June 15, 2019
What share of public companies have interest coverage below parity in China?
It's estimated that 15% of Chinese bank loans will be non-performing in the next credit cycle. This would be worse than any previous US crisis but on par with the late 1990s Asian debt crisis in Korea.
The diversity of the Chinese customer base
Chinese exports to all destinations are up 6% YTD in 2019 with exports to the U.S. down about 5%. The US is only 1/7th of all Chinese exports allowing overall Chinese export growth to hold up.
Howard Marks Memo: This Time It's Different
Howard Marks rarely attends a meeting these days where someone doesn't propose a new theory of why this market cycle could be different. Mark's latest memo broaches this very topic where he outlines nine of these hypotheses that have become far too prevalent among investors:
What do all nine of these theories have in common? That's easy: they're optimistic. Each one provides an explanation of why things should go well in the future, in ways that didn't always go well in the past. Mark argues that it should be very worrisome if these are the guiding principles of investors today. It's important to keep up with current developments and those that will shape the future, but it's also important to not unlearn the lessons of the past.
How elite NBA athletes handle pressure
- There doesn't have to be a recession
- Continuous quantitative easing can lead to permanent prosperity
- Federal deficits can grow substantially larger without becoming problematic
- The national debt isn't worrisome
- We can have economic strength without inflation
- Interest rates can remain "lower for longer"
- The inverted yield curve needn't have negative implications
- Companies and stocks can thrive even in the absence of profits
- Growth investing can continue to outperform value investing in perpetuity
From Larry Bird's nausea to Stephen Curry's butterflies, throughout history, the NBA's brightest stars have had to manage and learn from pressure in a variety of ways. The most elite basketball players are not immune to stress but instead mastered how to channel it, and in some cases thrived from it.
The truly great ones know there's pressure, so they don't consider consequences. If they did, they'd cave all the time. If you succumb to those consequences, you will never reach your potential. Just like with refining your shooting stroke, the more reps under pressure and stress, the more your body will learn to cope.
Today, over 50% of the planet's population is online, a mere quarter of a century after the web first took off among tech-savvy types in the West. Most of the recent growth in users has come from the emerging world where 726 million people came online in the last 3 years. Countries like China are still growing fast, but much of the rise is coming from poorer places, notably India and Africa.
As these countries come online businesses now have access to a vast pool of new customers. The one challenge here is that most of these new users are too poor to spend very much.
For example, the average Facebook user in Asia generates only $11 of advertising revenue a year, compared with $112 for a North American user. The combined revenue of all the internet firms in emerging markets (excluding China) is perhaps $100 billion a year. That is about the same as Comcast, America's 31st-biggest listed firm by sales.
Flocking climbers and investors
Climbers are flocking to Mount Everest, making for increasingly dangerous climbing conditions as inexperienced climbers crowd the peak. In 2019 at least 11 people have been killed on the mountain, which is the highest death toll since 2015. Why the sudden rush? People didn't suddenly become braver and the mountain didn't become less steep. What happened was a slow but steady amount of progress in the technology and equipment needed to make the climb, thus opening the way for more and more people to attempt it.
Climbing Mount Everest still has cache, of course, but compared to ten years ago? Or 30 years ago? Not really. More and more are reaching the peak every year.
We see this phenomenon play out in the investment markets all the time. The first people to discover something exploitable and profitable are treated better than the subsequent people that come rushing in. This is what crowds do to opportunities. No matter how good you are, if what you're doing is very profitable, others will copy you and will be "good enough" to impinge on your game. Which is why the best investments are those with moats - companies that are so good at something that their abilities and assets literally act as a barrier to those who would follow and imitate.
EdgePointers celebrate the Toronto Raptors' unbelievable NBA championship!