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Authored by Lance Roberts via RealInvestmentAdvice.com,

We have recently been discussing the lack of performance in value versus growth. Such is historically the case during the late-stage, exuberance-driven, bull markets. However, not everything classified as a “value stock” is necessarily a value. The problem today, more so than at any point previously, is the astonishing lack of value in “value.”

Be careful about what you are paying for. pic.twitter.com/P6wkg2kb4O

— Lance Roberts (@LanceRoberts) September 18, 2020

The chart is pretty stunning but needs some explanation.

The Problem With Book

Valuing a company is not a simple task. Every fundamental analyst uses different measures and adjustments to calculate a fair valuation. Importantly, there is no precise method, and each presents a different version with varying results. Such is why “value” investors often use several valuation methods in combination to gain a better perspective of the underlying business.

One such method of valuation is “book value.” Theoretically, book value represents the total amount a company is worth under a liquidation scenario. Such is the amount that the company’s creditors can expect to receive.

Book value analysis, and buying companies with low “price-to-book” ratios, has historically been a profitable venture. Companies with machinery, inventory, and equipment, and financial assets tend to have large book values. Significantly, these types of assets are easily valued and liquidated in the event of financial stress or bankruptcy.

However, today, as shown in the tweet above, such is no longer the case. With the rise in gaming, software, database, consultancies, etc., the increase in “intangible assets” has surged. Items such as patents, licenses, human capital, etc. now make up a significant portion of many company’s “value.” These types of assets are hard to value, and more difficult to liquidate. Such is especially the case with human capital, or a measure of the economic value of an employee’s skill set.

The Intangibility Of The Intangible

Here is the issue with intangible assets.

“Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets. Proper valuation and accounting of intangible assets are often problematic. Such is due in large part to how intangible assets are handled. The difficulty assigning value stems from the uncertainty of their future benefits. Also, the useful life of an intangible asset can be either identifiable or non-identifiable. Most intangible assets are long-term assets meaning they have a useful life of more than a year.” – Investopedia

Read the bolded sentence again.

In many cases, the value of intangible assets is often overly optimistic assumptions about the companies worth. The companies website, brand, software, permits, etc. may indeed have recognizable value today. However, in many cases, those values can change rapidly. Such is the case where there are few barriers to entry, rapid changes in consumer demand, or economic or political interference,

In other words, a company with large amounts of property, plant, and equipment has a greater definable value than one with large amounts of “human capital.”

Here is the entirety of the problem summed up nicely by Raconteur:

“Tangible assets are easy to value. They’re typically physical assets with finite monetary values, but over the years have become a smaller part of a company’s total worth. Technology disruption continues in artificial intelligence, robotics and cloud computing. As such, intangible assets have grown to represent the lion’s share of corporate valuations. But without a physical form and the ability to easily convert them into cash, working out what these assets are truly worth can be challenging.”

A Pervasive Problem

Just recently, Visual Capitalist prepared an infographic for Raconteur.

“In 2018, intangible assets for S&P 500 companies hit a record value of $21 trillion. These assets, which are not physical in nature and include things like intellectual property, have rapidly risen in importance compared to tangible assets like cash.”

Click To Enlarge

As shown, in recent years, the surge in intangible assets has become a larger share of enterprise value. The largest contributors to intangible assets are:

• Intellectual Property

• B2B Rights

• Brand

• Hard Intangibles Like “Goodwill”

• Data

• Non-Revenue Rights (Non-Compete Agreements)

• Relationships

• Public Rights

You should almost immediately grasp that while these assets may have “value” to the company, they may not hold much value during a liquidation process. Or rather, “one man’s riches are another man’s trash.” 

The Evolution

“Intangibles used to play a much smaller role than they do now, with physical assets comprising the majority of value for most enterprise companies. However, an increasingly competitive and digital economy has placed the focus on things like intellectual property, as companies race to out-innovate one another.

To measure this historical shift, Aon and the Ponemon Institute analyzed the value of intangible and tangible assets over nearly four and a half decades on the S&P 500. Here’s how they stack up:” – Visual Capitalist

“In just 43 years, intangibles have evolved from a supporting asset into a major consideration for investors – today, they make up 84% of all enterprise value on the S&P 500, a massive increase from just 17% in 1975.

Digital-centric sectors, such as internet & software and technology & IT, are heavily reliant on intangible assets. Brand Finance, which produces an annual ranking of companies based on intangible value, has companies in these sectors taking the top five spots on the 2019 edition of their report.” – Visual Capitalist

While the issues of “intangibles” should undoubtedly be a concern for “value” investors, another issue further compounding the problem. Debt and accounting gimmicks.

A Compounded Problem

As discussed previously in “EBITDA Is Bull****,“ the heavy use of accounting gimmicks is obfuscating the real value of publicly traded companies. As noted:

“An in-depth study by Audit Analytics revealed that 97% of companies in the S&P 500 used non-GAAP financials in 2017, up from 59% in 1996, while the average number of different non-GAAP metrics used per filing rose from 2.35 to 7.45 over two decades.

This growing divergence between the earnings calculated according to accepted accounting principles, and the ‘earnings’ touted in press releases and analyst research reports, has put investors at a disadvantage of understanding exactly what they are paying for.”

Compound the problem accounting issues with surging levels of corporate debt, and the issue becomes more apparent.

Since the onset of the pandemic, the enterprise value to GVA (gross value added) ratio has surged.

Given the Federal Reserve’s monetary injections and suppression of interest rates, it is not surprising to see companies leveraging their balance sheets. As interest rates have plunged, corporations have hit a record issuance of debt to pay dividends and other non-productive purposes.

The increased leverage of corporate balance sheets is problematic, particularly given already weak revenue growth for S&P 500 companies.

Lack Of Disclosure

The debt, accounting gimmicks, and intangible assets make it increasingly difficult for investors to determine the actual “value” of the companies they are investing in.

Currently, given the speculative nature of the investing environment, such certainly seems to be an irrelevant problem. However, in the long-run, “value” always matters in the end.

The problem, when it comes to investors, is understanding and identifying these issues, particularly in the case of intangibles. As shown in the tables above, most investors are unaware that intangible assets make up such a large percentage of overall enterprise value.

When you combine that issue with the surge in corporate debt and level of debt relative to enterprise value, it is easy to visualize the risk investors are taking on.

Visual Capitalist’s conclusion is appropriate:

“The majority of intangibles are not reported on balance sheets because accounting standards do not recognize them until a transaction has occurred to support their value. While many accounting managers see this as a prudent measure to stop unsubstantiated asset values, it means that many highly valuable intangibles never appear in financial reporting. In fact, 34% of the total worth of the world’s publicly traded companies is made up of undisclosed value.

Brand Finance believes that companies should regularly value each intangible asset, including the key assumptions management made when deriving their value. This information would be extremely useful for managers, investors, and other stakeholders.”

Conclusion

Without better disclosures, a return to “mark-to-market” accounting practices, and tighter restrictions on “accounting gimmicks,” investors remain exposed to increased risks.

Of course, when executives’ compensation benefits from manipulating their earnings and speculative investors benefit during bull markets, you can understand why the rules won’t change.

That is, of course, until investors once again lose a majority of their invested wealth.

As Warren Buffett once quipped: “Price is what you pay, value is what you get.” 

With a “lack of value” in value, just make sure you know what you are paying for.

The driver of a white Toyota Prius who had carefully weaved through a BLM protest was heckled, chased down by a black pick-up truck leading the protests, and then assaulted on Thursday night. The driver was then arrested.

“It wasn’t traveling at a fast speed — it was inching forward, trying to get past, and that upset people,” said photojournalist Christian Monterrosa.

People in the crowd began striking the car’s windows and doors, the news footage shows. After the Prius cleared the crowd, a black pickup truck with several people sitting in the bed gave chase, accelerated ahead of the Prius and pulled to an abrupt halt. A man got out of the truck and, according to the footage, appeared to try to pull the driver out of the Prius.

The Prius reversed and collided with a green Mustang convertible, which was associated with the protest, according to the LAPD. A person got out of the convertible and began striking the Prius with a flagpole, the footage shows, and another person arrived on a skateboard, which he used to smash the Prius’ windshield. The motorist drove off but was detained a few blocks away by the LAPD. No one was injured in the incident, according to police. –Los Angeles Times

Watch:

So the mob blocks the streets in LA, driver drives through pretty carefully with strobe flashing, the mob chases after him in multiple vehicles, box driver in, beat him, smash his car, driver escapes before they pull him out and police arrest the driver?! pic.twitter.com/ZfV6nSABGP

— Robby Starbuck (@robbystarbuck) September 25, 2020

According to the Los Angeles Police Department (LAPD), approximately 300 people gathered near the Hollywood Forever Cemetery before marching through Hollywood.

Doesn’t look like a wedding proposal https://t.co/nlP8bmctJG

— Jack Posobiec 🇺🇸 (@JackPosobiec) September 25, 2020

The incident with the white Prius comes after a truck struck one of the protesters, according to the Los Angeles Times.

On Thursday, the group in Hollywood was walking down Sunset Boulevard, video posted to Twitter and YouTube shows, when a dark-colored pickup accelerated among the protesters, striking one directly and hurtling the person backward. The truck then sped down Sunset Boulevard, nearly hitting other people who leaped out of the way, the footage shows.

Capt. Steve Lurie, who leads the Los Angeles Police Department’s Hollywood Division, said officers stopped and identified the motorist, although they didn’t immediately arrest him. The motorist told them that protesters had attacked his car first, according to Lurie, who added that officers have noted damage to the car. -LA Times

According to Monterrosa, the truck was traveling against the flow of the crowd when protesters began crowding the vehicle, trying to stop it.

Content warning. Protesters get struck by car during Hollywood march/protest #losangeles #protest #hollywood pic.twitter.com/MJfParkHsS

— jessicarayerogers (@jessicarayerog1) September 25, 2020

According to the LAPD, police have identified both motorists, and detectives are reviewing the cases. The drivers maintain they were accosted by protesters.

An LAPD captain said the protest was mostly peaceful – with the exception of around 20 “violent” individuals.

I don’t care how unpopular this is with some folks but the mob who’s flashing strobe lights, hitting cars and scaring people are the ones who need to be arrested, not the scared drivers who try to escape. Arrest the mob.

— Robby Starbuck (@robbystarbuck) September 25, 2020

Gov. Ralph Northam managed to survive a push to resign amid last year’s blackface scandal. But on Friday, the governor’s office announced that both the governor and his wife, the first lady of Virginia, had tested positive for COVID-19.

They’re hardly the first governors to test positive: Earlier this week, Missouri Gov Mike Parson, a Republican and opponent of mandatory mask rules, tested positive.

Northam, a Democratic governor of a ‘swing’ state’, said he has no symptoms. Virginia first lady Pamela Northam has “mild symptoms,” CNN said.

governor’s office said. Both will isolate over the next 10 days and the governor will continue working from home.

“As I’ve been reminding Virginians throughout this crisis, COVID-19 is very real and very contagious,” Northam said.

The Northams plan to isolate for at least the next 10 days, and the governor will continue working from home. They’re working with the state’s contact tracers to inform anybody who may have been exposed.

“As I’ve been reminding Virginians throughout this crisis, COVID-19 is very real and very contagious,” Northam said Friday. “The safety and health of our staff and close contacts is of utmost importance to Pam and me, and we are working closely with the Department of Health to ensure that everyone is well taken care of.”

“We are grateful for your thoughts and support, but the best thing you can do for us—and most importantly, for your fellow Virginians—is to take this seriously.”

Outside Virginia, Northam is perhaps best known for this photo, taken from his medical school yearbook.

The two were notified Wednesday evening that a staffer had tested positive, and tests administered a short while later came back positive.

Back in August, Ohio Gov. Mike DeWine announced that a rapid test was positive. But a short time later, DeWine said a more sensitive test came back negative. In July, Oklahoma Gov Kevin Stitt became the first governor to test positive.

By Michael Every of Rabobank

Yesterday, I was calling out for someone, anyone with the chutzpah to match Moses and point out that almost everything we are doing political-economy-wise and central-banking-ly needs to improve, both practically and morally.

Well, yesterday got a surprise 200bp rate hike in Turkey, which Piotr Matys sees as a step in the right direction (see here for more); and a 25bp rate cut in Mexico, which Christian Lawrence thinks is still not the end of the line (see here for more); and the Aussie government have really let rip too….As Bloomberg words it:

“Australia’s government will loosen responsible lending laws in a bid to boost the flow of credit and help the economy recover from its first recession in almost 30 years….the government will scrap so-called responsible lending obligations for most forms of credit that it says have made banks overly cautious and stifled access to mortgages and other loans….The move is a turnaround from the findings of an inquiry into misconduct in the financial system, which called for banks to more strictly follow lending rules…

In effect, the government has heeded what became known as the ‘wagyu and shiraz’ verdict…[where the]… regulator had argued actual living expenses should be used instead of benchmarks, which have been criticized for underestimating how much people spend. As part of his ruling, Justice Nye Perram said borrowers can change their spending habits to service a mortgage: “I may eat wagyu beef everyday washed down with the finest Shiraz but, if I really want my new home, I can make do on much more modest fare.”

Lenders…will remain subject to APRA’s lending standards, but will no longer be monitored by ASIC for compliance.”

Let’s put this into a broader context. Australia is one of many neoliberal, financialised, consumer-debt saturated, housing-bubble obsessed, low-productivity, low capital investment, infrastructure-poor Western economies. It was already stuck in the linked new normal of low wage, low GDP, and low productivity growth, and the lower quality jobs that come with it, albeit probably being 10-15 years behind the US on social and political polarisation. It is also being hit hard by Covid and a closed border, and by serious trade tensions with China.

The RBA has responded with zero rates and Yield Curve Control out to three years, the latter of which is not stopping the market pricing in more rates cuts next month. The RBA has also said it will be there to support fiscal spending as needed. In short, the government has the ability to expand the fiscal deficit to a threshold determined only by the capacity of AUD to hold up.

And what is the response? To tell banks to return to a housing bubble, exacerbating problems in society, making businesses less price competitive, starving non-housing firms of attention, making the banking system even more reliant on global wholesale money markets and, as the historical track record *everywhere* shows, eventually ending up in bad loans, which will be repackaged and sit with the taxpayer. And making a mockery of the idea of prudent regulation.

THAT is where the fiscal capacity the RBA is offering is going. I long said when the RBA goes full QE, it will be to buy shonky MBS rather than for a fiscal deficit for mega infrastructure projects…and that indeed seems to be the journey we are on.

Central-bank financing of fiscal deficits admittedly takes us to the world of central planning, but here we have something worse: central planning with no plan.

Wagyu, Australia. Wagyu very much.

Of course, this is not an Australia-specific issue. Look at the scale of fiscal deficits looming in the US, UK, Europe, Japan, and even China. Nobody has any idea how these are going to be dealt with – especially not as, in the case of the UK, it becomes clear that a grim winter looms regardless of the latest step to try to keep unemployment down by subsidising the jobs that are salvageable; or as the US initial claims figures, and the Fed, confirm that the V is behind us and things are now going to get worse without further fiscal steps, pronto.

[The Fed’s Williams also stated “structural inequality stifles growth.” Well, of course it does. Try helping everyone, and especially the working class, for once and see what happens. It really, really isn’t rocket science. But of course we can’t do that. “Because markets.”]

Indeed, what we see again and again is the utter failure of the imagination of those leading to realize that the old models no longer work. So many tools are now available to them to do something new – but that means abandoning deep-rooted dogma. As such, they prefer to stick to the tried and tested. Which is like watching someone try to eat the finest wagyu steak with a teaspoon. Or soup with chopsticks.

Hilariously, AUD is slightly up on this news, albeit down from a high of 0.7410 to a low of 0.7022 this week. If the RBA is going to be buying junk MBS to prop up the economy then it won’t be holding a 7 or a 6 handle over time.

Meanwhile, in China a giant property developer is talking about potential debt defaults. The China Beige Book also underlines that while a few major cities and the SOEs closest to Beijing are seeing a strong rebound, most of the economy is still stuck in the doldrums. One would presume that the same arguments that apply to Australia will apply here: when in doubt, just blow those bubbles bigger rather than abandoning any comforting dogma. The currency outlook remains the same there in that case though.

Of course, there is some upside given that against a backdrop of trade war, Cold War, sanctions –some over allegations of major human rights abuses– and rising geopolitical tensions (China’s Global Times says it will start a “just war” if US troops ever return to Taiwan), FTSE Russell has just announced Chinese government bonds will be included into its flagship World Government Bond Index from October 2021. ‘Wagyu. Wagyu very much’ thinking at its absolute finest: but 13 months is a long, looong time in current geopolitics.

North Korean leader Kim Jong-Un has issued an extremely rare apology over the Thursday killing of a South Korean fisheries official who breached the border in the water off the coast while allegedly trying to defect. He had been shot on site by the north’s border patrol in a boat who happened upon the life jacket wearing man, his body also immediately burned on coronavirus fears.

Kim’s message was that the north was “very sorry” over the “unexpected, unfortunate incident” which was expressed in a letter to South Korean President Moon Jae-in.

“Chairman Kim Jong Un asked to convey that he feels very sorry that instead of giving aid to our compatriots in the South who is struggling with Covid epidemic, we have given President Moon and our compatriots in the South a great disappointment with this unseen misfortune in our sea,” the letter read, according to the Blue House.

However Kim did also take Seoul to task for charging Pyongyang with “atrocious acts” before formally inquiring into the matter to learn what had happened. 

It further apologized for “an incident that will clearly negatively impact inter-Korean relation” while noting the north had recently upped the intensity of its maritime patrols along the border.

The letter revealed more details about the shocking killing:

In a letter sent to South Korea’s Blue House Friday morning, North Korea said units responded to a call that an unidentified male was found floating on an object in the sea. The letter claims about 10 rounds were fired at the man after he did not comply with a soldier’s demand to identify himself and subsequent warning shots.

North Korea says only a pool of blood remained on the floating object after the shots were fired. After soldiers presumed the man to be dead, they burned the floating object on site per North Korea’s Covid-19 disease prevention measures.

The south’s defense ministry had immediately suspected the ‘shoot first’ reaction by the soldiers had more to do with North Korea’s extreme “shoot to kill” anti-coronavirus measures implemented along all border zones. “We assess it was carried out under the North’s anti-coronavirus measure,” a military official had told AFP.

Seoul defense sources had also said that “circumstances tell us that there was an intent to defect.”

But the surprise apology direct from Kim strongly suggests a new and rare softening out of Pyongyang, which could portend near future major diplomatic openings toward peace.