Market Trends, WeWork, Cryptocurrencies, Passive Saturation

Last week was a remarkably one for my stock market portfolio. Share prices were up on almost all my holdings. This was no doubt sparked by good news from the USA – inflation seems to be under control with CPI falling to 7.7%, and the war in Ukraine is looking up as Russia withdrew from the west bank of the Dnipro River. Stalemate in the latter war is looking increasingly likely which may encourage both Russia and Ukraine to reach some accommodation.

I also get the impression that stocks were being bought back in a panic after previous sales as they fell sharply in previous months. This particularly affected less liquid small cap and AIM stocks.

But this is surely only temporary relief from the gloomy economic prognostications. Interest rates in the UK still need to rise further as inflation is still high and real interest rates still negative. Political stability may help over the next few months but it looks like we are all going to be significantly poorer from aggressive tax rises. This will not help the UK economy one bit.

I watched an interesting TV documentary on WeWork yesterday. WeWork was essentially a company that rented out office desk space, i.e. it was a property company but ended up being valued as a high flying technology business valued at a peak $47 billion before it crashed. Led by Adam Neumann as CEO in a messianic style it developed into a cult which became further and further detached from reality. As profits were non-existent they redefined the word profit.

It’s a great example of how investors can be suckered into backing dubious companies led by glib promoters simply due to FOMO (fear of missing out). There is a good book on this subject entitled “The Cult of We: WeWork and the Great Start-Up Delusion” which I have ordered and may review at a later date.

Cryptocurrency exchange FTX became bankrupt last week. At the end it looked like a typical “run on a bank” as folks rushed to take their money out. FTX reportedly had less than $1bn in easily sellable assets against $9bn in liabilities before it went bankrupt. This has also affected other cryptocurrencies as traders take their money off the table.

Can cryptocurrencies survive? Only if backed by the state I would suggest. I am reading an interesting book – the Travels of Marco Polo which covers his time spent in the Mongol empire including China circa 1300. It describes how paper money was widely accepted in the Mongol empire which covered most of Asia at the time. But it was backed by gold or silver for which it could be exchanged. One advantage of their paper money was if you wanted a lower denomination note you could simply cut up a larger one. Paper currencies do rely on public confidence which is why state backing is so essential and also confidence that holdings are not going to be devalued by excessive printing of more money. Cryptocurrencies have tackled this issue in more than one way including the need for large power consumption to create new coins. But the whole structure still seems unsound to me.

An interesting article in the Investors Chronicle this week covered the subject of passive investing under the headline “Passive Saturation”. There has been concern expressed for some time that a high proportion of the stock market is held by index tracking funds that simply follow the herd. This might magnify trends and not relate to the reality of fundamentals in the companies they buy and sell. This was previously not thought to be a problem because the “passive percentage” of the market was estimated to be only 15%. But a new academic report suggests the real figure is more like 38%.

A very high passive percentage means that stock pickers can do well, and better than the indices as they ignore trends and look at the fundamental merits of companies. I prefer actively managed funds even if you do pay more for them in charges. Funds that rely solely on momentum may have done well historically but they are likely to exaggerate trends both up and down and the higher the percentage of the market held by passive funds, the more dangerous this becomes.

Roger Lawson (Twitter:  )

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