Contrarian

Comrade Corbyn, the next British PM?

Something has been burning in the back of CM’s mind as the UK election looms this week. While polls point to the Tories winning, Corbyn is likely to do way better than what the pundits predict. Could he end up as PM? It is not an impossibility. In fact, the odds are increasingly in his favour. CM thinks Corbyn might actually do it.

While it is true that 1.3mn more people voted to leave in the largest ever democratic process in UK history, almost 13mn people didn’t vote on the basis they probably assumed it was a foregone conclusion. CM fundamentally believes that referendum results should have been respected regardless. Not showing up to vote is no excuse. None-the-less we now have a ‘youthquake’ who are desperate to overturn the referendum result to consider.

Of the 18.6mn that couldn’t vote in the referendum in 2016, official figures suggest that 3.85 million registered to vote between the day the election was called on Oct. 29 and Tuesday’s registration deadline — two-thirds of them under the age of 35. The youth seem far more preoccupied with socialism than their parents. While it is safe to assume that not all of the 13mn that didn’t vote were remainers, the youth could well be a decisive factor.

CM detests pretty much every policy that Corbyn espouses as it would be a total disaster for Britain in terms of future investment and immediate capital flight. Yet young kids being offered free everything lack the lived experiences of pre-Thatcher socialism and the economic calamity that ensued. They are utterly clueless in this respect. Yet Corbyn sings all of the woke causes of climate change, social justice and equal outcomes. They are on his side.

How well do millennials know their tyrants? A CIS study in Australia showed that 58% of millennials had a favourable view of socialism. Unfortunately, 51% did not know who Chairman Mao was. Another 32% did not know Stalin and 42% hadn’t heard of Lenin. If we combine with “know but not familiar” with “don’t know” we see almost 80%, 66% and 74% respectively. Oh how wonderful to learn in school about three men whose social policies led to the deaths of 10s of millions. With Marxist teachers rife throughout academia, Corbyn will have a plentiful stock of willing comrades in his back pocket.

Still, as much as the press smears the socialist opposition leader, UK PM Boris Johnson has been the man who has been looking to avoid confrontation at all costs. Surely if BoJo possessed a winning hand and held a superior manifesto, why wouldn’t he show up on the popular BBC programme hosted by Andrew Neil to state his case? It is a terrible look. Neil eviscerated Johnson without the PM being there to defend himself. Worse for BoJo is that his video went viral. What have you got to hide PM?

Corbyn could well snatch victory.  If the Tories take the attitude of former PM Theresa May’s snap election in June 2017 they should beware the barking electorate. Don’t forget how well Corbyn did in that fight.

CM stated in May 2017 the following,

“The first thought to come across CM’s head when Theresa May called this [June] election was, “bad idea.” This hubris she’d romp home may prove yet again how out of touch many politicians are with their constituents and how one must never believe in polls. I think she scrapes home but for now, wants the nightmare over.”

History revealed she scraped home with the help of the DUP. The EU has masterfully engineered delay after delay to keep the ‘remain’ dream alive. Now the youth have gathered steam as registered voters, they could well hand the EU a gift that will keep its Ponzi scheme alive.

When will politicians realise that being less worse no longer cuts it with the electorate? They are sick of the self-interest of the political class. They want to blow it up. Johnson has not looked good and the Brexit Party, which might have smashed the European elections, looks as though it does not have the traction it had hoped for. It could underwhelm.

Many of the Labour MPs may have ignored their elderly constituents but it would be a safe bet to say that the ultimate outcome in these so-called “betrayed” constituencies is anything but a doe deal to shun them.

Polls are damned near useless now. They failed to predict Trump. Failed to pick Brexit. Why put faith that the UK pollsters are any closer to the mark?

Politics is a random walk. Trudeau managed to cling on to power in Canada despite being found guilty of two breaches of conflicts of interest, blackface, cultural appropriation and many other gaffes. Clearly, it didn’t matter enough, just as “p*ssy grabbing” didn’t impact Trump in 2016.

Therefore CM expects a much higher chance of a Corbyn PM-ship or at the very least a parliament that puts us straight back where we were before the election – a hung parliament with no rudder and a Brexit that is watered down in such a way that it achieves nothing in the way of that originally intended.

CM sincerely hopes he is wrong on Corbyn. He would be an economic disaster at a time the Tories would have left a troubling fiscal legacy that is nothing to write home about.

If Corbyn wins, the UK will face severe capital flight. The pound will tank. A second referendum will be put forward. The outcomes will be dire. This is not being hysteric in any way. The markets are simply not pricing it in at all.

At least Sir James Dyson of vacuum cleaner fame saw the light. He is a Brexiteer but his lack of faith in the process has already seen him relocate the HQ to Singapore. Many more would follow. After all, if Corbyn wants to control the behaviour of British business on the FTSE and nationalise utilities it will hardly be a fertile ground to invest.

Elon hits 200k Cybertrucks

200k Cybertruck orders. As CM wrote this morning, the biggest loads these pick-ups will probably ever carry are double shot grande soy lattes. This car is a fashion accessory, not a work horse.

As a bonafide petrol head, CM hates the whole concept of EVs but this maybe the one product that might sway CM to the dark side. Matte black looks good.

The irresponsibility of socially responsible investing

United Nations Sustainable Development Logo

Socially Responsible Investment (SRI) has been heavily pushed by members of the Australian Council of Superannuation Investors (ACSI) for a while now. Apart from cynically cashing in on the generally higher fees generated by these “woke” funds, the returns have been nothing much to write home about. As Milton Friedman once said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.

If we look at YTD, 1 or 10-year performance all of the SRI portfolios as indicated by published performance (listed on their websites) of local ACSI members, they have “underperformed” the benchmark index. One outperformed in the 5-year category. Hardly anything to crow about. So as much as they might feel warm and fuzzy for turning these funds into virtue-signalling investment vehicles, the outcomes for the monies entrusted to them is far from ideal. While investors should bear ultimate responsibility for where they deploy retirement funds, do they realise how much money they are torching by believing in this nonsense?

So why do these funds try to bully top-performing companies to conform to their irrelevant ideals which on the face of it do not appear to be working? If one reads through the fine print, many superannuation administrators pat themselves on the back that they are aligning portfolios to the United Nations Sustainable Development Goals (SDGs). If one wants to champion best in class ethics, the UN is the last place anyone should look. Just look at the unethical scandal that occurred at UNAIDS. 

It doesn’t take a rocket scientist to work out what these SDGs are – eliminating hunger, wiping out poverty, promoting gender equality, good health, clean water and sanitation, affordable clean energy etc. All wonderful things in and of themselves, but surely if the market agrees with them,  shouldn’t share prices reflect that?

Friedman spoke of free-market economics, “Well, first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus [including the UN]. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade. If you want to know where the masses are worse off, worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.

In Australia,  it would seem that many high performing companies, that aren’t ‘compliant as they should be‘, are being pressured to increase diversity, women on boards and all manner of meaningless benchmarks preached by the ACSI and its members.

Take the 30% Club which pushes to have 30% women on boards. While this started in the UK in 2010, it has spread across multiple jurisdictions including Australia. The 30% Club emphatically quotes from a McKinsey study,  “Companies in the top quartile for gender diversity on their executive teams are 21% more likely to experience above-average profitability than companies in the fourth quartile.” What this study doesn’t say is that the bottom quartile of companies maybe just poorly run, in spite of the genitalia of the board.

Don’t mistake the most important point to be made. If a board is best served by all women, you won’t hear a peep from investors if they can produce the best results. As soon as we start to try to enforce gender quotas, performance becomes predicated on chromosomes rather than capability. What next? Ensure fair representation of LGBT on boards? Religions? Races? Disabilities? Where does it stop when all that matters is ability that produces performance?

Take a look at the disaster that has befallen PG&E in recent times. In the interests of pandering to all these irrelevant SDGs, it can tell you the exact breakdown of the diversity of its workforce but can’t tell you the status of much of its infrastructure, some which have been directly responsible for the devastating wildfires in California. The company was forced into Chapter 11 bankruptcy. Did diversity help shareholders? If one’s house is on fire, do we worry about identity? Or who has the skillsets to put out the blaze the fastest? QED.

Yet our woke investors keep pushing these trends. IFM Investors waxes lyrical about its climate change, 30% Club and carbon disclosure project. Good for it. It has a choice. It should live by the sword and die by it. If that is what it wishes to focus on why not allow the free market to; a) decide whether superannuation holders want to deploy funds in such a manner and b) let corporates decide if SRI is good for their businesses.

Yet, the latest push by these socialist fund administrators is to ensure that companies conform to the ‘Modern Slavery Act.’ Are these people for real? Who are they to try to enforce federal law? Talk about self-imposed authority. It is a safe bet that 99%+ corporates listed on the ASX behave are compliant in this regard because if not the punitive outcomes will be severe.

Moreover, if some of these funds own stocks like Tesla in their international portfolios, perhaps they might consider such a hip and trendy investment has an indirect connection to child-slave labour in DR Congo where 70% of the world’s cobalt is mined to go into the Li-ion batteries.

There is one absolute truth in finance. In good times, any mug CEO can be successful. It is only when markets turn sour that the “quality” of decent management is truly appreciated in how they successfully manage to mitigate risk in an ugly downturn. In a difficult market climate, only the fittest survive and if companies have strayed off the reservation to appeal to investors, it will soon become self-evident in the results.

As we stare at the precipice of a potentially deep global recession, the previous paragraph will be all that matters. Because those corporates too busy hitting diversity targets, installing genderless bathrooms and ensuring they have double-checked all employees have complied with Earth Hour will be slaughtered when markets take a pounding.

These SDG focused funds will soon see that they are part of one giant herd and as performance starts to suffer in this crowded trade, the stampede toward the exit will reveal just how irresponsible the push to ram through such irrelevant metrics at the very companies who caved in was.

As a contrarian investor, the best investments will be in exactly those companies that shun(ned) this foolhardy exercise and forged a path in the spirit of Milton Friedman. Afterall they understood what it really means to be “free to choose.” So back up the truck in tobacco, mining and fossil fuel stocks on any pullback. After all, mean reversion will see these stocks outperform if nothing else.

Don’t forget Harvey Norman (HVN). How could it be that the company is worth 4x the combined value of Myer and David Jones, the latter two businesses focused on pleasing the United Nations rather than customers?  Hmmm.

Isn’t that the ultimate ready reckoner for these SDG funds? The market is always right. If the performance of the funds deployed isn’t making the grade, don’t attempt to force the best of breed to comply to your self imposed standards. Embrace companies that follow their lead. Not the other way around. It begs the question, what on earth are people who should believe in free markets doing to thwart it functioning efficiently?

Perhaps investors have the clearest indication of socialist activism by the very requirement to join the club. “ACSI drives strong ESG performance in companies in which our members invest because ESG creates long-term value…We use our collective impact to influence companies and financial markets in the interests of our members as long-term investors…Commitment to these beliefs is a pre-requisite for membership of ACSI.

Never has it been a more sound decision to set up an SMSF.

Even China can’t help us avoid a Climate Emergency

CLimateEmergency.png

Here are the numbers. This is the contribution of many of the Pacific Island Summit attendees’ CO2 emissions as a % of the global atmosphere. Why do the media guffaw at the ridiculous when looking at the numbers? Do the political class honestly think that spending billions on renewables will make the slightest difference? Scott Morrison absolutely right to soften the language in the draft agreement at the summit. Honestly, he should push to have it removed in its entirety. Even China’s CO2 emissions are 0.000352% of the world’s atmosphere. China can’t even save us.

So to the Pacific Island leaders – go ahead and buy more Maseratis. The Italian economy needs an economic boost because they’re sinking, unlike your islands.

Cate Faehrmann plays investor for a day

Investment managers have difficult jobs. They have to forecast a whole plethora of variables from global economic growth, currencies, commodity prices and micro level corporate industries. If governments can provide ironclad policy certainty, investment choices become relatively easier. Unfortunately, perfect information detracts from performance because things get priced almost instantaneously.

It might be nice that 415 funds all call for a ratification of Paris Climate Accord (which means nothing in practice as the US isn’t a signatory and its emissions have fallen while China is a signatory and emissions continue to rise) but truth be told,  it sounds what is commonly termed in financial circles as “talking one’s book.” NSW Greens MLC Cate Faehrmann pretends to understand finance in her latest piece.

While these 415 firms might represent $32 trillion in assets under management (AUM), the truth is not all of those funds are spoken for in terms of climate-related investments. Investment advisors by their very nature have very diverse client bases. They cover basic low-risk pension (i.e. stable income) funds all the way to riskier return profiles for clients that want more exposure to certain themes or countries. If clients aren’t interested in buying climate funds, the asset managers don’t gather fees. Pretty simple.

Much of the fund industry has focused on ESG (environment, social responsibility & governance) since its inception in 2005. ESG represents around $20 trillion of global AUM, or 25% of total professionally managed funds. Therefore the other 75% of monies are deployed without this in mind. In reality, this is done because investment managers must hunt for the best returns, not those which sacrifice profitability for virtue. If NAB offered you a 10% 1-yr deposit and no solar panels on the HQ roof and Westpac offered a 1% 1-yr deposit because it did, would you invest in the latter based on its ecomentalism?

Let’s take the world’s largest public pension fund (2 million members), California Public Employees’ Retirement System (CalPERS) which is a cosignatory to this demand for climate action. Apart from the fact that this $380bn fund has been so poorly managed (marked to market unfunded liabilities are c.US$1 trillion), its portfolio consists of widespread ownership of met coal, petroleum and other mining assets. It owns bonds in fossil-fuel producing nations such as Abu Dhabi, Qatar and Saudi Arabia as well as highly environmentally unfriendly aluminium smelters in the world’s biggest polluter, China. So there goes the rhetoric of “demanding” Paris is ratified, that we shift to a low carbon economy and we force companies to report their carbon commitments.

It is frightening that some members of our political class believe that investment managers which collaborate in groupthink are worthy of listening to. On the contrary, the performance of many must be sub par. It is a sad reality that 80% of large-cap fund managers fail to outperform the index on a regular basis. So praying for governments to backstop investments they deployed capital into shows more desperation than innovation.

Maybe we should think of Adani as a classic example of investment at work. While Annastacia Palaszczuk’s government is backflipping on the Adani Carmichael coal mine after the electoral drubbing handed out to federal colleagues, the voluntary infrastructure tax is a cynical way to try to make the project less financially viable. After 8 years of ridiculous and onerous environmental approvals, Adani probably think it only needs to wait til October 2020 when an election will wipe out Queensland Labor from government and the infrastructure tax will be repealed soon after.

CM has long held that the non-ESG names are the place to invest. Most of the auto-pilot, brain dead, virtue signalling group think money has been poured into ESG. All non-ESG companies care about is profitability, not focusing on all the soft cuddly things they do displayed on the corporate lobby TV screens on a loop. Sadly when markets inevitably implode, investors always seek safe havens to limit the damage. As so much money is collectively invested together, so the bigger the stampede to the relatively attractive values provided by the stocks that have been cast aside by “woke” investors.

More auto marriages have ended in divorce

Auto mergers were once thought of as the best things since sliced bread. Massive operating capacity leverage, shared platforms to reduce cost and a reduction of R&D spend per vehicle. The word “synergy” gets bandied about more than Casanova whispers “I love you“on Valentines Day! Yet why is the auto industry littered with divorces from these romances?

Lets list them.

Daimler bought Chrysler in 1998. Divorced in 2007.

Daimler alliance with Mitsubishi Motors founded in 2000. Divorce in 2005.

Daimler alliance with Hyundai founded in 2000. Divorce in 2004.

Honda – Rover JV. Started 1980. Divorced 1994

BMW – Rover – Started 1994. Deceased 2000.

Nissan – Renault – Started 1999. Currently providing real headaches due to Carlos Ghosn saga. Nissan wants full independence

Ford forms Premier Automotive Group (PAG) comprising Land Rover, Aston Martin, Volvo, Lincoln and Jaguar. Set up in 1999.

Ford sells Aston Martin in 2007.

Ford sells Land Rover & Jaguar to Tata in 2008

Ford sells Volvo to Geely in 2010.

Fiat Chrysler (FCA) formed in 2014 – including Fiat, Abarth, Chrysler, Jeep, RAM, Dodge, Lancia, Maserati & Ferrari brands.

FCA spins Ferrari off in 2016.

This isn’t an exhaustive list but one can be guaranteed that more money has been lost in auto mergers in aggregate than made. Daimler paid $45bn for Chrysler. Almost all of the Mercedes profits plugged the losses of Chrysler. Mercedes quality suffered through cost cutting sending it down toward the bottom of surveys. Daimler’s shares lost over $80bn in market cap as this disaster unfolded.

FCA and Nissan/Renault have been amongst the more successful marriages but global markets have turned many a honeymoon period into separation with fights over custody.

Forming a merger at the top of a cycle seems fraught with risks. Global auto sales are slowing. Renault and Fiat bring a lot of overlap in product lines. Nissan is such an unclear part of the puzzle.

One can argue that synergies which will lower the costs of future production have merit. Investing in battery technology does make sense across multiple product lines.

The biggest problem for the auto industry is that should a slowdown hit mid-merger, which brand suffers the hits? Which marketing team gets culled? Which R&D projects get scuppered? Too many cooks spoil the broth is the end result. There is no way a merger can be locked down in a short timeframe unless one of the parties is facing bankruptcy and has no choice but to comply. That is why Nissan-Renault worked.

Renault-FCA would be better conceived after markets have imploded. Marriages built on tough times stand a far bigger chance of survival than those that are built when things are the rosiest. Shareholders will be the biggest losers if conceived now.

Apple to buy Tesla? Is Tim Cook on autopilot?

If Apple truly stumped up for Tesla that would make two companies that are complete novices at auto manufacturing. It would be the Apple Lisa of the auto world.

Worse for Apple it would signal that the world’s largest company is completely out of creative ideas and its existing product line up was truly approaching stall speed. It already is but and the lack of transparency only adds to doubts.

Rumours circulated that Apple considered a $240/share purchase back in 2013. 6 years ago Tesla was full of hope. Now the stock is full of hype. It has been a litany of disasters from fatal crashes, production hell all the way to complete wishful thinking on Level 5 autonomous driving which Israeli company Mobileye, a leader in the field, believes is decades off.

Let’s assume a $240 per share deal was done. Apple would pay around $40bn and assume another $12bn or so in debt.

The most dangerous strategy for highly successful companies is to throw spaghetti at a wall and hope some sticks. Tesla is by no means an overnight repair job. It needs the skills of Toyota to turn it around. Don’t forget Apple has no manufacturing expertise as its products are all built by 3rd parties. Toyota rescued Porsche several decades back and Lockheed Martin called in the production efficiency king to help build the F-35 Joint Strike Fighter better.

It reminds CM of the time Hoya bought Pentax back in 2007. Such was the earnings dilution against the incumbent high margin business, hunting for growth sent Hoya shares down 50% soon after the deal. Hoya was completely dominant in glass photomasks. Yet the $1bn merger of a 2’d tier camera/optics maker was thought of by the founder’s grandson as a total failure and divested many divisions.

Losses continue to mount at Tesla, senior management departures are a revolving door and demand is slowing. The recent cap raise sees investors well under water. The Maxwell Tech deal looks a dud for the management to accept an all share rather than an all share deal (if the tech is so leading edge).

If Apple truly wanted a car deal, it could buy an established maker like Fiat Chrysler with decades of production expertise and global reach for half the price. Not to mention a wide choice of vehicle styles to broaden the appeal to customers.

Although the history of car mergers, even between industry players, has led to some pretty disastrous outcomes. Daimler overpaid for Chrysler so badly that its shares cratered 80%. BMW bought Rover from Honda. Fail. Even Land Rover had to be sold by the Bavarians. Ford ended up selling most of its Premier Automotive Group stable – Aston, Lincoln, Jaguar, Land Rover and Volvo. Just Lincoln remains.

Tech companies meddling in the automobile sector reveals a graveyard of sad stories. Korean analysts jumped for joy when Bosch sold out its stake in the Li-ion batteries JV SB Li-motive. How could a Korean tech company proclaim to have a better read on the global auto industry than Bosch, a supplier to the major auto makers for over 100 years? Panasonic is already kicking itself hrs over the Tesla deal and management is highly unimpressed with Musk after his disparaging remarks made about production.

Have investors ever wondered why Tesla has no mainstream suppliers? Many are obscure parts companies from Taiwan. More established auto suppliers have been burnt by experiments before and they’ll only sign up for makers who have much better prospects and track records.

If anyone thinks Apple buying Tesla makes sense they need their heads read. The last 6 years have detracted value. Pre-pubescent fund managers who have never seen a cycle might see the value of millennial nirvana but the damage to Apple would be considerable. Just because Apple has been so successful doesn’t mean it won’t make mistakes. Tesla would be a disaster. It is in the product creativity blackhole of following the path of Hoya. It would be better to flutter at a casino.