Regarding… Vol 2 no 42 – Trump won. So what?

Dear Fellow Investors and Friends,

Welcome to this week’s edition of my investment musings, where I try to make sense of the world around me.

I do appreciate you taking the time to read this.

Today is Thursday, November 14th, the 319th day of the year. There are 47 days left until the end of the year.

On this day, 30 years ago, the Springboks played their first match against Scotland since 1969. They won 34-10. Plus ça change, plus c’est la même chose. This Springbok team would go on to become world champs a year later. See how many of these names you still remember:

I couldn’t help notice the bench – there are only six subs, with a three-three split between forwards and backs. The bomb squad, which hurts the brains of most foreign rugby pundits, is a recent development.

Fast forward thirty years, and today, the Springboks are the strongest brand in South African sport. That’s what consistency at a high level does.

From sport to politics, which is a risky segue because I am bound to step on someone’s toe. But it’s worth discussing the US election, specifically the economic and market implications.

What I am not doing in this piece is choosing political sides. What I am doing is trying to describe what happened, why it happened and anticipate what will happen as a result.

For me, the most significant takeaway from the run-up to the election was that which was not discussed. Neither candidate spoke about the burgeoning government deficit, high debt levels, low rates of economic growth, or widening disparity between the haves and have-nots.

For the first time I can remember, economic issues played a minor role in determining the result.

No, this election result was determined by the wholesale rejection of the left’s moral ambivalence to critical societal issues. What decided the outcome of the election was American society’s adverse reaction to identity politics, transgenderism, lax border controls, out-of-control homelessness, defunding the police and pro-Palestinian (anti-American) riots.

Sam Harris hangs the loss of the election by the democrats squarely on their “moral confusion”. This is an apt description of public opinion worldwide. Governments in Southern Africa have changed hands as a result of similar issues. Germany’s government is also in trouble. In recent elections, voters in Italy and the Netherlands made their views known.

More dominoes will fall.

Because the economy wasn’t the central issue in the election, it’s easy to conclude that there will be no economic impact.

However, the rejection of the moral confusion of the left has handed the reins of government to a group of people with their own distinct set of ethical issues. They are divisive, driven by the cult of personality and do not always play by the rules, especially when they don’t get what they want. At the same time, the economic issues have not gone away. These issues will force the incoming government’s hand to make certain choices, driving a completely different economic environment than we have experienced for a couple of generations. It bears thinking about how to position our investments as a result.

First, what are the economic impacts?

1. As globalists lose influence, nationalism and isolationism will increase. Recently, Gavekal research made the point: Viktor Orbán wins, Ursula von der Leyen loses.
2. New bilateral treaties will bind countries useful to each other, replacing international organisations. This might weaken the role of the US$ in the international payment system. In bilateral systems, gold could increasingly be used as a set-off mechanism.
3. In the West, trade barriers will increase to preserve domestic jobs. In the “Global South”, trade barriers could decline.
4. Big tech platforms will face heightened regulatory scrutiny, with possible anti-trust sanctions. Forced break-ups are not out of the question. International banks might feel the same pressures.
5. High debt levels in the developed world are dealt with not by belt-tightening but by using repressive tools. These could include exchange controls, prescribed assets, interest rate controls, credit rationing, price fixing and other forms of government intervention.
6. As a result of the push for globalisation over the past two generations, gross imbalances in the global economy have developed. These will be unwound over the next few generations.
7. Broadly, the “Global South” becomes increasingly integrated, and the “Rich West” increasingly balkanised.

This is not an exhaustive list, but it significantly impacts how we should think about our investments. These are also not forecasts – the future always turns out very different than we expect at any given stage – but merely thought exercises to help us allocate assets in this new world.

Here are some guidelines:

• Own more gold than you currently do. The same goes for Bitcoin specifically and crypto in general. Any hard asset should be favoured.
• Own the equity of energy producers (specifically fossil fuels and nuclear).
• Don’t own Chinese assets.
• Own less developed market equities than you do now, especially of the indexed variety.
• Instead of owning indices, own shares of genuinely multinational companies, wherever they are listed.
• Own more Japanese and Emerging market equities than you do now.
• Own bonds of emerging market countries (ex-China).
• On no account should you own fixed income in the West.
• Domiciling your assets in a jurisdiction outside the major financial centres of the West might be a good idea.

Such an asset allocation looks radical in the light of market movements since the election and looks especially radical relative to how most portfolios are positioned today. This is how the MWI Worldwide Flexible fund (aka the cockroach) is positioned.

I am not sure of very much in markets, but I am sure of one thing: tomorrow will be different from today. We still need to find out how different.

To recap, Pick ‘n Pay (PnP) is in financial trouble and owns 100% of the well-run mass-market retailer Boxer. PnP is selling part of this jewel to help alleviate its onerous debt burden.

The long-awaited pre-listing statement for Boxer was released this week. I have yet to study the statement in much detail, but I have thought about the incentives of the different parties in this new listing:

• Pick n Pay desperately needs capital. It’s selling 40% now, with possibly more to come later. They will want to sell at the best possible price.
• The offer is effectively only open to institutional investors, who have been starved of quality new listings for a long time. The excitement is palpable. The investment banks know this.
• RMB/Morgan Stanley/ABSA and Standard Bank are the joint book-runners and are being paid a handsome fee (c R240mn) to ensure its success. It will be successful.

The net result is the best of all worlds –  Pick ‘n Pay should receive a very good price for their shares, and – hot on the heels of the successful WeBuyCars listing – there should be a nice pop in the Boxer share price post-listing.

My take: Remember stagging? This might turn out to be a good stag. If you can get your hands on some, that is.

Last week, Merchant West Investments (MWI) published the quarterly report for all its funds on its website. Most of the funds managed by the team at MWI have generated returns that are above industry (and benchmark) returns over the past three years. As a shareholder of MWI, I am proud of the work the investment team has done since the firm’s creation during the Covid panic of 2020, and it is a pleasure working with them.

As the co-manager (along with my colleague at MWI Rudi van Niekerk) of the MWI Value fund and an investor in the fund, I am specifically interested in how the fund is doing. You can find its quarterly report here.

It’s worth pointing out that this fund is ahead of its benchmark – the FTSE/JSE All Share Total Return Index – over five years, ten years and since inception. To outperform an index is difficult, and few funds can do this.

In the USA, less than a third of funds outperform the S&P 500 over time, and since 2001, a majority of active funds have only beaten the S&P 500 index in three years: 2005, 2007, and 2009.

According to Morningstar, only 5 funds (out of 70) in South Africa outperformed the All-Share Index (total return) over 10 years. The MWI Value fund is one of them. Over 5 years, only 12 funds (out of 93) could do so. Again, the Value fund is one of them. In fact, the Value fund is ranked 2nd overall.

My take: Value investing works. Not all the time, but over time. All you need is patience.

Berkshire released its quarterly results on Saturday. The big news? It significantly reduced its holding of Apple shares. Significant meaning to an exposure of $70bn from $174bn at the start of the year.

The net result is that Berkshire now has the highest cash holding ever – in absolute terms and relative to total assets. As pointed out by The Brooklyn Investor:

“Cash went up to over $300 billion. Cash as a percentage of shareholders’ equity is 51% vs. the usual range of 25-30% in the past 10 years. Cash excess over float is itself now $170+ billion, or more than 27% of BRK’s shareholder’s equity. So, this is big.”

This significant holding of cash elicited much speculation about Buffett’s intentions. Was he expecting a market crash? Was he cleaning up in anticipation of a handover to someone else? Or is he just realising taxable gains now while tax rates are still quite low?

I don’t think anyone has an answer to that – I definitely don’t. But I have said in the past that I effectively outsource the management of the US equity market exposure in the MWI Worldwide Flexible Fund (aka “the cockroach”) to a certain Mr. Warren E. Buffett by buying Berkshire shares instead of the index or some other combination of equities. I spoke about doing so in Vol 2 No 22.

Also, Berkshire is in my ten stocks forever portfolio, so the cockroach will remain invested as I gradually shift the equity exposure towards that strategy.

My take: I am happy with the performance of my outsourced, 94-year-old fund manager; thank you very much.

With gold not far from all-time highs, I thought I would leave this quote about what Keynes called “the barbarous relic” here:

“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

-Alan Greenspan, Gold and Economic Freedom, 1966

So far this century, gold has been the asset to own. This chart is from John Authers’ Bloomberg column:

My take: One of my outsourced money managers, Mr. Warren E. Buffett, prefers not to own gold. Therefore, I have separately allocated a significant portion of “the cockroach” to the physical asset (importantly, not the equity of companies that mine it). In fact, physical gold is the single biggest holding of the MWI Worldwide Flexible Fund.

I have been an advocate for holding a sensible proportion of one’s assets in Bitcoin/Crypto. I justified this in Vol 2 No 29.

Well, since Trump was elected, it has rocketed:

I cannot claim any prescience here. My view is, and always has been, that it is a hard asset – i.e. an asset with a limited supply – which will benefit from the forced increase in money supply in Western economies over the next 10 to 20 years. But since the election results were announced, anything to do with crypto has shot up.

Here’s the share price of Coinbase, a prominent cryptocurrency exchange platform that facilitates the buying, selling, and trading of various cryptocurrencies:

And here’s the price of MicroStrategy, a “tech company” run by a certain Michael Saylor:

Nvidia’s got nothing on this one!

Mr. Saylor has had several brushes with the law:

• On June 3, 2024, Saylor settled the lawsuit for $40 million, marking it as the largest income tax recovery in D.C. history.
• In 2000, he was charged by the U.S. Securities and Exchange Commission (SEC) for fraudulent reporting of MicroStrategy’s financial results, leading to a settlement that included personal financial penalties.

My take: A leopard does not change his spots. Also, any new technology tends to get hyped, and dodgy people sometimes take advantage of the hype. Bitcoin is no exception, and neither is MicroStrategy, so caveat emptor.

Also:

“Bitcoin is not a bubble. Bitcoin is the pin that’s popping the bubble. The fiat money world is the bubble.” – @maxkeiser

Cognitive dissonance can be scary, but it can sometimes be a helpful way of thinking about the world.

Darryl Bristow-Bovey writes a short daily blog, which is a delight to read.

Unsurprisingly, it is called “Daily Delights”. You can find it here. He and his wife travel – a lot – and I love visiting all the places they go vicariously through his blog. His writing style is so effortless that you want him to write more than his daily allotment of, at most, one paragraph. Also, as a bonus, he uses a new word (at least a new word for me) at least once a month.

Last week, he wrote a letter to his subscribers (of which I am one) containing a wonderful story about statues in Riga, where he has been staying most recently. It included this gem:

“In the Baltics, they know all about Russia. In the past year, Riga has renamed the street on which the Russian embassy stands. It used to be Antonias Street; now the Russian Ambassador’s business card lists his street address as “Independent Ukraine Street”. In Vilnius, the Russian embassy now stands on “Ukrainian Heroes Street”.

“Even if Ukraine falls this winter,” said the barista at Ezisa Kofisops, handing me my coffee, “we know the West will protect us.” He twisted the corner of his mouth. “That is Latvian sense of humour,” he said.”

Morgan Housel is a partner at Collaborative Fund, a venture capital firm focusing on investments at the intersection of personal and common good. He is also one of my favourite business writers. He writes an irregular blog for his company, which I think I have mentioned before. You can find it here.

But now he also has a podcast that shares timeless lessons about wealth, greed and happiness. The most recent one came out on November 4 and was called “Rare and Powerful Skills.”

He listed the following as essential skills to develop:

• Accepting a certain level of nonsense and hassle when the situation demands it, enabling you to get through life without being constantly upset.
• Understanding how people justify their beliefs so that you can respect their delusions.
• Quitting when you are ahead or before you have had too much.
• Being able to interact with those you disagree with respectfully.
• The ability to have a ten-minute conversation with someone from any walk of life.
• Respecting luck as much as you respect risk.
• Getting to the point. Use as few words as possible. Treat words like they cost you something.

Each podcast is only about 15 minutes long, but each one packs a powerful punch.

You can find it here on Apple, and here on Spotify.

Sam Harris dissects the recent election in America and interrogates the reasons for the Democrat’s loss and Trump’s resounding victory. To listen to the full podcast, you need to subscribe, which I highly recommend. But if you don’t want to, here is a transcript of it.

I don’t agree with everything he says. But he says it well, and he expresses what a lot of people are thinking.

One last thing: after years of deriding the sport, my son Nic has taken up cycling. It’s scary how easily he has taken to it. And I couldn’t be prouder or happier.

That’s all for this week.

Except to say – be careful out there. Very, very careful.

Piet Viljoen
RECM