The Death of Growth

I take no comfort in the market's recent turmoil. The evisceration of 'non-earning' growth stocks like Peloton, although predictable, harms the risk-taking psychology that is critical for fostering economic advancement. But we had to break the speculative bubble that was misallocating massive amounts of capital in fads and memes instead of productive assets. With the ultra-loose monetary tide receding, we are finding out who's been skinny-dipping and it's not a pretty sight.

But there is some good news in all this upset. The collateral damage caused by this process of true value discovery is generating opportunity. I have no confidence in my ability to predict the path of markets in the short run given the many moving parts. My initial view this year was clear - a sideways choppy risk asset market with a generally supportive economic backdrop. That forecast has been hijacked by the twin artificial supply constraints imposed by Premier Xi's Covid-Zero gambit and Vlad the Impaler's war.

But there are good companies that have suddenly, through no fault of their own, been put on sale. Stock-picking is not within my purview but I do know when to be aggressive and when to be cautious. I have been cautious since the last-gasp FOMO rally of Q4 2021, especially with respect to growth stocks. Not owning them has been my best call. It's time to be more constructive now.

We have come full circle in a short space of time. The pessimism is palpable, especially amongst retail investors. The current narrative is now coalescing on a hard landing scenario. The head-snapping reversal of the post-Fed rally last Thursday marked the death of any soft landing dreams. But the jury remains out.

Bond markets are bouncing back from the mechanical selling of yesterday morning. A Tuesday turn-around is easing the massive pain felt by the battered Bondies. But this quick 25 basis point reversal is equally mechanistic and lacks informative content. Nobody is fully convinced by the bounce as it lacks visibility on an economic path beyond anything more than next week. Should the current growth slowdown morph into a full-on recession these bets will pay off. Conversely, a softer downshift in the economy or inflation may cause further pain for Treasuries.

Interest rates still need to be demonstrably higher to generate a 'real' rate of return. The side effects of the decade-long suppression of price discovery in global bond markets by central banks have yet to be fully reversed. This imprudent policy loose construct is the real policy error by the Fed - not the over-hiking fears that are driving current risk-off behaviour. But they have never been good at forecasting anyway, so why start now?

Long-duration assets should enjoy a period of stability in the short term - including growth stocks with sustainable models (starting with APPL and MSFT). They have the ability to generate competitive cash flow yields - especially as compared to fixed income alternatives that are still overvalued relative to inflation. Bonds do not have 'pricing power' as true growth stocks do. The Fed, armed with its QE 'put' has seen to that in removing any 'real' return possibility.

And there will be winners among the emerging 'concept' stocks as well. Just as Amazon, Apple, and Facebook survived the tech wreck of 2001, there will be companies that will transform the future and lead to economic prosperity. I just don't know their stock symbols. Don't shoot me, I'm only the guitar player.

Whenever you see a headline like the one on this blog post, it pays to go the other way. By that, I believe the commodity/resource trade is likely to be a source of cash for investors as the economy downshifts to a slower growth path. I was a big fan of Copper last year but not now, given the risks to growth and the speculative excesses in the commodity board from Johnny-come-lately ESG bulls enamoured of the 'green" metal. Stable growth stocks are likely to provide positive returns from here.

Oil is harder to call. As it was in the 1980's when I closely followed this commodity, there is only one source of supply that can immediately dictate price expectations - the Saudis. But they have been demonstrating a frustrating level of discipline in managing the delicate balance of global crude markets. Production from Russia is slowly being redirected to India and China, and although difficult logistically, this should partly quell supply crunch fears. Lower demand from China and a less than complete abidance with import restrictions from Russia, especially in energy-starved eastern Europe should also help rebalance the current artificial tightness. The summer driving season demand from refiners usually peaks in Q2 as well. We could get one more rally before post-summer seasonality creates a sell-off. Oil stocks are still priced for sub-$100 oil so any weakness will be bought.

Choppy markets are ahead, no matter what happens in the short term. It's too early to tell if all the moving parts can somehow mesh together to create a positive backdrop for risk-taking to once again be fashionable. That uncertainty should cap any short-term advance. But I do believe many stocks have seen their lows already. Growth may not be completely dead just yet.

Risk Model: 1/5 - Risk Off

This is no time to disagree with the model. We will need a positive reaction to tomorrow's CPI print to generate a better tone for the market. As welcome as good news on inflation peaking may be, it is also important to generate a soft-landing vibe in the markets before we can call for Risk-On behaviour. Anybody got confidence in that?

Copper/Gold is now breaking down and threatens to generate a downward spiral for economically sensitive assets should the demand destruction argument play out in full. This is my biggest concern as to the soft/hard landing argument.

Copper/Gold Ratio