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Pyrford International Q4 2020
Pyrspectives
For professional investors only
Cockapoo (allegedly the first ‘oodle’ dating back many decades) – a
Cocker Spaniel crossed with a Poodle.
Goldendoodle/Groodle – Golden Retriever and Poodle.
Labradoodle – Labrador Retriever and Poodle – apparently the most
popular dog in America for more than 20 years.
Cavapoo/Cavadoodle/Cavoodle – Cavalier King Charles Spaniel and
Poodle.
Maltipoo – Maltese and Poodle.
Schnoodle/Schoodle – Miniature Schnauzer and Poodle.
Bernedoodle – Bernese Mountain Dog and Poodle.
Peekapoo – Pekinese and Poodle. Surely this is the cutest ‘oodle’ name.
Aussiedoodle – Australian Shepherd and Poodle.
Permit us to stray for a brief moment from our usual economic and We think by now you get the idea. Perhaps many of you own an ‘oodle’.
market perambulations and turn to a COVID-induced boom of the canine But here’s the thing – as a certain US President-elect is fond of saying
kind – now who would have thought we’d end up talking about dogs – prices have absolutely rocketed as a consequence of the pandemic.
in Pyrspectives? During the various stages of lockdown, relaxation, The free market at work – massive demand, restricted supply, and
re-lockdown etc. etc. it suddenly dawned on your correspondent that prices go in only one direction. Thousands of dollars are now paid for
in place of the usual doggie outings spotted during daily exercise an ‘oodle’ with some of the most reputable breeders getting well into
the numbers seemed to have doubled or trebled. And to a non-dog- 5-figures. If a breeder has a dog or dogs that can each produce litters of
owning eye it did seem that most of the dogs appeared very similar 8-10 pups we’ll leave you to do the maths. It is quite an industry. One
– with a pronounced ‘teddy bear’ look. It only took brief research to of the unfortunate but inevitable consequences is an upward spiral
discover that what was being spotted was an explosion in ‘oodle’ dogs. in the number of dog thefts together with a cottage industry of fake
It seems that being stuck at home for lengthy periods has induced pedigree documents. Follow the money.
many people to acquire a canine companion.
But all of this leads to the obvious question – where is the money
For those of you not familiar with the term ‘oodle’ let us explain. coming from to fund these expensive ‘oodles’?
An ‘oodle’ is a mix of a pure-bred dog and a Poodle. They are often
referred to as ‘designer’ dogs. They are generally quite small but We can answer that one. There are several aspects – holidays have
sizes can vary somewhat dependant on the size of the Poodle – Toy, been cancelled left, right and centre during 2020. Restaurant meals,
Miniature or Standard. They are popular because of a loveable nature; visits to gyms, pubs, sporting events, theatre and cinema trips, night
limited shedding and are relatively easy to train – or so we are told by
enthusiastic owners.
How many ‘oodle’ varieties are there? We started counting but gave up
at 50. Here are some examples:
Pyrspectives - Q4 2020 Page 2
clubs, daily commuting, morning coffees etc. all cancelled or restricted - again, the quarter-on-quarter movement multiplied by 4. Relative to
for months at a time. Simultaneously, governments throughout the a year earlier Q2 GDP was down by 9.0% and Q3 GDP by 2.9%. These
world have found all sorts of innovative ways to funnel money to their are the somewhat more pertinent statistics.
citizenry, disguising the real economic damage caused by the many
restrictions – whilst building eye-boggling amounts of public debt. But Of more significance is the outcome for the full 2020 year which,
the consequence has been an extraordinary increase in household according to a very recent forecast by the OECD, will be for a real GDP
saving rates, bank deposits and, therefore, money to buy an ‘oodle! fall of 3.7%. In 2021 the OECD forecasts an increase of 3.2% which
means that by the end of next year US GDP will still not be back to the
Savings Ratios level attained at the end of 2019. In other words, two years of potential
30 output growth will have been lost thanks to the shut-downs – hardly
Household savings to personal disposable income
25 something that should cause the share market to race to an all-time
high. And it is not as if all uncertainty has been removed and the
20
economic ‘holes’ suddenly sutured. Many businesses have crumbled,
% 15 never to return. Livelihoods have been shattered. We have looked at
10 other OECD country forecasts and find that in a great number of cases
output is not expected to be back to 2019 levels prior to 2023 – the
5
UK, Eurozone and Japan are examples. And then there is the virus – is
0
it definitely nearing its end?
2017 2018 2019 2020
Germany France Canada US UK Australia
So 2020 will end up being a year out of the box – a box we will not
Source: Refinitiv Datastream want to see repeated. Forecasts from this point, at best, are foggy.
There is much to be repaired before meaningful and lasting advances
We have, of course, witnessed many other COVID-induced booms. can be made. But, returning to our ‘oodle’ theme, we suspect that
Home exercise equipment, IT paraphernalia, on-line retailing and at some point in the next year or two there will be an awful lot of
communication, home improvements, coffee machines, internet unwanted dogs available. We hope we are wrong but it is probably an
streaming services, mask-manufacturers, delivery services, out-of- inevitable consequence of an extraordinary canine bubble. All bubbles
city property et al. And, sadly, many COVID-induced depressions burst.
– hospitality, entertainment, restaurants, travel agents, cruise lines,
hotels, events management, shopping malls, airlines, city offices, Debt and growth
public transport, taxi services and so on. Governments have no money of their own so they either confiscate it
(via taxation) or borrow it – from their citizens and from the citizens
In all our years of number watching we have never seen so many of other countries. There is nothing too wrong with this procedure as
topsy-turvy statistics as witnessed in the last year. Economics is never it means that they then have the wherewithal to deliver appropriate
easy – just look at all the 12-month forecasts produced each year fiscal jabs to an economy when and where required – although it does
and compare them with the outcomes – any similarity is usually a have the tendency to bring forward future economic activity.
coincidence. But trying to forecast what happens next in the world
economy is now more of a mug’s game than ever. Optimism is suddenly This practice only becomes a concern when an economy cannot thrive
everywhere – according to the pundits the ‘great rebound’ is underway without continuous jabs – the government trough becomes overrun
and share markets are rejoicing – but we retain our customary caution. by feeders. This is where the world currently sits. Even before the
Government hand-outs will taper and many will end in 2021. They pandemic government debt to GDP ratios were steadily rising in
have been on an unprecedented scale – an overused term but in this almost every advanced country. Now they have risen to or beyond
case entirely accurate. heights previously only witnessed during WWII.
Let’s consider some statistics. In the US the Bureau of Economic
Analysis (BEA) delights in annualising quarterly GDP data when it is
released. So when the estimate for 3rd quarter US GDP was announced
the BEA trumpeted an annualised increase of 33.1%! This was derived
by multiplying the actual quarterly increase by 4. Simple, but fairly
meaningless. Nevertheless the 33.1% number was the one that hit the
headlines. In the second quarter the annualised decrease was 31.4%Pyrspectives - Q4 2020 Page 3
General government debt as a % of GDP US: Public debt (treasury securities outstanding)
Advanced Economies, 1880-2020 Advanced Economies, 1880-2020
140 30
130
120
25
100 110
20
Trillions USD
80 90
% 15
60 %
10 70
40
5 50
20
0 30
0 1980 1985 1990 1995 2000 2005 2010 2015 2020
1880
1886
1892
1898
1904
1910
1916
1922
1928
1934
1940
1946
1952
1958
1964
1970
1976
1982
1988
1994
2000
2006
2012
2018
Total public debt (trillions) [LHS] Public debt to GDP % [RHS]
Source: IMF, October 2020 Source: Refinitiv Datastream
If we dial our focus to the world’s largest economy, the US, and The latest hot-topic in the world of economics suggests that deficits
examine the progress of government debt and GDP since the end of the and debt simply don’t matter. Governments (with the connivance of
2008-9 Global Financial Crisis we find that at no stage has the growth their ‘independent’ central banks) can keep ‘printing’ and pushing the
in output exceeded the growth in public (government) debt. In only money out in all sorts of clever ways. As long as the printing presses
one year (2015) has real GDP growth edged above 3% whilst in four of are available how can there ever be a problem? Well, if a lot of your
the eleven years it hasn’t made it to 2% (including, obviously, 2020). debt is denominated in another country’s currency that can present a
We suspect that most casual observers of the US economy believe problem. You can’t print their currency so as you churn your printing
that growth of 3% or more is routine. Far from it. What is routine is presses the value of your currency is bound to tumble and inflation
public debt outstripping mediocre GDP growth. The famous Keynesian to rise. We have already seen this occur many times. Argentina is an
Multiplier isn’t broken, rather, it is overwhelmed by the quantum of excellent current example. The annual inflation rate exceeds 30% and
debt. the currency is nose-diving. See the depreciation of the Argentine
peso (relative to the dollar) in the chart below along with a number of
USA : Debt and Growth other emerging currencies.
Real GDP: Public Debt:
Year Selected emerging currencies to US dollar
% increase or decrease Year-on-year % increase
120
2010 2.6 13.9 January 2018 = 100
2011 1.6 8.5 100
2012 2.2 7.9
80
2013 1.8 5.6
2014 2.5 4.5 60
2015 3.1 4.3
40 Depreciation against USD
2016 1.7 5.6
2017 2.3 2.6 20
2018 2019 2020
2018 3.0 7.2
NEW TURKISH LIRA TO US$ ARGENTINE PESO TO US$
2019 2.2 5.6 SOUTH AFRICA RAND TO US$ BRAZILIAN REAL TO US$
RUSSIAN ROUBLE TO US$ INDIAN RUPEE TO US$
2020 -3.7* 18.0**
Source: Refinitiv Datastream
Source: Bureau of Economic Analysis and Federal Reserve
*OECD Forecast (December) ** Pyrford Forecast But what if the government debt is largely denominated in the
borrower’s currency (as is the case with the US)? Quite apart from the
The chart over indicates that US public debt actually fell as a percentage fact that growth hibernates as you inject more and more debt into the
of GDP between 1995 and 2001 but then commenced a steady rise. In
2008 it surpassed the 1995 peak of 65% and then climbed to 103% in
2014. In early 2019 the ratio assumed rocket- like dimensions. Today
the debt stands around 130% of GDP (approx. US$27.5 trillion).Pyrspectives - Q4 2020 Page 4
system it leaves the domestic economy vulnerable to ebbing foreign The country with the most cases and generating the most publicity
confidence – in both the currency and the debt. A loss of confidence is the US but in terms of deaths per capita it is 12th on the global
in the US dollar would lead to a sharp increase in US interest rates. table behind (in order): San Marino, Belgium, Peru, Italy, Bosnia and
This would be an unwelcome occurrence for an economy already up Herzegovina, Slovenia, North Macedonia, Spain, Andorra, Montenegro
to its ear-lobes in both public and private debt. China and Japan are and the UK.
the major foreign holders of US Treasuries – long may their confidence
remain. Even accounting for the odd ropey statistic it is apparent that greater
Asia has fared far better than Europe and the Americas. China, allegedly
To use an old-fashioned sentiment, it makes far more sense to live the source of the virus, has recorded ‘only’ 4634 COVID-deaths out of a
within your means. But our guess is that we’ve now gone too far population of 1.44 billion (3 per million).
for that to occur. We doubt that the incoming US administration will
change the debt trajectory. Expect growth to just creak along – if the We are in no position to answer the obvious question – why is the
US can average 2% annualised over the next decade that should be case-load and the virus death-rate so geographically skewed? Before
considered a victory. The market, however, expects more. the next pandemic comes along and cripples the world economy this
is the sort of question that must have a definitive answer.
COVID-19 Update
In our previous Pyrspectives we looked at the new daily case-load of Bitcoin
global infections and commented that they appeared to be levelling Here we go again. We wrote extensively about Bitcoin during the last
out around a 7-day moving average of 300,000. How wrong we were. great run-up in 2017. Now there is a pronounced sense of Deja-vu.
The 7-day moving average is now around 600,000 (see graph). We
Bitcoin price (USD)
will not make any more predictions about a ‘levelling out’ but, along
25,000
with everyone else, hope that the various vaccination initiatives work
as planned.
20,000
Global new cases of COVID-19
7-day moving average 15,000
USD
700
10,000
600
500 5,000
400
Thousands
0
300
2016 2017 2018 2019 2020
200 Source: Refinitiv Datastream
100 Is this another bubble? Do the fundamentals work? Your correspondent
0 has recently tuned into more and more conversations about Bitcoin and
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec has encountered many people who have invested their hard-earned
2020
shekels but all have great difficulty explaining why they have invested
Source: Refinitiv Datastream
other than “because it is going up.” This is the FOMO syndrome (Fear
What we find intriguing is that a number of countries with significant of Missing Out). It now appears, however, that some major investment
populations have escaped almost unscathed. Did you know, for houses are also putting their buying weight behind Bitcoin.
example, that Cambodia (population 16.8m) has recorded no COVID-
related deaths at all. It has registered only 362 cases since the start We admire the blockchain technology behind Bitcoin but its use is now
of the pandemic. Laos (population 7.3m) - zero deaths. Mongolia widespread across a growing number of applications. And, of course,
(population 3.3m) – zero deaths. Burundi (population 12.0m) – 1 death. there are now many digital currencies. The supply of Bitcoins is finite
Taiwan (population 23.8m) – 7 deaths. Vietnam (population 97.7m) – 35 – capped at 21 million. Around 18.6 million have already been digitally
deaths. Thailand (population 69.9m) – 60 deaths. Singapore (population ‘mined’. Supply is based on a ‘decreasing supply algorithm’ which
5.9m) - 29 deaths. Tanzania (population 60.5m) – 21 deaths (data
accurate as at mid-December courtesy of Worldometer).Pyrspectives - Q4 2020 Page 5
apparently means that the final Bitcoin won’t be mined for another Brexit
120 years. We may not be here to see it. After more than four years since the referendum we thought we would
be able to make a definitive statement about the UK leaving the
So what to make of Bitcoin? We ‘get’ that it neatly sidesteps official European Union but, at the time of writing, we cannot. Talks continue
scrutiny and control, the banking system and no doubt, the tax on the prospect of a deal which keeps the market in high suspense.
system. Payments for all manner of things are scurrying around
the world using this and other digital currencies. But how to strike We have never considered ‘no deal’ a potential catastrophe. If Britain is
a fundamental value? Is it worth $5000, $20,000 or $100,000? That, to leave the EU it must do so in a manner that markedly distinguishes
sadly, is a question that we cannot answer. its future European relationship from its past. There is no point signing
a deal that ensures the EU bureaucracy maintains extensive control
Tesla over many aspects of the British economy. Sovereignty – or not - is the
We rarely comment upon individual stocks in Pyrspectives but Tesla central issue.
forces us to abandon a long-run practice – and not for the first time.
By the time you read this the answer should be known. We look
Unless you’ve been living in a cave you will no doubt be aware that forward to having some certainty to discuss next time around.
Tesla is about to be admitted to the S&P 500 index (on 21 December).
To make way for this automotive upstart Apartment Investment &
Management Co (Aimco) is leaving the venerable index. Tesla will The Final Word
instantly become the sixth largest stock in the index (based on market In the last few months there has been a slight increase in the yields
cap) and the largest ever to be introduced. Its market cap (now over of several benchmark (10 year) government bonds – the US, Canada,
$600 billion) is bigger than the combined value of the next five largest Australia, UK and New Zealand - but no increase at all in Japan,
auto companies in the world. The trillions of dollars invested in index Germany, France, Switzerland, Italy and Portugal. The former group
tracking funds plus the active ‘shadow-trackers’ collectively generate suggests economic growth is seen to be firming somewhat more
enormous demand for the stock. At the beginning of 2020 the share rapidly than expected (together with inflation?) whilst the latter group
price was $86 and now it is around $650 – this is more than a 7-fold suggest quite the opposite. In fact, the yields in all of the second group
increase. None too shabby for 12-months work. have fallen slightly over three months.
Elon Musk has developed a cult following that can see him do no What to make of this? Despite some effervescent market chat it is
wrong. His rocketing stock price has elevated his personal wealth to probably an error to get too excited. The key point from our perspective
place him almost at the top of the global wealth tree. This is not to is that all of the yields remain derisively low. All are below 1% and
suggest that Teslas are not fine cars – they clearly are – but trying to in the case of Switzerland, Germany, France and Portugal below zero
determine a fair stock price is not easy when the investment arithmetic whilst the Japanese 10-year yield hovers around zero.
is elusive. In Germany investors have always referred to certain stocks
as having an element of ‘fantasy’. They regard this as a good thing. We This, in a nutshell, is the investment dilemma. Why buy long duration
think Tesla is in that category. bonds yielding next to nothing or even less than nothing? Such a
practice destroys the rationale and viability of pension funds. But do
There is little point in discussing Tesla in conventional investment you buy equities with dividend yields well below long-term averages
terms unless it is assumed that Musk has the ability to transform one and price earnings multiples well above long-term averages?
of the lowest volume car manufacturers in the world to one of the
biggest together with enviable profit margins – whilst beating off It is important to appreciate that averages can conceal a great deal. For
the German, Chinese and other manufacturers who have entered the example, over half the gain in the S&P 500 market value this year has
electric car industry with gusto. On that score we offer no judgement. been due to the IT sector. Many non-IT stocks have languished. The US
has the greatest market dominance of IT stocks of any global market
That electric cars are here to stay is beyond question. Even the British but elsewhere in the world significant skews also occur.
government has now announced that it will ban the sale of new cars
powered by conventional fuels from 2030. This is an incredibly tight
timetable. It fuels the ‘green’ credentials of the government even
though we consider this particular aspect of the ‘green’ revolution
nothing but an elaborate ruse. But, by golly, it is working!Pyrspectives - Q4 2020 Page 6 Is the IT sector in a bubble? Maybe. It happened all of 20 years ago The combination of government largesse and central bank ‘printing’ but the great Dotcom bubble remains fresh in the mind. In the US have propped and spurred asset markets. This, of course, is quite the tech-heavy Nasdaq index rose by more than 500% over 5 years deliberate policy. It makes value increasingly hard to find but there to March 2000 and then in the next 2½ years fell by 77%. For a time always remains some. Inevitably this will be in currently out-of-favour it seemed everyone was gobbling up any stock that was in any way areas. It may take some time, but the wheel always turns. related to the ‘new’ technology called the internet. We see similar kinds of fervour today. Greed and fear – the classic description of a And finally, the US election. We haven’t mentioned it as there is nothing stock market. When DoorDash (a food delivery service) debuted on illuminating we can add to the gazillion words already splashed across the US market this month its price soared to 86% above its IPO (Initial the airwaves . And, of course, we are decidedly non-partisan. Or so we Public Offering) price. Currently it is trading ‘only’ 55% above its IPO would like you to believe. price. Airbnb also debuted this month and is currently trading at more than double its IPO price. These are not small companies. DoorDash So, for now, we leave our meanderings. Season’s Greetings to all our has a current market cap around $50bn and Airbnb around $80bn. In patient readers. May 2021 be totally unlike 2020. these terms they dwarf many successful companies in similar sectors that have been around for many years. Neither company is in profit. Pyrford International It seems the digital economy is gradually consuming the old economy. 31 December 2020 But, similar to the experience of 20 years ago, share prices and profitability don’t always tango in the same direction. Until they do. Be very careful.
Pyrspectives - Q4 2020 Page 7 Disclaimer Pyrford International Ltd is authorised and regulated by the Financial Conduct Authority, entered on the Financial Services Register under number 122137. In the USA Pyrford is registered as an investment adviser with the Securities and Exchange Commission. In Australia Pyrford is exempt from the requirement to hold a financial services license under the Corporations Act in respect of financial services it provides to wholesale investors in Australia. In Canada Pyrford is registered as a Portfolio Manager in Alberta, British Columbia, Manitoba, Ontario and Quebec. Pyrford is a wholly-owned subsidiary of BMO Financial Group, a company listed on the Toronto Stock Exchange (ticker BMO). This document is made available by Pyrford to professional advisers and professional clients (in the UK), wholesale clients (in Australia) and accredited investors (in Canada) only. Unless specified to the contrary, within Switzerland and EU member states, this document is made available to professional advisers and professional clients by BMO Global Asset Management, a trading name of BMO Asset Management Ltd, which is authorised and regulated by the Financial Conduct Authority in the UK. In Hong Kong, this document is made available to professional clients by BMO Global Asset Management (Asia) Ltd, which is authorised and regulated by the Securities and Futures Commission. In the USA, this document is made available to institutional investors through BMO Asset Management Corp, an SEC-registered investment advisor. This document is a marketing publication and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. The value of investments can fall as well as rise and an investor may receive less than the amount invested. The investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult your investment adviser. Performance data shown in the document may not be in the base currency of the country where an investor is based. Actual returns may increase or decrease as a result of currency fluctuations. Although the information contained herein is believed to be reliable, Pyrford does not warrant its completeness or accuracy. All information provided in this document is for information purposes only and should not be deemed as a guide to investing. Pyrford does not guarantee that the views expressed will be valid beyond the date of the document. Past performance is not a guarantee of future results. Investments cannot be made in an index. Gold is subject to special risks associated with investing in precious metals, including prices being subject to wide fluctuations; a limited and unregulated market; and sources being concentrated in countries that have the potential for instability. BMO Global Asset Management comprises BMO Asset Management Corp, BMO Asset Management Inc, BMO Global Asset Management (Asia) Limited, BMO Asset Management Ltd and BMO’s specialised investment boutiques: Pyrford International Limited, LGM Investments Limited, and Taplin, Canida & Habacht, LLC. BMO Global Asset Management is part of the BMO Financial Group, a service mark of Bank of Montreal (BMO). Certain products and services offered under the brand name of BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions. These products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations BMO Wealth Management is a brand name that refers to BMO Harris Bank N.A. and certain of its affiliates that provide certain investment, investment advisory, trust, banking, securities, insurance and brokerage products and services. Not all products and services are offered in every state and/or location. Securities and insurance products offered are: NOT FDIC INSURED — NOT BANK GUARANTEED — NOT A DEPOSIT — MAY LOSE VALUE. Enquiries: Pyrford International Ltd - 95 Wigmore Street, London, W1U 1FD, United Kingdom +44 (0) 20 7495 4641 | information@pyrford.co.uk | www.pyrford.co.uk Ref: C11
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