It’s been a real interesting start to the year and the first quarter numbers don’t really reflect the huge events we’ve seen in the last three months. The whole GameStop saga has taken place all in the first three months of 2021. Amazing. We also saw a huge run up in energy prices which really continued the recovery trend at the end of last year. The price of Bitcoin has more than doubled already in 2021. In addition more recently we saw Credit Suisse take a $4.7 Billion loss after the implosion of the highly levered Archegos Hedge Fund.
These are all really interesting events that have kind of overshadowed another pretty strong quarter for equity markets. On top of that, other markets like residential real estate also are going through the roof. As we get closer to hopefully ending this horrible pandemic, we’re starting to see green shoots of economic growth. In the US the most recent jobs numbers are much better than anticipated. And here in Canada, as vaccinations continue to happen, we should see a similar trend as we start to get back to normal. The pandemic can seem all consuming at times, but if we look at the experience of several Asian countries after SARS, we can see that eventually these things do end and are ultimately forgotten, as people get on with their lives.
It certainly looks like governments are planning to use their fiscal power to build infrastructure and provide all kinds of other supports to the economy. These are by and large good things. Infrastructure which provides a high return to the economy is a good investment for governments to make. But even this has to be done prudently. Building infrastructure just for the sake of spending money is kind of like paying people to dig holes and then refill them, except it’s worse because the hole comes with an ongoing maintenance cost. Still if the infrastructure spending is prudent and effective, that could extend or enhance the economic boom in the post COVID era.
Another source of optimism is that the businesses which are leading the current market are large technology firms which for the most part are wonderful businesses. They are extremely profitable, fast growing, and have deep economic moats. These companies are priced expensively because they are worth it. These are not the kind of companies that were decimated in the early 2000s by the tech bubble.
So why am I being so cautious right now? Well 2020 was a very good year for our investments, and that comes off of the heels of 12 years of bull market prior to that. Many pundits are now calling March 2020 as the end of the previous bull market. But the speed of the decline and the recovery was so fast, it’s hard for me to see the current market in those terms. I look at March of 2020 as a blip, a significant blip to be sure, but still a blip. I think we’re still in the same market we’ve been in for the past 12 years.
It’s a market which has been really enabled by central bank stimulus, and more recent fiscal stimulus (on top of the tax cuts that we saw in the US in 2018). This has really supercharged markets since 2009 and although it has obviously been fun, I don’t think this level of stimulus is sustainable in the long term. (There are many smart people who advocate for what’s called “modern monetary theory”. While I don’t think many people disagree with me that the current level of deficit spending is unsustainable, many would disagree with me as to what the actual appropriate level of spending should be) So assuming that I am right, and that stimulus is not sustainable, it therefore follows that stimulus will have to be withdrawn at some point.
And therein lies the concern. No one really knows what the withdrawal of stimulus is going to look like. We’ve seen over the past few months that bond prices have really plummeted and interest rates are on the rise. The market kind of threw a mini tantrum in March when this happened as higher interest rates means lower asset prices generally. The initial pain has kind of subsided but what if we did see an extended period of rate rises? That could really throw the equity markets for a loop, as well as bonds. That’s a major concern. If inflation starts to tick up, rates may have to rise quickly and that would throw a real wrench into the bull market.
Another concern that I have is that we are seeing more and more signs of speculative mania in the markets. I’ve already mentioned GameStop and Bitcoin. The price movements surrounding these two assets can only be described as speculative mania. But those are not the only examples. We’ve seen the proliferation of the use of SPACs, or Special Purpose Acquisition Companies. These SPACs are a way for private companies to go public by being “acquired” by the SPAC. By doing this the company that is going public gets to avoid some of the regulatory scrutiny normally required on an IPO. There are some valid uses for a SPAC structure, such as the ability to handpick your long term investors, or perhaps to have more certainty around your IPO pricing. Still SPACs are a very expensive way to go public, and its hard to argue they are the best method for most companies. In addition, the sheer number of SPACs and the quality of their promoters should certainly give investors pause.
This year you could invest in a SPAC promoted by Shaquille O’Neal, Steph Curry, Serena Williams, Alex Rodriguez, or Colin Kaepernick. If athletes aren’t to your liking you could have also bought a SPAC promoted by Jay-Z, Ciara Wilson, or Tony Hawk (yes that Tony Hawk). On top of this Dave Portnoy of Barstool Sports launched his own ETF and the ticker symbol is BUZZ. I confess, I have not done any research into any of these investments nor do I plan to. They may very well turn out to be great investments, however I think the reason they are all being launched at this time is more about Wall Street’s ability to sell them, and not the ability of these celebrities to select great businesses to acquire.
None of this means we are headed for a crash tomorrow, or even next year. But it is giving us reasons to be cautious. I think for prudent investors, it behooves us to be humble and appreciate the uncertainty that we face. We’ve been gradually adding to our cash position over the past 6 months and I would expect that to continue over the remainder of 2021 until we do see a more severe pullback. It hasn’t hurt our returns yet but it could in the future as cash can be a drag when markets are rising. However what happens in the short term is far less important to me than ensuring we don’t lose our clients money over the long term. By building up a cash position we are essentially taking out an option to buy in the future when prices are more attractive. As 2021 unfolds, I’m starting to like that option more and more.
- Craig White, BA, LL.B., CIM®
Craig White is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.