Great Expectations

Sometimes I wish NPHET’s body of experts and medical chiefs would collectively do the ‘Freezebury Challenge’. As each day of February goes by, those hardy souls counting the extra minute each day in the frigid Dublin Bay waters understand the battle waged between fear of the next day’s incremental pain and the motivation of a charity challenge completed with a firm finish date; March is the fun swim focus. However, NPHET don’t do fun. Dates are fuzzy and the focus remains fear. The good news is human beings are resilient. It’s in our nature to look ahead, despite the challenges, and financial markets are currently providing a remarkable case study in expectations.

If anything, economic conditions have worsened in recent weeks as businesses in Q1 deal with second and third wave pandemic lockdowns. Main Street is struggling. Yet, Wall Street is flying to record highs on an almost daily basis. The headlines would suggest “meme stocks” like Tesla are the drivers of this market excitement but that is not even close to the full picture. The truth is that it is not just “stories” which are generating investor enthusiasm. It is real stuff; dirty, old, fundamental stuff. And a little bit of digital dreaming. Here are a few data points which caught the eye:

• Lumber prices in the US are up 170% over the past 10 months.

• Oil prices above $60 per barrel are at 13 month highs.

• Prices of natural gas in Asia almost reached $30 per MMBtu compared to just $2.60 in the US.

• Tin prices at $30,000/tonne hit a 10 year high.

• Copper prices at $8,400 per tonne have not been seen since 2012.

• Soybean prices are up 60% in the past year.

• Investor confidence in riskier companies’ debt hits record highs(price) as junk bond yields go below 4%.

• Share prices in emerging markets are at record highs, finally eclipsing the previous peak achieved in 2007.

• Japanese investors in the Nikkei 225 index have had to wait a little longer. The Nikkei is back at the 30,000 level it last achieved 30 years ago!

And now for the dreamy stuff…..

Investors can’t get enough of thematic blank cheque investment vehicles. Known as SPACs (Special Purpose Acquisition Companies) these vehicles are being listed on public markets at an unprecedented rate of almost $1 billion raised per day. In 2020 the total SPAC investment universe raised $83.4 billion dollars. We are only in mid-February and funds raised are already at $46 billion. Please note investors don’t even know where these funds will be spent in terms of acquisitions, geographies, valuations etc. You know, the fundamental stuff, right?

Of course, we can’t ignore cryptocurrencies. Elon Musk and Tesla made a big splash in recent weeks buying $1.5 billion of Bitcoin and now this digital “store of value” has passed through the $50,000 price mark. Now there are commentators excitedly talking about Bitcoin as a more efficient substitute for gold which is an asset class ten times the size of Bitcoin’s market cap. So, next stop is $500,000 for Bitcoin!

Yes, this writer is a little concerned. However, confidence is critical to economic recovery. There will be fun and tears along the way(ask the Gamestop bandwagon victims) with pockets of irrational exuberance, particularly in a super-low interest rate environment. However, we leave you with one final fundamental data point which suggests better times ahead. There is a school of thought that Wall Street has detached itself from Main Street reality but check out the latest analysis by Goldman Sachs below. It would appear that profits from companies in the S&P 500 in Q4 2020 were actually higher than those achieved pre-pandemic….

Clearly, things are getting better in the corporate world and the roll out of vaccines can only add to optimism. However, expectations must be managed. There is a danger some investors will chase the shiny baubles of Wall Street as a panacea for pandemic loss. Fear of missing out, FOMO, is a powerful emotion but there will always be fundamentals….. and hopefully fun. Indeed, Dickens himself told us Pip would rather have missed the glitz of wealth:

“I used to think, with a weariness on my spirits, that I should have been happier and better if I had never seen Mrs. Havisham’s face, and had risen to manhood content to be partners with Joe in the honest old forge.” ‘Great Expectations ’

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