I mentioned Andrew Hunt of Andrew Hunt Economics in my last RM column, while cribbing some of his proprietary China data for that piece. I am reminded of his excellent "A View from 38,000 Feet" weekly piece as I am writing this column on an airplane. Frequent travel is the analyst's lot, and as Andrew is often trotting the globe to glean macroeconomic facts and insights from his network of global contacts, I occasionally bring the world of Portfolio Guru to other nations, as well.
So, after two weeks of spreading the Portfolio Guru gospel in South Africa, I am on my way home, currently 37,810 feet over the Atlantic Ocean.
The view from here? The global stock markets look absolutely terrible. Why? Because the bond markets are so darn hot. There is just no fundamental reason for the 10-year U.S. Treasury yield to be approaching 2%. It's fear, pure and simple, and to paraphrase FDR, fear itself is what drives markets.
It's not just skittishness among American traders, either. The German Bund has once again fallen into negative yield territory and the Japanese JGB has also resumed its journey into negative-land. If you are frightened by the inverted yield curve in the U.S. Treasury market - and I am scared of a 10-year yield in excess of the 3-month yield - how would you feel to be trading in Hong Kong, where the spread between the 3-month and 30-year treasury rates just went negative?
Anecdotal evidence is flying in the face of bullishness, too. China's corporate bond markets are spasming after the bailout of Baoshang Bank, which some reports have called "the first government bailout of a Chinese private bank." I would guess there have been others that were not publicized, but I will leave it to local experts to perform those forensics.
China's economy is still, by far, the strongest of any of the industrialized nations. There is no way a bank should be failing in such a macro environment.
The underlying issue, of course, is liquidity. Lack of liquidity is what killed Baoshang, and is also a key driver of fear, and thus the rush into sovereigns, which are backed by money printed by...sovereigns.
I am sure Elon Musk wishes he could print TeslaBucks to fund his company's chronic cash burn, but he can't. Investors who bought shares at $243 in Tesla's recent follow-on offering have already seen those shares decline in value by 25%. I have been steadfast in my bearishness on Tesla (TSLA) - more so than any of Tesla's sell-side analysts, some of whom are my former competitors - but it has taken a move toward "risk-off" in hot stock markets to bring that stock back into the realm of a company that is actually subject to valuation, not just Musk-worship.
So, risk-off has its casualties, and stocks of companies that do not generate positive returns on shareholder capital - or even enough to cash to replace that capital, as with Tesla - will be punished.
Balance sheets matter. Elon Musk knows that and the folks at Baoshang learned it the hard way. The stock market's willful blindness for the first trimester of 2019 in the face of IPOs of cash-burning companies such as Uber (UBER) , Lyft (LYFT) , Pinterest (PINS) , and--the king of all kings--Beyond Meat (BYND) , was a sign that appetite for risk had peaked.
So, my view from 38,000 feet is that risk-off markets are no fun. All the hype and hoopla and folks ringing the NYSE bell just gets discarded. It is possible to lose money in equities. I believe that some investors, including influential pundits, had forgotten that in year-three of the Trump Jump, but sometimes a little perspective from high altitude is refreshing,
Lower your exposure to equities here and completely discard stocks of companies that are not earning their cost of capital.
