The bull market in belief

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9 December 2022

In the classic Christmas film Miracle on 34th Street, Kris Kringle is on trial for claiming to be the real Santa Claus. His defence lawyer says, “If this court finds that there is no Santa, I ask the court to judge which is worse: a lie that draws a smile or a truth that draws a tear.”

Doesn’t that feel like markets recently?

Benjamin Graham, if he were alive today, or even an investor from 2019, might struggle to comprehend the bull market we witnessed in SPACs, crypto, stonks and NFTs. A year ago, investors were buying monkey jpegs for millions of dollars or profitless tech companies promising jam tomorrow. This extraordinary period was a bull market in the willingness to believe. But exposing the truth has drawn a tear.

The silliness seeped into mainstream assets too. This month’s chart shows stocks in global franchises traded to spectacular valuations. The vertical axis is multiples of sales, not profits!

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“At ten times revenues, to give you a ten year payback, I have to pay you 100% of revenues for ten straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next ten years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

Of course, this has all happened before, with the Nifty Fifty and in the Nasdaq bust. Yet, every generation of investors seems doomed to learn from painful experience rather than from history.

So, having fallen from their highs, are these companies now gift-wrapped presents? We say not and see a compelling argument for equities to head lower again in 2023. Stocks are down in 2022 because bond yields are up, we have yet to see any widening of the equity risk premium or a fall in earnings expectations.

The market seems to think four things can happen: the Fed funds rate peaks in Q1; this engenders a soft landing or very shallow recession; that slowdown sucks all of the inflationary pressure out of the system; and all of that can be achieved whilst corporates still generate about 8% earnings growth for 2023.

That story seems like the lie that draws a smile. How could corporates deliver on earnings despite a potential recession, rising labour costs and the huge change in financing costs versus a year ago?

If we’re to see a Santa rally this year, it will be powered by a bull market in belief.

#growth, #inflation

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Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

T +44 (0)20 7963 8123

Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

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The bull market in belief