T 2006: $14T 2005: $8T 2004: $7T 2003: $6T 2002: $7T 2001: $8T 2000: $13T *Goldman data, household + mutual fund ownership of equities. via @BearTrapsReport
And when there is so much liquidity, a lot of bullshit gets propped up. Some of this is 100% because the fed has killed every other form of income giving people very limited choice of where to park their savings. If people think that this correction. wait till you see what follows.
and it may get worse if people start running for the door, when the exit door gets smaller things can get UGLAY
Speaking of things for which metrics no longer matter, you have the crypto mania that trades on nothing but with people who read a book or two on “trading signals” who look more like astrology, tarot witches than anyone doing serious investing. The whole thing is on leverage, 4-5% move in them and they start liquidating accounts. This was on a 30% correction, million of people got liquidated. Just wait when interest rates start going up and bitcoin moves sideways for a prolonged amount of time.
Another bubble to look for against which I have puts are the e vehicle bonanza. The thing about innovative bubbles is that the short-term impact is overstated, and long-term impact understated. You have a company like Rivian that has a $70bn market cap and the thing has 0 revenue, I mean how can I not short it. Do not get me started on delivery services (I hate doordash and uber, can’t wait to see how they cope when people stop funding these fucking money burning disaster).
Around the dry wood, even the wet ones burn
Correction is happening, no one knows when it’ll stop, but that does not mean there are not good companies to be found. After all Microsoft, Amazon, Cisco and a myriad of other companies declined by more than 70% during the dotcom bubble, but still survived and outperformed the wider market. Some of these stocks that have declined are truly disruptive, they were just retardly priced. Some are still very expensive (cloudflare) and some are just so bad they will go almost certainly lower as they are dog shit, overhyped companies that are not innovative at all (lemonade).
Emerging markets are cheap for a reason
While metrics are important, there is a reason why people are more lenient with advanced markets ie why they trade at higher multiples. Advanced countries are stable, emerging markets are not. While this time around emerging markets have started hiking rates before the FED, they are still emerging market. While it seems markets have started pricing in the fed rate, I doubt they are done buying USD. EM currencies against USD are heading for March 2020 levels, when they fled EM for security.
2021 was worse for EM then 2020.
This is not to say that EM do something bad, it’s just unsafe, and you have a lot of things bundled up. How the fuck are Turkish Lira (commodity importer) and Brazil real (commodity exporter) correlated or those two correlated with the South African rand. ANSW: they are in same fucking "baskets". You buy an emerging market ETF, you buy turkish, south african and brazilian companies, with a myriad of other countries.
The biggest problem for EM will be China. I think China will get stuck on a middle-income trap eventually, but short-term it has worse problems. Omicron it seems won’t be contained and China is stuck on zero case policy. If it continues to quarantine people and shut off ports, prices will continue to go up. It is a very real possible contributor to stagflation that I think gets discounted. For me this will leave south-east asia as the one region which will carry growth as China did in 2008. Especially since China has itself 2008'd itself.
While I’ve been a doomsayer for a while now, and I’ve learned that the most bearish things that I listed are not likely to happen, I do still think that the likelihood of a blackswan event happening is a bit higher than average and it would be prudent to have some investments in Gold, if you think I am the only one, check Palantir.
If the economy continues to grow like it has so far, if there are no new tariffs/trade restrictions (quarantined staff/China, MAGA lunatics bringing jobs home, EU closing supply chains), if war does not occur(very likely) the economy can take interest rate hikes, and we will learn to invest in new environment. Long term, tech is deflationary and emerging markets will provide great opportunities for growth (or only great opportunity for growth), and e vehicles will be a reality, just do your DD as I do not think it will be a good year for them.
Long: South-East Asia, payment processing, food restaurants and energy
Short: High Sales multiples tech, non-existent revenue e vehicles and emerging market currencies.