The end is coming . For world economic growth that is. This predicament characterization will no doubt be laughing matter to many, just like the famous "We are all doomed" prophesized by the respected Marc Faber, but make no mistake economists will soon find out "this time is different" doesn't apply and it is likely that one day we will reflect on the current epoch as one of the greatest manic episodes in the history of finance (and of the world) .
I am going to go over the specific reasons for this call below but let me address the reason for the absence of posts since last year. Obviously if you have visited this blog before, you know that I called for caution for a couple of years already although that didn' t mean completely disinvesting from the stockmarket. Around mid-2015, it became increasingly difficult to form an outlook for the market with conviction. Other than a systematic approach, I could not see the reasons to be substantially invested in stocks and bonds considering the downside risk. And even with a systematic approach, i.e. trend following , I feared that the risk of a sudden meltdown changed the risk/reward ratio. Other investments such as gold and real estate didn't have much appeal either, especially real estate. So what's an investor to do ? Bitcoin ? (I will address that further below) Take a vacation ? The latter perhaps. And in a way that is what I have been doing. It all came at the right time for my personal circumstances as I was working on a new book. We were invested substantially again since the US election and until the summer of this year but we saw this market as running on momentum. Sure S&P 500 earnings growth has come back but most of that growth comes from the recovery in the energy sector and from tech. It's unlikely these two sectors will continue to drive earnings growth. In addition, current historically high profit margins will not last forever.
The Federal Reserve Created a Bubble in Stocks and It's in its Last Climactic Stage : Valuation Metrics at or near Record Highs
Uninspiring best describes the markets of the past two years whether it's stocks, bonds, commodities, FX. We bought crude oil a few months ago and it has done well but who wants to invest more than 10% of a portfolio in crude oil ? Something feels very wrong with the US equity market which has had a stellar year in 2017. It's not just that it has kept going up ignoring the high valuations and the chaotic news flow from Washington ... it doesn't even go down any more. This situation has lasted for a long time now, strategists have talked about the ever rising share of passive investing as being part of the equation and tech stocks such as Facebook or Google are said to have become "low volatility" (safe) stocks. However over the long run that simply can't be and it's an anomaly. Others have even posited that Yellen's Federal Reserve has moved to support directly equity markets (via proxies of course). When the stockmarket no longer has 3-4 down days in a row, the natural order of things has changed because investors' psychology naturally creates some sort of momentum to the downside from time to time. The US stockmarket also registers gains on a monthly basis every time. The charts show a parabolic move for the major indices and especially tech stocks. Speaking of tech stocks, I previously talked about the crazy valuations of a number of well-known hot stocks such as Amazon or Netflix . It's not just tech stocks, the entire market stands at or near record valuations whether you look at the market PE or Price/sales ratios. Below is the Shiller CAPE (Cyclically Adjusted PE ), we can see historically what happened when it was higher than 30 as it is now.
Chart is from Multpl.com
On a price to revenues basis, the US market (remember, it's essentially a proxy for world markets) is truly in nose-bleed territory. There is a recent update on the subject on the Hussman Funds website that one should read to really understand how extraordinarily high valuations are with regards to corporate revenues.
In the past I have talked about the possibility of a gigantic meltup in asset prices, especially stocks, as a consequence of the central banks ' folly (see 2012 post on Gundlach's Kaboom for instance). We may be in such a scenario today and there is a possibility that the market will continue to go higher for 2 or 3 more years for example but such an extreme asset inflation seems to be such an outlandish development, the stuff of Sci-Fi movies, that I cannot bring myself or anyone to invest on that view. Today's geopolitical landscape makes that bet even harder to contemplate.
The Election of Trump is a By-Product of the Federal Reserve Policies
From fairly early on in the election campaign we knew that Donal Trump had a good chance of becoming the next US President. In the end the majority of voters don't vote so much for a political program as they vote for body language and catch phrases. Billionaire and socialite Donald Trump who was already a reality TV star, annihilated his rivals with his debate style, charisma, defense of blue collar workers and promises to radically solve what had been painful and critical issues for Americans (Obamacare rollout, ISIS terror, jobs moving abroad). On the Democratic side, Hillary Clinton unfortunately had never been an immensely popular person among voters. Trump surfed to victory on the wave of discontent across Middle America. And that discontent originates with the divide created by Bernanke's policies; Mainstreet simply did not get a fair share of the artificial prosperity brought about by the Fed's ultra easy money policy. I said before that central banks easy money, and the resulting inflation (nowadays in assets) can manufacture new Adolf Hitlers. It's good to recall that Hitler came into power on the back of the Great Depression which was a result of the Federal Reserve easy money in the 1920's, and the Nazis made their first headways during the decadent Weimar Republic where central bank induced inflation and crime ran amok.
Thank this man for putting
Donald Trump in the White House
Of course there is no comparison to be made between fascism and Trump but the outcome of the 2016 election may eventually have comparable consequences. Who knows where the world is headed when a US President trades insults with someone like Kim Jung Un? I will admit that I didn't think that Trump's election and his move to protectionism would cause havoc in the stockmarket like many had warned. I thought there was a chance that the Donald would not be as bad a President as the media kept telling us (the reason to go long stocks was strictly technical though) . It's my belief that the media contributed unwittingly to his success by casting Mr Trump as the populist villain and systematically attacking him on just about everything. It's a shame because there were a number of things to focus on that disqualified Mr Trump for the role of US President. Not just his egomania and lack of humanity in some personal interactions, but his business dealings and above all the story of his privileged life which should have made him unfit to act on behalf and represent the average American. I would also add his stance on environmental issues. Yet he was elected. Those who thought Trump would prove to be different than during his campaign and a benign protectionist who would pass great tax reforms for Corporate America, missed the mark. Although a tax bill will go through, greatly favoring corporations and the wealthy, it may turn out to be just a sugar high for the economy and so far the Trump's presidency has been rather disastrous with rising tensions in the Middle East and with North Korea (the situation becoming more and more worrying on that front).
Will Trump Be Impeached ?
Democrats are going to try to impeach Mr Trump. It's not a question of if but when. There is of course the Russia probe, which took a really bad turn for the Trump White House with the indictment then cooperation of Michael Flynn. I believe the findings of Special Counsel Robert Mueller, and perhaps Trump's business dealings with Russians, will lead to attempts to impeach him but the latest efforts seem to go in the direction of the "sexual misconduct" accusations. It's interesting to note that the wave of revelations of sexual harassment by prominent men which started and snowballed with the Weinstein story seems to have been very coincidentally -tongue in cheek - moving slowly but surely in Trump's direction as the media digged anew into Trump's past history with women. It's evidence that everything will be thrown at Trump to impeach him (Trump has to the best of my knowledge no history of sexual abuses with women, let's call him a womanizer, but Weinstein he's not ). Should impeachment proceedings start sometime in 2018 then that would be one of the first nails in the stockmarket' s coffin, Wall Street does not like uncertainty.
Druckenmiller : Central Banks are "Financial Darth Vaders", ECB Keeping Crooks and Zombies Alive
But the real problems for the market are likely to be interest rates, i.e. Fed keeps hiking or a natural end to this expansion with central banks stuck at the zero-bound. Like others have said, there are many risks : interest rates, geopolitics (e.g. N. Korea), market risks (leverage, i.e. record debt, new shenanigans reminiscent of Enron and the subprimes, maybe this time in the tech industry), politics ( e..g. Trump's agenda can't get passed and Wall Street euphoria ends in big selloff). That said, with most central banks still cranking the printing press, it's hard to pinpoint the right time to sell and get out. Central banks have completely distorted markets. We live in a phoney economy. One of the most egregious manipulators of markets has been the ECB (read article : "The ECB is keeping crooks and zombies alive"). Yet you can be sure European markets have not decoupled from US equities and they have lagged the US.
Zombies ... and Crooks !
Central banks' free money is, we can see it now, leading us straight to disaster. Bitcoin is the posterchild for this age of insanity. Today's cryptocurrencies are the internet stocks of the late 90's. The folks who buy them, mostly millenials, have little recollection of the internet bubble and in the age of immediacy fueled by frenetic social networks (related article : Facebook destroying social fabric), there is seemingly no limit to where bitcoin price can go. But at some point, and sooner rather than later, it will collapse in a huge crash. Birinyi Associates looked back at previous infamous bubbles, bitcoin is the worst of them all. But what's most incredible is that bitcoin is truly worthless, it obviously can't even serve its purpose as an alternative currency since its value can go up or down 10 or 20% in a matter of minutes. As an investor with an open mind, you could ask yourself whether bitcoin investors see something others don't see. Maybe bitcoin is a safe haven considering central banks are destroying the value of currencies. Maybe bitcoin investors are the smart money. It's unlikely. For example most of the volume in bitcoin comes from Asian exchanges, so most of the bitcoin trading originates in places where the gambling mentality is deeply ingrained in culture. I once called for bitcoin to be shutdown. But regulators, seeing the growth in bitcoin-related companies did not want to appear as interfering with "innovation". In countries not particularly reknown for their tech industry, you have to believe this business creation has been seen as positive. Switzerland for example has jumped on the bitcoin bandwagon, its regulators have opted for a hands-off approach to the phenomenon.
But the bottom line is bitcoin 's technology is fundamentally flawed. Bitcoin cannot serve its original purpose of means of exchange, it simply cannot be used as a currency, it cannot be trusted as a store of value either. Whereas the original idea of a "digital currency" could have been beneficial, cryptocurrencies are plain nefarious for society. The cryptocurrency fad which many from media to analysts have exploited to get attention is an outrage. It's not just this new tulip mania that has blown to $500 billion, (last time I heard), but more importantly it is the huge waste of natural resources caused by bitcoin. One bitcoin transaction uses the same amount of power as what's necessary to power close to 10 homes, it's hugely taxing on the environment and society as a whole. So console yourself if you are not "invested" in this fraud (now I guess I will get death threats for writing that ) .
Cryptocurrencies are a huge and outrageous waste of natural resources
But the bottom line is bitcoin 's technology is fundamentally flawed. Bitcoin cannot serve its original purpose of means of exchange, it simply cannot be used as a currency, it cannot be trusted as a store of value either. Whereas the original idea of a "digital currency" could have been beneficial, cryptocurrencies are plain nefarious for society. The cryptocurrency fad which many from media to analysts have exploited to get attention is an outrage. It's not just this new tulip mania that has blown to $500 billion, (last time I heard), but more importantly it is the huge waste of natural resources caused by bitcoin. One bitcoin transaction uses the same amount of power as what's necessary to power close to 10 homes, it's hugely taxing on the environment and society as a whole. So console yourself if you are not "invested" in this fraud (now I guess I will get death threats for writing that ) .
Today's cryptocurrencies are the internet stocks of the late 90's.. Wait... it's worse, way worse !
The Birinyi Associates study
Bitcoin futures are slated to start trading this Monday. Expect a selloff when the serious shorts will start taking positions. So far, shorting bitcoin has been practically impossible or reserved to a select few. That 's about to change !
