Newsletter: Published Tuesday, 16.10.18

  • Feeling gleeful during a selloff;
  • A look at US interest rates;
  • Another look at the US/Chinese trade war.

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Is it so wrong to feel glee when billions of dollars are wiped off the share market?

Everyone woke up last week to news that most shares were in the middle of a savage sell-off.

Global markets were see-sawing, investors were panicking, the trading screens were a sea of red.

Oh how wonderful, I thought, and opened my Spaceship Voyager app. The Spaceship Universe Portfolio was down since last Tuesday.  

Headlines were blaring. Share prices were tumbling, slumping, plummeting, crumbling and cratering. Good God, there is so much fabulous unnecessary emotive language when it comes to the financial press.

It’s easy to imagine a turbulent ocean, violently throwing around wooden investment ships. Money managers, hedge fund owners, investors like you and me, all clinging on desperately to the ropes that bind us to our investment decisions.

We are technology believers. But Amazon is crushed, Facebook is slaughtered, Alibaba and Tencent are losing billions of dollars of market value every minute!

Was it all for nothing? Is the age of the internet over? And has the ability for these firms to keep making money in the real world dried up?

The ocean heaves and investors scurry from port to port, counting the thousands of ships turning back from the storm, selling their positions and heading for the safety of cash, desperate to stem the bleeding from their portfolios.

Hell, nobody wants to see their holdings head south!

But amidst all the shrieking winds and the hurried backpeddling, there are a few of us hanging on grimly to what’s left of our wooden investment ships. The ocean hasn’t overthrown us yet, the shares we hold are still solvent and conducting their businesses.

Companies are still transferring activities to the cloud; people are still buying computer chips; e-commerce is still a thing and there hasn’t suddenly been a max exodus off Instagram.

At times like these, the market itself doesn’t have a great deal to do with the actual day-to-day business of generating profits because the fundamentals of the businesses we own haven’t changed.

There's a change in the weather, but our ships still know how to sail.

It was with that in mind, I happily looked at my depressed portfolio and decided over my morning coffee, the $200 I earmarked for a rather extravagant dinner out in Sydney’s inner west that weekend, may be better served buying some more units in the Spaceship Universe Portfolio instead. Because investing is for the long term.
                                                                                                   
I’m making a lot more decisions like that recently. Slowly re-allocating my money into the market rather than on just other stuff. And between you and me, it’s heartening watching that balance slowly build up.

Why the sell off?

The dirty secret of investing is that nobody knows whether markets will go up or down. And there are thousands of reasons why anybody makes a decision to buy or sell a company.

What’s worth remembering is the herd mentality exists. And sometimes, when a group of people all make the same decision, it triggers the rest of the participants to follow suit.

But we can break down the sell off of last week into two main ideas (the main ones that are spooking the herd, so to speak).

🇺🇸 Rising US interest rates

The US Fed is the American central bank and interest rates are what it costs to borrow money.

In Australia, the cash rate is 1.5% (which is the interest rate charged on overnight loans between banks). So, if a bank was to borrow $100 from another bank at the cash rate, it would cost the bank $1.50 over the year for the privilege.

In America, the interest rate is now between 2% and 2.25%. So, if you want to borrow $100 from the central bank it will cost you between $2 and $2.25 over the year for the privilege.

The flow on effect of rising interest rates is that debt (the money that businesses and people have borrowed from the bank) becomes more expensive to pay off (or more expensive if you need to borrow more). Which means a bit more of company profits go towards paying off debt instead of getting distributed to shareholders (like you and me).

For companies with a lot of debt, an increase in the interest rate can be quite substantial and if investors think that central banks (like the US Fed) will keep raising rates, then that cost of debt will eat more and more into the company profits. (And investors will get less).

The reason the US Federal Reserve is raising rates is because they think the US economy is growing along nicely and people and businesses can afford to cover the cost of more debt.

Interest rates have been extremely low (like, 0%) for a really long time because the GFC shattered, not only the US economy, but the global one.To make sure there weren’t widespread bankruptcies (though there were definitely a lot of those) the US Fed and other central banks around the world (like the European Central Bank, the Bank of England and yes, the Reserve Bank of Australia), decided that borrowing money and paying off debt should be really cheap.

They wanted to stimulate economic activity (people buying and selling and making stuff) so they made it really cheap to do so.But things are looking good now (at least in the US economy) and the US Fed has decided it’s time to make things a bit more expensive again.

Which has spooked investors because they are now used to things being very cheap.

And now everybody is factoring in whether or not stocks on the stockmarket can afford to pay a bit more. And in the meantime, investors are taking their money out of the share market and putting it in the bond market because the interest paid on bonds usually goes up when interest rates go up.

You can read about bonds here if you’re interested.

So that’s one reason.

Another is the trade war the US is having with China.

🇨🇳 This bloody trade war (and the rest)

We’ve gone over this before; but in a nutshell a trade war is when governments put barriers, like tariffs and taxes, on goods going into their countries.

The idea is to make foreign products more expensive and force companies to purchase locally manufactured goods.

The war part is when other countries react angrily to the market interference and implement tariffs and taxes of their own.

Things can get out of hand if taxes are jammed on any good or service crossing borders just to spite other nations: the price of everything goes up (inflation rises) and economic growth slows.

The US and China have been raising tariffs and taxes on each other for the last few months and nobody really knows when or where that will end.

So that’s made investors a bit nervous because they don’t know if the businesses they are invested in will have to pay more and more to sell stuff to China.

These are the two main consensus reasons as to this month’s share market selloff.

There are plenty of other theories (or reasons to yank your money out and hide underneath your bed).

US President Trump tweeted that central bankers are going “loco” and “wild” with “ridiculous” interest-rate hikes. VC has pumped too much money into private companies which has distorted prices. Brexit still has no plan. Turkey, Argentina, Venezuela and Pakistan are all having economic crisis. The price of oil is zooming higher towards $100 a barrel. China has an unbelievably large debt load. The Italians can’t afford to pay back the European Union for bailing them out of their last crisis.

Oh my God, that’s all so hectic.

But the truth is, business is still happening and we believe our investment thesis are holding sound.

You know how people talk about markets going up and down? Well, this is one of the times where it’s going down. It won’t always go down, just like it won’t always go up.

It’s time in the market, not timing the market, that matters.

Stay cool.

Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.

The Spaceship Universe Portfolio and the Spaceship Index Portfolio invests in Alibaba, Amazon, Facebook and Tencent.