On Target Newsletter

In this issue:

  • Stock markets
  • Doctors condemn virus policies
  • Self-Inflicted Disaster update
  • Shielding yourself against crashes
  • US election

Are Share Markets Ignoring the Risks?

Things are really looking good for investors. Wall Street has been setting new all-time highs, which have been followed by a significant correction – not a negative development but a positive one. European stock markets and Tokyo haven’t yet recovered their pre-Covid peaks but have been rising steadily since the March crash. China shares largely escaped that crash and have been starting to look encouraging.

The world economy is performing much as expected. The figures for what happened in the April/June quarter are stunningly bad – annual growth fell more than 50 per cent in South Africa – but almost everywhere strong recoveries are under way. In America and Europe workers are returning to their jobs, the devastated hospitality industry is reopening and airlines are starting to restore their flight schedules. China is once again by far the world’s most important growth economy.

Are share markets ignoring the risks?

► Strongest counters have become outrageously expensive. “Stocks with real or perceived exposure to the cloud, digital payments, electric vehicles, plant-based food, or anything to do with the stay-at-home economy, have shot up meteorically” says Andrew Parlin of investment advisory firm Washington Peak.

“Insanely high price-to-sales ratios highlight the total lack of realism embedded in the hottest growth stocks.” If a stock trading on ten times sales earns net profit margins of 20 per cent – “a very high margin indeed” – its price-to-earnings ratio is an extremely expensive 50 times. According to Bloomberg data the US has 530 listed companies that were recently trading at more than ten times sales.

The troubling thing about stock market bubbles like the current one is that they don’t come to an end in a smooth way, deflating till they disappear. They continue to expand until they stop doing so. Abruptly. The bubble bursts. The reversal is usually sudden, disorderly, spectacular.

You can avoid that risk by staying out of the market. Trouble is, that safety means you forego all chance of making profits – which can be huge if you’re in shares when they’re inflating AND you get out before they explode.

The factor that suggests a collapse is not an immediate risk is central bank policies. The four most important ones – the US, Europe, Japan and China – have  inflated their balance sheets from $9 trillion to $26 trillion over the past decade.

they counter governments’ catastrophic anti-Covid policies. Furthermore, central banks have indicated that they won’t stop their bubble-pumping until there is significant inflation.

It will be quite a while before the major central banks withdraw their support for stock markets.

► Political risks are rising. In the US the outcomes of elections for the presidency and for the equally important Senate are going to be tight. Because of the scale of postal voting this time and its potential for disallowance of ballots and fraud, we can expect an avalanche of legal challenges that may only be resolved eventually at the Supreme Court.

Whoever wins it seems certain that the superpower rivalry between America and China will persist and intensify. Both sides have become sensitive to their interdependencies such as American reliance on Chinese factories for drugs and iPhones, China’s on US companies for their advanced technologies.

As Britain finally implements its departure from the European Union at the end of this year it becomes clear that Brexit is going to be a nasty business. Complex future relations encompassing trade, borders, citizens’ rights and military co-operation will take years to negotiate, resolve and implement.

►There are huge uncertainties arising out of the Covid-19 Self-Inflicted Disaster. When will governments scrap extreme measures that have devastated hospitality and aviation industries? How much permanent damage has been done to them? How much unpleasant (and largely unnecessary) bureaucracy will we be forced to comply with for years to come? Masks everyone? Compulsory vaccinations?

It’s tempting to believe that commonsense will be restored as the pain of shutdowns and the rest become too much to bear, as it becomes apparent that the extreme measures were never warranted for a disease not much worse than ‘flu, and that politicians should be made to pay a price for their madness.

But in this I may be too optimistic. Most people have been in favour of, or at least tolerant of, shutdowns, border closures and the rest. Ruling elites and their officials could well be reluctant to abandon the powers they deployed under the cover of the need to fight the virus. “Scientists” may hang on to their undeserved status as gurus whose wisdom we must follow.

Doctors Expose the Flaws in Virus Policies

One of the most distressing aspects of the pandemic is the way governments, other official bodies and their acolytes go to extreme lengths to suppress all facts, theories, even opinions, that conflict with theirs… even though they occasionally later reverse their positions, proving that some of their suppressed critics were right in the first place.

In Belgium a group of 394 medical doctors and 1,340 other health professionals have published an “open letter” to the world’s public health authorities challenging much of the received wisdom about Covid-19 that we’re being forced to believe and act upon. They identify, in 51 footnotes, the sources all the alternative facts they identify. The “objective facts” that show “a completely different reality.”

Their conclusion is that there is no longer any medical justification for the measures, often extreme such as shutdowns, that have devastated all countries and the global economy. “The current crisis management has become totally disproportionate and causes more damage than it does any good,” the doctors say.

Here are the most interesting in the English-language version of the letter you can read on the American Institute for Economic Research website…

► The PCR test produces many false positives and a greatly exaggerated – “exponential” – picture. The test was rushed into use via an emergency procedure and “was never seriously self-tested.” Its creator “expressly warned that this test was intended for research – and not for diagnostics.

“If someone tests positive, this does not mean that that person is actually clinically infected, is ill, or is going to become ill.” It does not justify the social measures imposed by governments, which are based solely on these PCR tests.

► Lockdowns: If the waves of infection in countries with strict lockdown policies are compared to countries that did not (Sweden, Iceland) we see similar outcomes. “There is no link between the imposed lockdown and the course of the infection. Lockdown has not led to a lower mortality rate.”

► For thousands of years the human body has been exposed daily to infectious micro-organisms (viruses, bacteria and fungi). Their penetration is prevented by the immune system. Most people have a congenital or general immunity to viruses Their systems neutralize the coronavirus, so they experience few or no symptoms.

Social distancing is damaging to health

“Most people… have a congenital or cross-immunity” because they have already been in contact with variants of the same virus. “Only people with a weak or faulty immune system should be protected by extensive hygiene or social distancing.”

► Studies have shown that the more social and emotional commitments people have, the more resistant they are to viruses. Isolation and quarantine have fatal consequences. Particularly for many older people forced to stay indoors.

► Covid-19’s mortality has turned out to be many times less than originally predicted by the experts, “and close to that of a normal seasonal flu.” The vast majority of those who have died were aged 80 or older, while most of younger deaths are those with underlying disorders such as cardiovascular disease, diabetes, chronic lung afflictions or obesity.

► There is “an affordable, safe and efficient therapy available for those who do show severe symptoms of the disease” – hydroxychloroquine, zinc and Azithromycin. Rapidly applied, this therapy often prevents hospitalization and leads to recovery. “Hardly anyone has to die now.”

This effective therapy has been confirmed by clinical experience ‘with impressive results” in the US and France, as well as research in Switzerland comparing mortality rates with and without the therapy.

This positive experience contrasts sharply with theoretical criticism – insufficient substantiation by double-blind studies – which in some countries, such as the Netherlands, has even led to a ban on the therapy. But a critical meta-analysis in the scientific journal The Lancet has been withdrawn as unreliable.

► Spreading occurs in closed, unventilated rooms. “Contamination is… not possible in the open air. Contact tracing and epidemiological studies show that healthy people (or positively tested asymptomatic carriers) are virtually unable to transmit the virus.

“Healthy people therefore do not put each other at risk.” This “seriously calls into question the whole policy of social distancing and compulsory mouth masks for healthy people – there is no scientific basis for this.”

Oral masks “belong in contexts where contacts with proven at-risk groups or people with upper respiratory complaints take place, and in a medical context/hospital/retirement-home setting.” In the case of healthy people they are “ineffective against the spread of viral infections.”

► As viruses mutate continually, vaccines are “at most a temporary solution.” in ten years only three times have anti-influenza vaccines been developed with an efficiency rate or more than 50 per cent. With people older than 75 “efficacy is almost non-existent.”

An anti-Covid vaccine “implemented by emergency procedure, and for which manufacturers have already obtained legal immunity from possible harm, raises serious questions.” On a global scale, “700,000 cases of damage or death are expected as a result of such a vaccine.” The Belgian doctors say “we do not wish to use our patients as guinea-pigs.

“The relentless bombardment” of the public with figures day after day without interpretation, without comparing them to flu deaths in other years, and without comparing them to deaths from other causes, “has induced a real psychosis of fear… This is not information, this is manipulation.”

There is an infodemic, one openly called for by the World Health Organization – all opinions divergent from those of the official discourse, including those by experts with different views, are silenced “by an unprecedented media censorship.”

Self-Inflicted Disaster Reports

Vitamin D: The world’s first randomized controlled trial, carried out at Spain’s Reina Sofia University Hospital, proves that having healthy levels of it is a major defence against dying from Covid-19. This confirms earlier studies in America suggesting that this could cut the virus’s mortality rate by as much as a half.

The vitamin cannot be obtained from a normal diet but is produced by exposure of your body to sunshine. In Britain, says science writer Matt Ridley, it’s deficient in much of the population “especially towards the end of winter, and especially among at-risk groups such as the elderly, obese, and black and minority ethnic groups.”

The vitamin is very cheap, which is why “no big [pharmaceutical] firm is pushing it.”

As we’re in our 80s. we have been taking a dose daily as part of our virus defence regime.

Minimal risks: For the first time the Centers for Disease Control has broken down by age groups the chances of dying in the US of those who get infected by the virus. They are… one out of 34,000 for ages 0 to 19; one out of 5,000 for ages 20 to 49; one out of 200 for ages 50 to 69; one out of 20 for ages 70 and older.

As the risk for all those younger than 70 is statistically negligible it would make sense to scrap all measures that are so damaging to economic growth. It would make sense simply to spend more looking after the elderly.

That would be the logical course of action, says Eoin Treacy, but it’s a very difficult thing to do “because we are still in the hysterical phase” of response to the virus. Watch out for the first country to decide to open up. It will see an exponential rise in cases – but not the death toll. Then other countries will follow. Within a year all restrictions will have been lifted.

Soft policies deliver some of the best results

Politics: The world’s most successful populist is the one who has refused to favour the extreme anti-pandemic measures favoured by almost all other leaders – Jair Bolsonaro of Brazil.

Famously known for describing the virus as being no worse than a “little flu,” he refused to support tough shutdowns, criticized the media for spreading paranoia, and prevented compulsory wearing of masks in school, shops and churches. His focus was on limiting economic damage.

His policies have paid off in spades. Brazil’s economy is expected to contract by less than 6 per cent this year – the best performance of any major Latin American economy. And he’s enjoying record popularity.

Tests: The Australian government’s Therapeutic Goods Administration admits on its website for health professionals that the swab and blood tests they are using nationwide are unreliable. The extent to which a positive PCR result correlates with infection “is still being determined” and there is “limited evidence” about “the accuracy and clinical utility of available Covid-19 tests.”

Masks: The evidence for and against their general use is weak, but requiring it where it’s extremely difficult or impossible to be infected – outdoors or alone in the street – is an unscientific farce. Forcing youngsters to wear masks makes no sense as their death risk from the virus is virtually zero, while transmission from children to adults is unusual – lower than the risk from influenza.

The wrong figures: Media commentary continues its obsessive focus on the numbers of new cases of Covid-19 reported. The statistics are grossly misleading because the number of tests being performed has increased beyond recognition over the past six months. Obviously the more you test, the more you find. It doesn’t mean the pandemic is getting worse, or moving into a “second wave,”

The figures that matter are hospitalizations and deaths. In both respects the ratios are falling, mainly because most newly infected people are younger. Very few of them are at risk of dying from the virus.

“We are in a period of mass hysteria,” says Eoin Treacy. “The introduction of vaccines will help improve sentiment, but a massive public information campaign will be required to convince [people] they are safe.”

Five Ways to Shield Yourself Against Crashes

Market crashes happen regularly and are an inherent part of investing. In America since 1928 there’s been a market fall of 10 per cent on average every 11 months. One of 15 per cent happens every 24 months, one of 30 per cent every decade, of 40 per cent every few decades, and of 50 per cent two or three times a century.

But if you try to time the market to escape crashes, there is a major risk that you’ll end up losing because you’re out of it when the market bounces back. Between 1980 and 2018 if you missed out by not being invested for just five of the best days you would have missed 35 per cent of the return; if you missed being invested for the 50 best days you would have lost 91 per cent of your return.

Morningstar says its research into all market crashes since 1870 shows that no matter how bad the crashes, the market has always rebounded and continues to expand to new highs, closely tracking economic growth.

So crashes aren’t a good reason for trying to time the market, or barricading your portfolio against volatility.

The investment information service Seeking Alpha offers these five ways to prepare for the next market crash…

► Ask yourself how much drawdown – fall in the value of your portfolio – you can cope with.

You need to prepare yourself psychologically for market crashes. When the next one comes, how much lower can you let your portfolio get before you call it quits? Setting your tipping-point in advance means avoiding the risk of exiting a bad market unnecessarily or prematurely. It guides you as to how much of your wealth can be risked in equities.

The further you are away from retirement, the more time you will have to recover from a market crash, the bigger the drawdown you can plan to accept. And the longer your time horizon, the less that market crashes will matter.

► Make sure you’ll have the cash you need. As part of your moneycraft you should always have an emergency fund set aside to cover unexpected substantial expenses such as loss of income, an accident, a medical crisis. Usually it should be equivalent to three to six months’ normal expenses if you’re employed, but “much bigger as you get closer to retirement, based on your personal circumstances and the peace of mind you are seeking.”

You should also consider if you’ll need money for major outgoings some time over the next five years. It’s probably best not to invest that money in shares.

You should also keep part of your investment portfolio in cash – anything from 3 to 25 per cent of the total – in a reserve to buy shares that you’ve identified as good prospects… when and if you can get them cheaper.

With such funds as part of your financial planning you ought never need to draw money from your investment portfolio in an emergency, strengthening your ability to withstand the shock of a market fall.

► Build a portfolio that suits your risk profile. Look at your holdings and ask yourself if they fell in value by 50 per cent, would you have a change of heart about specific positions, would your life be impacted adversely in the short term?

You may decide it’s wiser to hold off on buying that small biotech investment you heard about. However, “if you have decades ahead of you before retirement and save more in a year than the value of your entire portfolio, you can probably take some risks and allocate funds to ‘moonshot’ opportunities that could create tremendous alpha for your portfolio.”

There are clear warning signs that should make you question your existing approach. For example, if you find yourself checking your portfolio or the movements of a specific stock you own several times a day, you may be taking more risk than you can tolerate. Have you ever lost sleep because of an investment?

► Build a wish list of stocks to buy on sale. Broad market sell-offs are the perfect opportunity to accumulate shares of the best companies. If you compile a list of the companies you wish you owned, and at what price you would be prepared to buy them, you’ll be at ease about making the right choice when the time finally comes.

Without a wish list built when you are at ease, you may end up buying the wrong stocks just because they’ve fallen in price more than the others.

► Write down your strategy. Your temperament is the single greatest factor in your portfolio’s returns. There are many ways to fight your natural flaws. When it comes to preparing yourself to handle a market crash, the most powerful tool is recording the data in a journal. Have your long-term strategy written down, keep repeating to yourself what it is. When things are falling apart you need to remind yourself of your thoughts and conclusions made in calm times.

How Election Outcome Could Impact Investors

Current betting odds favour a Democrat sweep in next month’s elections, but alternative outcomes have good chances. The odds give a 24 per cent probability of victory for Joe Biden combined with Democrat majorities in both the Senate and the House of Representatives, but 20 per cent chances that the Republicans keep their control of the Senate, or that Donald Trump manages to retain the presidency while losing the Senate.

So once again it looks like a very tight race. And, given the chances of an avalanche of legal challenges to election outcomes, we could see the disputes only resolved in the Supreme Court.

How is all this going to impact on investors?

Evergreen Gavekal’s executives suggest…

► Biden would unwind most of Trump’s tax cuts, raising the corporate rate from 21 per cent to 28, boosting taxes on individuals and increasing the capital gains tax for high-income earners to the ordinary income rate. As well as boosting restrictions on the energy industry to favour renewables, stricter regulation of industries can be expected, impacting most on financials, pharmaceuticals, even technology.

If Trump wins there could be a tax cut for individuals, a tax credit for moving manufacturing abroad to America, a focus on lowering prescription drug prices, more money for the police, and continuing deregulation of the energy industry.

► Regardless of which candidate wins the presidency, either will be forced to address the issue of inequality. Over the past decade owners of assets (shares, bonds, real estate) have seen a massive surge in their wealth while the average worker has been left in the dust. The stock market returned an average of 14.5 per cent a year but workers’ wages increased only 2.9 per cent a year.

Anti-trust regulations could be used against tech giants and there could be a national infrastructure upgrade under both candidates. Under Biden there could be an increase in the minimum wage and perhaps a wealth tax.

► Although Biden’s manifesto contains business-unfriendly policies, there could also be additional rounds of fiscal stimulus. Trump’s re-election could bring the negative development of a re-escalation in the trade war with China.

► Judging by how stocks moved in summer in anticipation of a Biden victory, that would seem to favour technology, consumer discretionary stocks, communication services and healthcare. Trump’s re-election, bringing tax cuts and more deregulation, would be relatively bullish for financials, energy and value stocks.

Suppressing the Truth

Donald Trump is an easy target for accusations of spreading fake news. But it has become increasingly clear that his critics are increasingly as guilty themselves of manipulating the facts… or suppressing them.

The latest example is the way Twitter and Facebook have banned the controversial Chinese scientist Yan Li-Meng.

The consensus view is that the Covid-19 virus originated among bats from whence it has spread to humans. It’s an explanation aggressively defended and promoted by the Chinese government. An alternative explanation is that it was developed as a biological weapon in a Chinese government laboratory in Wuhan.

Yan, a specialist at the world’s top coronavirus research laboratory at the Hong Kong School of Public Health, together with three other Chinese virologists, authored a 26-page scientific study containing the evidence that Covid-19 was clearly developed in a lab to target humans.

The Chinese government is furious and doing all it can to silence Yan, who has fled to America. Twitter and Facebook have joined its campaign by clamping down on her to prevent distribution of her views.

Fox News’ medical commentator Dr Marc Siegel says Covid-19 is quite different from all other coronaviruses… which tends to support the view that it was manmade.

Good News Could Be Bad for Big Tech

Big Tech – household names such as Amazon, Apple and Facebook — continue with their powerful growth surge. Can it continue?

Sophie Huynh, the Société Generale strategist, says their “sky-high valuations do make a good deal of sense.” They have fine business models and are benefiting from the gradual digitalization of our daily lives. Their abundance of cash has allowed them to make generous buybacks – almost half of all those by S&P 500 companies in the second quarter. Earnings margin has been outstanding.

Tech companies have led the American share market recovery since the March trough, their surge accelerated by demand from individual investors, momentum plays and FOMO (fear of missing out). The chance of a disputed or delayed election outcome continues to favour growth assets and defensive segments.

What could bring Big Tech back to earth?

“Investors should watch out for the economic outlook, and regulation.” If normalization follows from the arrival of an effective vaccine, that could lead markets back towards mid-caps, as well as Eurozone and emerging-market shares. “Old Tech” could outperform New Tech. Enhanced regulatory scrutiny and politicians looking to raise taxes would not help.


Dividends: Even in a best-case scenario, global dividends will shrink 17 per cent to $1.18 trillion this year as companies act to conserve their resources by cutting their distributions to shareholders.

In some countries firms are under pressure from governments to do this as they seek to show that they want the rich to match the sacrifices being made by those losing their jobs. This, says a banker, is “dead wrong” as most dividends are not paid to the wealthy but to retirees… millions of them.

Schroders warns those of us whose incomes are suffering in this way that dividend bear markets can last much longer than the economic downturns that cause them. Dividend futures prices infer that US, UK and European payout rates will remain below what they were in 2019 for many years to come.

A V-shaped recovery: There’s “overwhelming evidence” that it’s under way in the US, says Morgan Stanley. Economic data have been “strongly surprising on the upside.” Retail sales have exceeded their pre-Covid highs while indexes of manufacturing are well into expansionary territory.

However, the increase in household savings is still well above pre-Covid levels, showing how family spending levels have not yet fully recovered. Personal savings surged from an annualized 7.6 per cent of disposable income in January to 33.5 per cent in April and was still 19 per cent in June.

Blacks in America: Professor Edward E Levitt says in The Credit Strategist: “Fear of acknowledging the collapse of black families and the failure of urban black communities to adopt fundamental bourgeois values (hard work, respect for others and the rule of law, responsible personal behaviour, education and employment) – as well as fear of accepting responsibility for these failures – stops people from confronting the realities that lead to the endless cycle of black-on-black violence that is destroying the black community and America’s cities.”

Portfolio diversification: There is a clear trend among institutional investors towards stuffing portfolios with “alternatives,” Eoin Treacy reports in FullerTreacyMoney. It’s an incredibly broad sector including everything from seed capital for new companies to timberland, real estate and gold.

With interest rates close to zero the perception of risk from investing in illiquid assets has evaporated. One needs to have a very clear opinion on the success potential of constituent companies within a portfolio because the sector is highly leveraged to interest rates.

Investing in oil shares: Amidst all the noises about renewables and green investments, says Jefferies’ Christopher Wood, it is worth noting that the more successful the world is at eliminating fossil fuels, the more likely the price of oil is going to increase – because of under-investment in the supply needed to meet still-large ongoing demand – and the more profitable it is going to be to produce.

Political cycles: There is clear potential for the American economy to face inflationary pressures next year. The third year of the four-year presidential cycle is usually the best, and the fourth is reasonably good, but the first is the worst. That suggests investors need to be prepared for significant volatility in 2021.

The best choices: According to Credit Suisse, family- or founder-controlled companies listed on stock markets are on average considerably less indebted yet have historically generated stronger revenue and profit growth – and greater investment returns.

Quote of the week:

Two types of people laugh at the law: those that break it and those that make it. 

Terry Pritchett on Night Watch.


Politics: The three modern myths, Rod Liddle says in The Spectator, are The Gender Pay Gap, Structural Racism and The Climate Catastrophe.

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