It’s good to see a bit of green in the market today, but the ASX gains have been more muted (although a much more positive day on the small caps front) compared against the Dow’s 300 point rise, perhaps because the futures are pointing south. Yes, it is a POTUS tweet away from deciding which short term direction the Dow is heading at this point.
I still believe this market is heading for a WAR ZONE in the year or years ahead (between 1-3 years) and people should be prepared for it. Just like when a country is in war, it doesn’t mean you perpetually stay in bunker and never go out. Similarly in a period of uncertainty and bearishness, there will always be pocket of opportunities, so you head out and buy but if you stay out there for too long, you have greater chance of getting perished.
This is because the US market is in its biggest ever bubble that will in a matter of time burst and we should be asking ourselves what we are doing about it. Because doing nothing is doing something. You can be on the lookout, undertake appropriate risk management, take cover and position yourself well. People will say that the US market rise is due to technological revolution etc (e.g see FAANG) but that could not have solely contributed to a 400% rise in the S&P500 since its 666 bottom in early 2009 or 500% in Nasdaq. The real answer lies in cheap money through bouts of Quantitative Easing (QE) by the Fed and the ECB since 2009. Near zero rates lending was just the shot in the arm stimulus for an unprecedented bull market that we’ve had for close to a decade now. Cheap money meant that retail shareholders with money would need to allocate more dollars to the equity market than to term deposits that don’t pay enough to cover inflation. Cheap money meant that companies bought their own stocks like no tomorrow- in fact, data showed that companies buying back their own stocks, are responsible for around 19% of cumulative US market cap increase since early 2009. The total buybacks between 2009-2017 bull market was $4.1 trillion compared to $1.9 trillion during the 2003-2007 bull market. Without QE and stock buybacks, the S&P 500 would be 1,600-1,800 instead of 2,700 and P/E ratios would be more normal at 15-16 times.
Well, cheap money is ending soon with an expected 3 rate rise by the Fed this year. The party and buybacks are over and as the elixir is removed, the bull cannot possibly sustain. But wait, what about the US Trump tax cuts? Despite what our Government is trying to justify that corporate tax cuts on the basis that they stimulate corporate investments, the statistics coming out of US shows otherwise. Yes, corporate profits were closely correlated with capex (capital expenditures) from 1983-2001 but since then, capex has lagged behind corporate profits substantially. Since then, corporate profits advanced a cumulative 201% over 18.75 years or 16.1% per year on average but capital investment only grew a pathetic 91% or 4.9% a year. Yes, CEOs use their profits to buy stocks and pay big dividends to enrich themselves while capex were not justified because the business or economic environment have not been robust enough and there still remains ample capacity. So tax cuts won’t translate into increasing production capacity nor investments to boost the economy as we were made to believe. US tax cuts would only serve to increase US $21 trillion of debt and cause much pain down the track.
If you followed my previous posts including Mike Maloney’s ‘Everything Bubble” video on Velocity of Money , follow link below
When money velocity is growing faster than average, it’s a sign that money is being lent and invested productively. It creates profits that can be reinvested or lent out again and that’s what makes money supply grow faster than the economy in good times.
But after 1998, money velocity started to decline and has now fallen to near depression levels despite unprecedented money printing via QE programmes to stimulate the economy, which shows it hasn’t been working. The excess money did not go into real productive capacity but you guessed it- speculation which has contributed to the present Dow bubble.
So you start unwinding these money supply and tighten interest rates, it’s akin to removing the steroids that continued to prop this Dow bubble.
