Regarding… Vol 3 no 15 – Globalists vs. Localists

Since the financial crisis of 2007- 2008, the US dollar has been in a bull market, steadily strengthening against almost all other currencies. The chart below of the DXY – an index that measures the value of the US dollar against six other major currencies – shows the long-term trend.

However, recently, the $ failed to make a new all-time high and dropped sharply.

This raises the question: is it the end of an era? Is it the end of American exceptionalism? Is it the end of America as a financial safe haven?

My take: I don’t know – it’s far too soon to tell. In any case, these things happen over very long time frames. However, having travelled to the USA a few times over the past few years, what I do know is that it’s one of the most expensive places in the world. The world has a funny way of arbitraging both goods and services, resulting in returns to fair value for misvalued currencies. Ask the Japanese about that.

Blackstone is the world’s largest alternative asset manager, with over $1 trillion in assets under management (AUM). It invests its clients’ assets in private equity, credit, real estate, and hedge funds.

The “alternative” part of the market has been all the rage over the past 10 or 20 years. Initially popularised by David Swensen, the Chief Investment Officer of Yale University’s endowment starting in the 1980s, the “Yale model” advocates a long-term diversified approach to asset allocation, focusing heavily on “alternative assets”, such as the ones Blackstone manages.

But investment markets believe – much like Mae West – that “too much of a good thing can be wonderful”. Thus, Swenson’s success at Yale with his approach has led many funds today to become heavily exposed to the asset class. Based on extrapolations of historically high returns and expectations of continued low volatility, US public pension funds have become overallocated compared to their target private equity exposure, with some exceeding their targets by over 100%.

As a result, Blackstone’s stock has done very well:

My take: If the “alternative” asset class provides such good returns with such low volatility, why is Blackstone’s share price so volatile? And why has it declined by 40% over the past few months? Does the market know something we don’t? I have many questions here.

I love writing about gold, which shouldn’t be surprising, as the MWI Worldwide Flexible fund has a 16% allocation. I most recently wrote about it in “Golden” in February, when gold was only $2800 an ounce.

Today, it is much higher:

My take: I don’t have anything to add to that article, except to say that, among everything else, gold is also a bet that governments cannot control their spending. That is a bet I’m willing to take all day long.

While we’re on the subject of gold, we might as well discuss the elephant in the room – if I’m so bullish on gold, why do I only own the physical, and no gold shares?

For reference, here is the share price of Goldfields (all the gold mining companies have a similar look):

That’s a ten-bagger in less than a decade! And I don’t own it! It just proves again that most mistakes in investments are mistakes of omission, not commission. It’s the ones you can’t see that hurt you the most.

But why don’t I own it? On average, gold shares tend to be overpriced because their natural buyers are not purchasing them for their intrinsic value, but due to a “belief” in gold. The management of gold companies has not been bound by the discipline of a share price reflecting a judgment on their actions. As a result, they have allocated capital particularly poorly, primarily through value-destroying acquisitions.

It’s no wonder their long-term return on equity is in the low single digits – not exactly an enticing investment proposition.

So, when should you buy gold shares? The only time you have the odds in your favour is when they are experiencing a difficult period with poor earnings, and the P/E ratio becomes quite high. This holds for most cyclical businesses. Here’s the Goldfields share price and P/E ratio:

The time to have bought them was in 2005, 2014/15 or 2019, when their P/E ratio was high, denoting poor earnings.

My take: It’s easy, with the benefit of hindsight, to point out the good buying opportunities. But you would have had to endure tough times if you had bought them then. To those who could, well done! Unless these businesses have changed their nature completely (which is possible), I would say that right now does not qualify as a good buying opportunity.

Aspen is a South African company that manufactures and supplies specialty and branded pharmaceutical products worldwide. It is widely held in South African institutional portfolios for two reasons:

1. It operates offshore. According to South Africans, anything offshore is a “good thing” and must be owned.
2. It operates in the pharmaceutical sector. No one knows what pharmaceutical companies’ long-term profit profiles look like, but everybody wants to own them. It’s one of those inexplicable market anomalies.

This week, Aspen came out with a surprise profit warning, and the share price dropped 30%:

In the announcement, CEO Stephen Saad was tight-lipped, which I understand. A listed business is extremely limited in what it can and can’t say. Also, if they are still in negotiations with the counterparty, giving away a lot of information to shareholders at this stage would be self-defeating.

My perspective: I don’t like investing in pharmaceutical companies because they are challenging to understand. As a result, I have no exposure to Aspen. Many investors probably understand Aspen better now and will start aligning their exposure with mine over time.

In this piece, market commentator Grant William has gathered five essays from his influential friends, whom he considers highly significant in shaping his thoughts on markets and investing.

Most of Williams’ works are typically behind a paywall, but he decided to make this collection available to the public because he considered it to be of such importance.

My take: The time you spend reading this 48-page document is guaranteed to be well spent. Each of the five articles is an incredibly thought-provoking meditation.

In January 1991, I moved to Cape Town from Pretoria to start working at Allan Gray Investment Counsel, as it was then called. I rented a cottage in Tokai, where I lived alone with my dog Jessie. It was a fascinating time for me, as I was learning about investing from some of the best people in the business. My previous job at the SARB was more trading-oriented, and investing requires an entirely different skill set.

Allan Gray was going through one of those tough periods that happen to all investors at some point, and I clearly remember my first bonus discussion. It was short and to the point. Zero was the number. The other thing I remember from that year was the pressure of studying for and writing the CFA exam, as no one from Allan Gray had ever failed it, and you sure didn’t want to be the first one!

So, the music of 1991 will forever remind me of moving to Cape Town and the pressures of learning new skills and studying at the same time.

Here are the top 20 songs – in that order – on Apple Music. And on Spotify.

The top 10 albums on Apple Music.

The long list of good songs, also on Apple Music.

1991 was the year of Nirvana, with their huge, game-changing album Nevermind. But Tori Amos also exploded onto the scene with her album Little Earthquakes. Over time, Nirvana was more influential, but Tori Amos hit just as hard, if not harder, albeit in a more feminine way. And the year’s anthem was undoubtedly “American Music” by the Violent Femmes!

Book No. 5 for the year! I’m still on track to reach my goal of reading 16 books this year.

Portnoy’s Complaint is the story of a Jewish guy growing up in the 50s and 60s in a Jewish neighbourhood in Newark, just across the river from Manhattan. The twist in the tale is that he is completely obsessed with sex, an obsession that consumes him from a young age. Roth was writing during an era dominated by American Jewish comedy. The book’s style and humour drew from this tradition, poking good-natured fun at all the classically Jewish stereotypes: the controlling mother obsessed with her son’s well-being, the constant stream of guilt and anxiety, as well as graphic details about various stomach ailments.

The book resembles a comedian’s stream of consciousness, which can sometimes be challenging to read, but also rewards your effort with incredibly funny nuggets. By merging Jewish stand-up comedy with sophisticated literary techniques, Roth blurs the lines between lowbrow and highbrow culture, transforming the confessional, neurotic humour of Jewish comedians into a new kind of literature.

I found the book to be a superb examination of a person trying to reconcile the small, protective world he grows up in with the broader outside world and all its pressures, all within a strongly Jewish environment – an environment that I have been fortunate enough to experience firsthand over the past 15 years through my Jewish wife, Amanda.

Speaking of Amanda, it’s her birthday this week, and we will be going away to celebrate. First, we’ll head to Namibia for a few days, then to Madikwe Game Reserve for a week, and finally to Durban for a friend’s son’s wedding.

Yesterday also happened to be Vinalia Urbana, an ancient Roman festival dedicated to wine. It marked the ceremonial opening and tasting of the previous autumn’s wine, which had been fermenting over the winter. It’s a time of merriment, feasting, and appreciation for the hard work of winemaking (investing?). As we leave for the holiday, that is precisely what I plan on doing.

In the cause of merriment, there will be no letter for the next two weeks. I will write to you again on the 14th of May. If you are also taking a holiday, enjoy it!

Piet Viljoen
RECM