Bubbles are far more dangerous when they are fueled by debt”
“This time it’s different”, is one of the most dangerous beliefs in financial markets. This time, things are different – but for a reason. Global Central Banks have pumped liquidity into the financial system to support the global economy as it struggles with a toxic economic shock of unprecedented scale. This may surprise some market participants, but they did not do it to pump stock markers and bond indices to stratospheric levels. They are doing it to save jobs, keep companies afloat and keep society stable.
Markets are indifferent to such concerns. They care about “up”.
The liquidity effect has generated the market momentum that’s driven the rally since March 23rd– not fundamentals. It’s like watching moths being drawn to a flame. You just know this can’t last, and the bear trap is going to slam shut at some point. Questions are when and if ever? There are articles about big institutions quietly exiting Amazon, Apple, Alphabet, Facebook et al… there are tabs explaining how over 500,000 RobinHood accounts have bought Tesla in recent weeks, there are stories about insider selling.
Never forget Blain’s Market Mantra No 1: “The Market has but one objective; to inflict the maximum amount of pain on the maximum number of participants.”
When the American’s are chucking China out of Houston, and worse, the Chinese are taking English Premier Football off the TV (which is actually going to prove highly significant for some clubs), you know the world is really changing. Central Bank action is central bank action. A new Cold War is fundamentally serious…
So please don’t waste my time by telling me Company X is such a fantastic investment proposition because its stock price has gone soaring higher. Tell me what the something special it does or what particular unique service is has proven it can deliver, makes it so valuable. Explain to me the rationale for it being able to generate secure cashflows, maintain orders through a worse case global trade scenario, and how it’s not subject to competitive threats likely to paradigm shift it into oblivion in a few months time. Don’t tell me to buy it because its going up because Robin Hood accounts are buying it….
It’s “going higher because it’s going higher” is not a reason I’d be buying a stock.
All that excess liquidity driving market momentum has consequences – not least of which is blinding idiots to dangerous reality.
One consequence is “financial asset stagflation”: prices of bonds and stocks are rising, but produce lower and lower returns. It’s undermining the natural selection of markets – allowing dead zombies to stalk the land, and the efficient allocation of capital. Long term it will destroy the value of pensions and undermine savings. Investing purely on upside price potential, and not long-term returns, will make financial asset markets irrelevant. If you are buying because a profitless stock is going higher, and this makes sense, I have a very pretty tulip, and I’m willing to sell it to you for $1 million.
You would do much better investing y amount of capital directly into a factory making “stuff” you sell at z price – thus making a proper return. Safe, secure, dull, boring and predictable.
A second consequence is being blind to reality – the volume of corporate defaults is rising and recoveries are falling. A US reader pointed out defaults this year already exceed the total for the whole of last year. As I pointed out yesterday, the liquidity deluge means refinancing is easy – but still we are getting defaults. What would happen if the markets normalise?? Which may be why they never do…
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This article by Pawel T. Mosakowski on the unsustainability of tighter spreads and higher defaults puts the data and the current madness of markets in context rather well..
Meanwhile.. is it worth saying anything about Tesla making its 4th consecutive quarterly profit? It made $104 million profit on the back of $428 million from the sale of regulatory emission credits. Hats off to Tesla – they have built a brand, are selling cars and…. Is it really worth $300 bln? Elon Musk just met the targets for his second dolup of bonus shares – a paper gain of $2.1 bln, although he can’t sell for 5 years.
What makes Tesla worth so much? Its tech? Nope. Its patents? Nope.. Its promise? That all that data its collected and its mastery of driverless self-driving and monetizing its cars as Robotaxis. Really.. believe whatever you want to believe. I won’t be selling my six accidental Tesla shares as the momentum of fools will probably carry them yet higher..
God often uses men who are not of the best moral character. Pharaoh, Nebuchadnezzar, Cyrus, Herod, and Trump (amongst others), to accomplish His will in events He orchestrates during human history. We either trust the sovereignty of God or we don’t. Nothing happens apart from Him…
The best index to a person’s character is how he treats people who can’t do him any good, and how he treats people who can’t fight back…
The Birth Pains Are Growing Stronger….
One of the signs of ruling class collapse is when they can no longer enforce the rules that maintain them as a ruling class. When the Romans started making exceptions to republican governance, it was a matter of time before someone simply decided the rules no longer applied to them. Perhaps the robot historians will consider Obama our Marius or Sulla. Maybe that person is in the near future. Either way, the rule of law is over and what comes next is the rule of men.
“Don’t piss down my back and tell me it’s raining.” Outlaw Josey Wales