Bitcoin to $800k? Hugh Hendry’s Magic, Tom Slater’s Musk Lessons, and more
Plus a dive into a quality compounder fallen angel trading at 9x P/E.
This week, something a little different:
For free subscribers, a summary of my conversation with Hugh Hendry, what I learned from my podcast with Tom Slater of Baillie Gifford, and thoughts on David Solomon’s pay packet.
Premium subscribers additionally get another great idea from the Sohn conference. It’s a fallen darling whose price has collapsed, losing it quality compounder status, but its business hasn’t changed much. It looks too cheap. Plus what Hugh and I would call a “magic” insight into the outlook for the S&P500 this year. (Magic is Glaswegian for fantastic or wonderful.)
“On January 31, I shall be taking to the Substack stage to do a livestream with my friend and collaborator, Marc Rubinstein. We shall be talking about what Bill Ackman is up to (Marc and I have both written about this fascinating character); how might markets surprise us in 2025; probably that Goldman pay package; and readers’ questions/suggestions. If you have a question for Marc or me, please just reply to this email and we shall try to cover them – 13.30 EST/18.30 London on January 31, live in the Substack app. It’s like a live podcast, should be fun…”
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Paying subs get an even better deal - go to end.
Hugh Hendry
In 2023 and 2024, the S&P 500 gained >20% - Hugh highlighted that it’s really unusual for this to happen two years in a row. He thinks it’s highly unlikely that it will happen 3 years in a row, but not impossible; and that there is a bubble in equities and we could be on the cusp of 1929 or 1999.
Hugh is watching a critical level on that index - as long as we are above that, he is relaxed, but if we go below it, he will be on high alert. I explain below for premium subscribers the level and Hugh’s rationale which I think is really insightful.
Hugh likes Chinese equities which are near a 20 year low, although he has a dislike for emerging markets equities and thinks it’s hard to make money in them.
The MAG 7 companies investing in AI are the best-capitalised companies with the most positive cash flow the world has seen. AI returns are likely to be lower than hoped, but it won’t have much effect - they can throw away $100bn or two and it doesn’t make much difference.
US 10 Year Yield Long Term
Source: Trading Economics
Hugh believes there is only another 25bps of rate cuts to come, but is uber bullish on bonds. He thinks there is a reasonable chance that the US 10-year could go to 2%. He points out that 5% is a critical level for the security. In the last 17 years, there were only 17 days on which the 10-year was 5% or above. If Elon Musk is successful in achieving $1tn of cuts – Hugh is doubtful, but see below for Tom Slater’s more positive perspective - then Hugh thinks rates could be 2%. The deficit is 6% but it goes to 3% if rates are low. Quite a lot of upside from rates in the high 4s or mid-4s as I write:
US 10 Year Yield -1Y
Source: Trading Economics
Hugh also highlighted that technically banks may be forced to become buyers again of 2-10 year T-bills to balance their mortgage book if duration starts to fall, but I am told this is less impactful today than formerly.
My personal view FWIW is that China will be reluctant to add to its stock of T-bills, and the Japanese, the largest foreign holder, are highly likely to repatriate funds over the next several years; hence, there is a high risk of a buyers’ strike and I would bet that we shall see more than 17 days in the next 17 years when the 10Y is above 5%.
But Hugh’s hypothesis is certainly valid. Which means that I don’t have a firm (any) handle on the most important number for forecasting. I cannot recall a time when there was such an extreme gap between two plausible outcomes.
Hugh is bullish on bitcoin. Last time we met, we had lunch in Notting Hill on a particularly sunny day, probably summer 2023, and Hugh told me he was getting ready to buy bitcoin when it hit $19,000. He was spot on with that, but he has become even more bullish, in spite of its subsequent 5-fold rise from his targeted buying level. He sees another 8-9x in bitcoin!
He expects that bitcoin will ultimately have the same capitalisation as gold. Today it’s around $2tn and gold has a capitalisation of $16-18tn. The US equity market is just over $50tn.
Hugh sees a fundamental change for bitcoin being that the establishment are now onside – banks and brokers can collect fees from crypto through ETFs and Hugh expects that options will be launched before long, sponsored by the big banks – Wall Street will have further incentive to see crypto rise in value.
On commodities, I was surprised that Hugh is happy not to own any. He thinks uranium is the only one to be long of and he doesn’t recommend holding any other equity in the space.
Tom Slater
I had an enjoyable and wide-ranging discussion with Tom Slater, manager of the £10bn Scottish Mortgage investment trust and head of Baillie Gifford’s US equities team. Of course we talked about Elon Musk, as BG and Scottish Mortgage were among his biggest backers shortly after the Tesla IPO; they also own Space X. Tom highlighted 3 interesting facets of Musk’s modus operandi.
First, you should never underestimate him. Not everything he predicts comes to pass, but he has set some goals which seemed outlandish at the time but on which he has delivered – notably the goals behind his $56bn comp package. Tom described it in Musk’s words as “turning the impossible into the merely late”.
Second, he highlighted Musk’s prodigious productivity. He described how Musk’s CFO explained that he finished answering Elon’s emails at midnight, but when he woke up in the morning, there were another 6 waiting for him.
Third, Musk is surrounded by highly capable teams. Since the initial Model Y production problems, probably one of Musk’s relatively weaker areas of competence, there hasn’t been a repeat. Two huge factories in Germany and China have been delivered flawlessly. Musk attracts highly talented people and a colleague in California on our recent call with Hugh explained that DOGE was hiring some of the best talent in Silicon Valley. (The call was for my friend Ahmed Husain’s community and for a small group of my customers and subscribers – let me know if you would like to join future such events).
Tom also talked about his growth investing strategy – going for the big winners, as identified by Hendrik Bessembinder in his study where 90 companies produced half the wealth in the US stock market from 1926-2016. This creates a quite different behaviour and forces you to think longer term, which Tom believes is a real advantage.
He was critical of the traditional reliance on a small group of sell-side analysts in London and New York and sees using different sources of information as a real investing advantage – he sees nothing wrong in an analyst or PM sitting at his desk reading a book, and such behaviour is encouraged at the firm.
He was similarly critical of earnings calls where the questions are focused on the trends in the 3 weeks since the quarter ended and sees a longer-term focus as bringing greater clarity – I agree, although I must admit I spent a lot more time at the hedge funds listening to quarterly calls and reading their transcripts than reading books.
One of the advantages of investing in growth stocks is the opportunity to learn from some brilliant founders and managers. Tom regards the management of TenCent as likely some of the best investors anywhere in the world; he has learned more from Jeff Bezos than speaking to many of his competitor investors; and he has been able to meet many others, including Elon Musk, and Jensen Huang.
He highlighted that technical founders, like Mark Zuckerberg, have a significant depth of knowledge of their subject and are at a real advantage in an age of AI – they can more precisely define the opportunity set and can direct the company on a clear course to achieve their goal. This is in contrast to most companies which are engaging consultants and don’t have that clarity of vision. This was my main takeaway.
Tom was charmingly humble:
“I meet investors all the time who are smarter than I am”.
And he talked about feeling uncomfortable when things are going really well, which resonated with me. It was a really enjoyable conversation and I would encourage you to listen in (LINK). And don’t forget to subscribe!.
Goldman Sachs CEO
I was surprised to see Goldman awarding CEO David Solomon and his number two, John Waldron a 5 year retention bonus of $80m each. Waldron was apparently headhunted by Apollo and the intention is to lock him in as Solomon’s potential successor and of course to keep Solomon in the role. I would ask why, however:
Solomon does not exactly have an unblemished record. His predecessor initiated development of a consumer lending business which Solomon vigorously pursued, ending up burning $7bn of shareholders’ money. One example - I understand that the Apple credit card deal was unbelievably favourable to the tech giant. OK, the bank today may be worth $200bn, but $7bn was 10% of the market cap back then.
Should Solomon not consider CEO of Goldman Sachs as the best job in the world? I would hope he would be happy to do it for his very generous and recently increased package.
That Waldron needs to be locked in with a $80m set of handcuffs surely sends precisely the wrong message to the Goldman troops – if you are a great talent, go find another job and blackmail the firm to have you stay.
I have written before here that I don’t care much about what CEOs get but care a lot about how they perform. But it surely has to be a reasonable number. Solomon received a 26% pay increase to $39m as well as that retention bonus. I suppose it’s a rounding error on the Goldman P&L, but………….
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Links
I recommend you subscribe to Hugh Hendry’s Substack, and listen to my podcast with Tom Slater. My podcast with Hugh is quite out of date but can be found here.
Premium subscribers can read on for Hugh’s magical insight and for a quality compounder which has fallen from grace but might be about to get back up again.