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- We have the most uncertain economic outlook in history
- We have the highest stockmarket valuation in history
- oh, and we have the highest debt in history.
He is a legend at spotting bubbles but even he admits that
- this time is different and
- that there is extreme uncertainty about how it pans out.
But he makes some great points on current actions by the authorities:
- Stimulus does not create jobs. You can print $2tn of money or 10% of GDP but it won't reduce the double digit unemployment rate.
I only partly agree with this - they have to do something and some jobs will be created or at least not lost, but see the next point:
- if you print money without creating more output, you have the same amount of services and products floating around the system and more money - the price of those services or products will rise and that means inflation. That is the inevitable end game.
Grantham is a generational thinker: On commodities, he thinks about three groups:
- Oil: we have passed peak oil demand, and shale has had a massive and fast ramp-up but there is not enough of it to keep prices low (demand will help).
- Metals: the real price of most metals has fallen in the last 100 years. That decline is over, apart from plentiful iron and aluminium. Other metals will be increasingly scarce and more expensive in the next generation.
- Food: It will be increasingly difficult to feed the planet and not enough is being done about soil erosion, insect destruction and many other issues.
On the virus, Grantham points out that developed countries have done an awful job. Taiwan, New Zealand, S Korea and many other countries in Asia have handled it well. Elsewhere, only Germany gets a pass. UK performance was woeful and he highlights that Massachusetts and New York are as bad as England. A lack of joined-up thinking is the main culprit - a lesson there for investors.
Vote with your feet
Grantham may have been one of the founders of GMO but his foundation is 60% invested in venture capital and his target is 70%. Asked if he would recommend a career in public equities, he was unequivocal: public equities is a zero sum game, venture capital is an additive game. Insightful.
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I was delighted to get the exposure for this important subject and Algy Hall did a great job of laying the piece out, creating some tables and graphics and asking me to add some charts. The article is in the accounting section of our Library and is attached here in pdf form.
Imagine my surprise when Algy emailed me to tell me that courtesy of that article, I was now an award-winning journalist! He tweeted this:
It was a huge pleasure to work with @steveclapham on his award-winning piece on audit reform. Lovely to have my name associated with the article but the glory is all his! CONGRATULATIONS Steve! CFA UK Journalism Awards 2020 winners announced https://t.co/8cHCjpQBhL— Algy Hall (@AlgyHall) June 18, 2020
- I am not an award-winning journalist. I am not even good enough to be considered a journalist, and I am full of admiration for them, as it's a really difficult job to execute well.
- I have been trying to persuade the CFA Society in London to let me do a follow on course for their members, without success. It's my belief that the CFA is a really tough course, but it needs more analytical training content - my Analyst Academy will equip you to be an equity analyst - I am hoping people will say that it's even better than a CFA, as this ad explains:
Anyway thanks to the CFA Society, and please lobby the FRC in the UK to implement my suggestion on publishing their comment letters. They are listening to me, but the more people who support this initiative, the more likely it is to happen.
Four Credit Suisse funds have $7.5 billion in assets in total and are sold to institutional investors and wealthy families as safe, short-term investments. They hold securities backed by loans made to companies to allow them to pay their suppliers more quickly.
SoftBank plays three roles in the Credit Suisse funds: it is invested in the funds; it is invested in the company whose loans are held by the funds; and the funds own securities backed by loans made to other companies that SoftBank has invested in.
I expect this may be true for Greensill too. UK Investors may recall supply chain fallen angel Tungsten whose share price soared until it didn't. Tungsten, founded by Eddie Truell, had no backing from Softbank of course.
Greensill is a curiosity so I decided to download the accounts. You can find them here. You will also see two changes of accounting reference date within 21 months - usually not a great signal. But what piqued my curiosity was the change of auditor in mid-2015. Grant Thornton resigned and you would imagine that a company which was about to receive an injection from Softbank and to run multi-billion dollar funds on behalf of Credit Suisse would be changing to one of the big 4.
Saffery Champness, actually.
Not heard of them? They had turnover of £71m in the year to 3/19 vs £491m (y/e 9/19)for Grant Thornton (the Patisserie Holdings "auditor"). Perhaps Greensill had some misgivings about Grant Thornton so they were replaced? Saffery Champness, a much smaller firm, does not seem the most obvious choice.
Saffery Champness audited Greensill Capital UK Ltd's 2014 accounts, turnover Aus$26m and charged A$40k (no fee for the previous audit by GT). By 2018, revenues had mutiplied to $234m (real dollars) but the audit fee had only climbed to $98k.
I emphasise that I have done no work on Greensill, and have not attempted to check the accounts - they have gone into my rather long to-do list and I shall return to this subject at a later date.
But the accounts are there if anyone is interested in taking a closer look. I suspect that it would be a rewarding foray.
Tech payments company Stripe has been extraordinarily successful and I was not surprised after hearing the podcast. Now I wish I could invest, as I have just listened to Patrick's brother, John Collison, on Invest like the Best with Patrick O'Shaughnessey. This is really worth listening to, and I would highly recommend it.
My main take-aways, and really you must listen to this in full, were:
- the 1950s were the start of computing and look at where we are today - this is now to think of the internet today. We are just at the beginning.
- the 1999 tech bubble is knows as the dot.com boom, but it was really a TMT boom - the telecoms companies were just as overvalued (think Worldcom etc) - something that's easily forgotten. (I cannot forget because I recall discovering that one of my new analyst colleagues at acquirer Chase was then getting paid $1m pa to cover the telecom stocks).
- Collison highlights how important it is in your career to be able to write well. This is a philosophy adopted at Stripe, just as at Amazon - communication through written memos cuts a lot of wasted time. Writing is a really important skill and it will only grow in significance, I suspect.
Listen to the podcast - it's really good.
Clearly, it is in the interest of an orderly market that both sell-side and buy-side analysts have sufficient time to digest company results. Pity my good friend Chris Bailey who tweeted this yesterday:
Presumably many institutional investors will hold some combination of Alphabet, Amazon, Apple and Facebook, but if it's one analyst, they may not even be able to listen to the whole call live. And it's hard enough trying to analyse one set of company results in detail in a day, without having to do several. More so when we have had such an unusual quarter.
My solution to the problem when I was a practitioner was that I would focus my energies on the important holdings. This was easy enough when we had concentrated portfolios. For important positions, I would always try to attend the sell-side analyst meeting in London if there was one, as it gave me an opportunity to read the mood of the room, and to ask the Finance Director any urgent questions before going back to the office and spending most of the rest of the day checking my forecasts in the light of the new information and preparing a written summary.
But this level of detailed attention becomes impossible if multiple positions are reporting on the same day. Part of the reason for the truncation of the results season is a decision by the UK authorities a few years ago to impose a time limit on publication of results - no longer can you publish your June results in September when everyone is back from holidays. And of course this means that as an analyst, you likely cannot take holidays in July until the results season is over.
The authorities should really do something about this. A computer has no problem analysing the data in seconds, but people need time to digest results and the current situation helps nobody, except those companies seeking to obfuscate. A longer period to report and a central timetable which allocates slots so that investors can cope would help market transparency. With accounting and reporting becoming ever more complicated, making analysts' lives easier would improve transparency.