No-landing consensus ?????

HI folks, it's Thursday!

So I guess summertime, like those rate cuts is coming, but not yet. Saying that, we had a cracking couple of mornings on the South Downs last week - we were camped out at the Amex stadium down in Brighton for a series of offsites for all our colleagues. Talking about what it means to be a profit-for-members organisation and covering some of the important history of The People's Pension. A great few days and we managed to swerve too many football related jokes which largely go over my head anyway, but I gather Brighton & Hove Albion are a good news story, broadly.

I tell you what my life goal at the moment is to approach things with the level of energy and enthusiasm that 18 month old Sacha has every time he's pointing out another pigeon in the garden :-)

Don't call it a correction ...

Stocks have had a slightly rough April but really, with things just a few percent off all time highs it's not really anything to get exercised about. The UK stock market on the other hand has stormed to an all-time high level which is always nice but please can we regulate to stop showing the FTSE 100 in price only terms?! Those dividends do matter.

It's earnings season and Meta published good results and saw the stock price fall while Tesla unveiled bad results and saw a rise, another lesson that it's all an expectations game. Stock markets do embed pretty healthy expectations for earnings growth this year.

Your global stocks are up about 5% so far this year.

Interest rates have been steady at those higher levels, you might call it a permanently raised plateau. UK inflation has dipped down below US inflation and both central banks are on the verge of rate cuts ... sometime soon. It's not the date of the first cut that matters though of course, it's where they settle out when the cutting is done. For economists that's a deep structural parameter of the economy but for markets it's something that gets re-assessed almost as often as the toddlers in our household re-assess breakfast preferences (TWO bananas and an egg this morning, no stickers, one small one big for those interested).

Why so high?

It's not just the level of rates it's why they are high says Karen Ward (link). high rates driven by a booming economy is different and better for stocks than high rates due to a resurgence of inflation. At the moment, it seems to be the former story that's winning and folks are coming round to the "no landing" consensus for the US economy.

Three things I'm reading...

1. Wake up ... new Mauboussin paper just dropped! and he's talking multiples [link]

let the quotes do the talking:

tl;dr "Multiples have also lost informativeness because of how accounting works and the nature of investment. Ideally, accountants should match expenses to revenues. But because there has been a sharp rise in intangible investment, which is generally expensed, the income statement’s ability to match expenses and revenues has degraded substantially in recent decades. Earnings are less informative than they used to be."

Adjusting properly for intangibles he reckons that Microsoft's EV/EBITDA ratio would fall from 24 to 17.

Multiples have lost relevance because of the widening gulf between earnings and what they are trying to reflect.

2. Intangible Value explored by Kai Wu [link]

Kai Wu's recent quanty but accessible papers have been a must read and not just because he's probably the only author I know who uses a smattering of emojis in his papers (which I am here for).

Between the lines: intangible value is a big growth driver in today's economy. think: code, but also brand. The US stands out as being hugely intangible-rich and in fact this explains a lot of the gap between US and non-US stocks over the last decade.

Yes but, the rest of the world is not a homogeneous blob of old-economy manufacturing companies, standout intangible-value firms do exist across the rest of the world which Kai has identified and backtested. Finding that a global intangible value portfolio would have done pretty much as well as the US market over the last decade, and it's not down to fortunate exposures to particular countries or sectors.

3. Small stocks big problems Robin Wigglesworth in the FT (link)

recap: it's not just been a bad couple of years for small companies it's been a bad few decades, with small cap indices underperforming large cap all around the world for the best part of the last 40 years. Does this challenge the received wisdom that "small companies do better"?

Not so fast says Cliff Asness on twitter. He reckons it had already been proved there is no real small cap premium in the data (link to 2020 piece), once you control for market beta which any reasonable researcher should do. So perhaps no new news here.

Yes and, says Robin Wigglesworth there's been some important things that have changed over time as well: smaller companies have become much junkier (less earnings) and small cap indices have been open to gaming by savvy participants, suggesting non-index approaches may be the way forward. Which doesn't fit with a broader asset allocation trend toward indexation of course.

Not surprisingly falling interest rates are cited as a potential catalyst for that long-awaited small-cap revival.

Two things I'm listening to

1. Goldman Sachs have a non-consensus bullish forecast on US growth which is worth a listen on their podcast (web | apple )

A good discussion of interest rate both short and long term as well.

2. Governance Alpha with Chris Ailman (Calstrs) and Ashby Monk (youtube | apple | spotify)

An excellent conversation I stumbled across on the importance of asset owners and some of the underappreciated factors behind their success. Very relevant to me at the moment!

Grab bag

Do less macro forecasting says Howard Marks. It's not what you don't know that gets you it's what you know for sure that just ain't so.

Here's 700 words on why I think asset owners matter, the biggest two trends I've seen in my career and how these ideas come together.

Tom Gosling on how universal owners can use modest objectives to achieve more. (link)

The Economist splashed on every boomer's fave topic of conversation: Gen Z. Who now make up a fifth of the population in the US and UK and as much of the workforce as boomers. Despite worries of existential angst driven by FOMO and doomscrolling, the authors reckon there is more for Gen Z to be positive about than meets the eye, and contrasted the difference with millennials whose formative years were shaped by risk-aversion in the wake of the GFC.

We're in a bit of a TV series bear market ever since fool me once ended. We had a decent tilt at The Gentlemen, a typical Guy Ritchie style series which was fun for a bit but ran out of energy. I really wanted to like Ripley but couldn't get through the first 10 minutes with the black and white (honestly, given the choice who thinks making in black and white is better?!)

Have a great rest of the week!