If you haven’t read Part 1 yet it is probably a good idea to do so and you can find it here:
When that Part finished I was going through the reasons why I am thinking that a proper full-on Bubble has become more likely, and here are a load more:
Technical ‘Breakouts’ on Major Indexes
If you keep up with my Weekly ‘Stocks & Markets’ Blogs which usually come out late on a Sunday Night, then you will probably have seen me mentioning the strength in the Indexes and how many have either recently ‘Broken-out’ to new All Time Highs (the US Markets) or they are very near such Break-outs and I expect to see them soon (German DAX, CAC40, FTSE100) and such Price Action is extremely Bullish and supportive of the start of a Bubble if that is how things are going to play out. It is pretty remarkable that after 11 years of the Longest Bull Market ever, we still have such strength and demand for Stocks.
Exchange Traded Funds ETFs
Back in the Credit Scrunch around 2008/2009, Exchange Traded Funds (ETFs) were a fairly new thing and there were not all that many available to buy and they were widely misunderstood and therefore not used. In the years after the collapse though, ETFs have really struck a chord and are extremely popular as a cheap way of getting exposure to the Markets and work in a similar way to Funds but with very low Costs. The relevance of this to a possible Bubble is that these ETFs are quite indiscriminate and if somebody buys into a particular ETF, then that money gets ‘invested’ across the Stocks which are in the Universe the ETF is designed to give exposure to and this has the effect of creating Buying Pressure for the Shares and helping to keep Prices buoyant.
Imagine this effect being widely used across the Markets and with a huge amount of demand and lots of Money flowing into the ETFs; with such a backdrop it is not hard to see how these big flows of indiscriminate money could ‘artificially’ drive up the Price of Stocks (and with little if any appreciation of the concept of ‘Valuation’).
Company Share Buybacks
This is a phenomenon that has been noticeable to an extent with big companies in the UK but is a much bigger thing in the US. In essence, companies are borrowing money at low rates to enable them to buy back Shares in the company and this action is very supportive of the Share Price because it reduces the amount of Shares in circulation.
To an extent this is a rarity thing; if there is less of something then the Price must rise, but it is also because if there are less Shares in issue, then any Earnings are spread over fewer Shares so the Earnings per Share rises and this lowers the crucial P/E Ratio which is the most commonly used valuation metric. Also it means that a given amount of Money that is due to go on Dividend Payments gets spread over fewer Shares so the Dividend per Share and the Dividend Yield go up.
Such actions ‘artificially’ support the Share Price and make it higher than perhaps it would be if the Buyback effect did not exist. I use the term ‘artificially’ because normally you would like to see growing Sales and Profits and Cashflow driving up the Share Price, not something that could with reasonable assertion be called ‘Financial Engineering’. So it should be quite easy to see how such actions as Buybacks are yet another way in which a Bubble could be inflated.
Valuation ‘Discipline’ has been abandoned
A crucial element in any Full-On Bubble is the complete absence of any discipline over Valuations and that people are just desperate to buy Stocks (or whichever Asset is concerned) and will buy at any Price. Such a situation is quite difficult for people like myself who are very much driven by Valuations and in many ways a key identifier that we are in a Bubble will be when Valuations get even more daft than they are already.
There is little doubt that Valuations have run away on many Stocks and this is rife with US Tech Stocks on the Nasdaq where it is common to see things on Forward P/E Ratios up around 200 or more. We are also seeing a similar thing in the UK but not to such an extreme, but whereas back just before the Credit Crunch in 2008/9 there were barely any Stocks on a Forward P/E over 20, now there are loads and loads of Growth Stocks on Forward P/Es over 30 and even 40.
OK, Valuations in the UK are not truly bonkers yet but it wouldn’t take much more upside for them to start getting this way. Note that back in 2008 we did not have a Bubble that then popped – the problems in the Debt Securitisation Markets caused the trouble rather than a crazy run up in Share Prices that eventually popped when there were no more daft Buyers left.
A key facet of a Bubble is that many new ‘Investors’ appear who have never been into Stocks before (but don’t worry, they will all be experts and will soon be telling you what Stocks you should be buying !!) and they will have utterly no concept of the importance of Valuation, and this is what will make them very poor.
The Supporting Narrative
Another vital ingredient in a proper Bubble is to have an over-arching Narrative which is simple for ordinary (and gullible !!) folk to understand and to give them a clear reason as to why they must put every penny they have and more into Stocks. Back in the Dotcom days it was all about the Internet and how that was going to revolutionise the World and back in the 1920s before the Wall Street Crash in 1929, it was all about Radio and the Railways.
And before this there were crazy speculations like Tulipmania which most people will know from ‘Black Adder’ when Baldrick eats the ‘onion’ and the legendary ‘South Sea Bubble’ (if you go to ‘Wheelie’s Bookshop’ I am pretty sure there is a short and inexpensive book all about these Manias and it is a great read – I think it is called ‘Popular Delusions and the Madness of Crowds’.)
So any upcoming Bubble will need a Narrative and there are plenty of things to choose from which would justify the madness. My favourite would be a move to ‘Green’ and Sustainability things and that could be a good one because “Society will need to dramatically change to save the Planet” and the consequent move to Electric Vehicles and all their supporting infrastructure such as Charging Points would make a good excuse to pile into Stocks like there is no tomorrow.
In fact, Tech in general might be a good one although in a way we have already had that in the Dotcom Boom and the Public is not that thick (well, actually it is but let’s give the wider Public some credit !!), but perhaps there is a Health story that could help drive it like using the Human Genome and making more ‘Personalised Medicine’. Other possible Tech Narratives could be AI (Artificial Intelligence) and Robotics which will increasingly infiltrate our lives along with the ‘Internet of Things’ IoT which 5G will play a key role in making possible.
Anyway, it is hard to identify in advance what the Narrative will be but no doubt Human technological advancement will be a key part of it and we are already seeing some pretty punchy Valuations in Tech.
Maybe it will be a new Space Race……..
Gold is rising with everything else
This is something I know I have mentioned a few times on the TPI Podcasts. It doesn’t make much sense to me that we have Gold (which is supposed to be a ‘Safe-haven’) going up at the same time as Stocks are going up and also Bonds are going up. This to me is a great signal that something isn’t right at all and sooner or later something is likely to give I expect (all Booms end in Bust, despite what Gordon “Bigoted Woman” Brown thinks), but it again supports my idea that a Bubble is getting more and more likely and that if we get it and it goes ‘Pop’, things will get very messy.
Looser Fiscal Policy
This is most definitely something that is about to happen in the UK and it has been ongoing for many years now in the US where Fiscal discipline has totally gone out of the window as the Trump Government (and the Obama establishment before it) have continued to borrow crazy amounts and run up a humungous National Debt.
This is yet another factor that will fuel any potential Bubble and the drift away from ‘Austerity’ (that’s a joke because there has never been any Austerity – it is yet more fiction from the Left), will mean that the Boris Government will be much looser with their Budgets and more Money will be pumped into the UK Economy and into Infrastructure especially. Such looseness has been common in Southern Europe for some time although the EU, driven by its dominant member of Germany, has been trying to fight the attempts by various Governments such as those of Italy, Spain, France etc. to be more ‘responsible’ with their Spending.
It seems highly likely though that as the EU limps on without the positive contributions (both financially as well as intellectually) of the UK, the European Economy will become even more stagnant and this will increase demands from Southern Countries for more freedom to Borrow and Spend. Germany with the support of perhaps The Netherlands will probably find it very difficult to refuse these demands and if the taps loosen this will be yet more stimulus for a Bubble. Indeed, the IMF (International Monetary Fund) has been calling for more Fiscal Stimulus in Europe for some time.
What Europe really needs is Deregulation but they just don’t get it. Trump understands this and it is a contributor to why the US is by far the strongest Economy in the World at the moment and my hope (probably unfounded) is that a UK free of the EU ‘dead hand’ can address its own Over-regulation problems and get a much more dynamic Economy. Japan is another one that has killed its own Economy with far too much Regulation and restrictions – however, for all the attempts to address the issue, it doesn’t look like Abe is achieving much with his Bow and Arrow.
It is an outside possibility, but if enough Countries can wake up to the dangers of over-regulation then this could perk Economies up and help to feed a Bubble down the track.
Helicopter Money and UBI
These are both terms I fear we might get to hear a lot more about in coming years and I would assume both to be inflationary and supportive of any Bubble yet again. Helicopter Money is the idea that Ben Bernanke put about quite a long time ago that if QE and NIRP failed to get the US Economy going, then ‘The Bernank’ could jump in his Helicopter and drop Dollar Bills onto the population below.
It is not all that different to the concept of Universal Basic Income (UBI) which is the latest wheeze from the Left to in essence pay people not to work. The ‘Universal’ bit is the principle that everybody in Society would get the UBI Payment and it could be enough to cover the Cost of Living or perhaps a good proportion towards it. The idea being that if you wanted to just laze around and do nothing, then you could afford to live because you would get a monthly payment or whatever, and if you wanted to work then you would earn your Wages on top of the UBI payments. This could free up people to have more fulfilling lives and they could do more learning or art things or hobbies etc.
It all sounds rather lovely but of course it is hard to see how a Government could afford to do this and it would be highly inflationary if funded by yet more Government Borrowing. In addition, it is probably very likely that in practice people would be bored senseless and we would get even more drug problems and suchlike and in the few Trials that have been conducted in some Scandinavian Countries etc., the reality has been very disappointing and it has been a flop. That of course may not stop a crazy Government which is determined to keep the ‘Good Times’ rolling along and to stoke the Bubble.
By the way, if anyone from the UK Government is reading this and wants to trial a UBI policy, then I am extremely willing to receive the Payments as part of your experimenting. Please can we make it at least a 10 year Trial !!
The Best Kept Secret
Something I find truly amazing is that we have pretty much had something like 11 years of the longest Bull Market in history – yet nobody apart from the kind of Investing Geeks who write stuff like this or read it, knows that such an incredible way to make Money has been going on for so long. I often mention to mates who are not involved in the Markets about how good the Bull Run has been and they are amazed. When I meet new people out of my Market circles, at some point the subject of Stocks usually comes up when they ask me what I do, and they are utterly surprised to hear about the Bull Run.
No doubt once the General Public wake up to the reality of the Stockmarket boom then we will be nearing the Peak of a Bubble. It may not happen, but this is something to keep a close eye on and stay alert for signs that ‘normal’ people are starting to cotton on.
We saw exactly this kind of effect at the end of 2018 when the Public was starting to get excited and involved in Bitcoins and all that Cryptocurrency nonsense. I remember in December 2018 going to a Party in a Greek Restaurant and everyone there telling me I was stupid buying Stocks and that they had all been buying Bitcoin like crazy. Funny enough, when I have met them in recent years they have never mentioned the Fortunes they must have made on Bitcoin……..I can only assume they are being extremely modest and have parked their Lamborghinis around the back.
The other great signal for the Bitcoin Peak was when my Cleaner came in one day and told me that her Taxi Driver had just told her to get buying Bitcoins…….
How will we know we are at the Peak?
The way these things seem to have played out in the past is that the Bubble tops-out and then it just falls away but it can take a long time to actually bottom-out. From my memories of 1999 to 2003 it really was a long and drawn out Downtrend and it did not finally hit the floor until 2003. What usually happens is that the Markets just get in a horrible mood and you will get a Major Downtrend which has fierce and sharp Rallies within it but ultimately any Rallies fizzle out and we drop to new Lows yet again. That is typical behavior of Bear Markets.
Of course back in 2003 the fall in the Markets went hand in hand with a Global Recession and it is highly likely that the actual popping of the Bubble helped to trigger the Recession as a lot of people who thought they were immensely wealthy suddenly discovered that their wealth was an illusion and their Stockmarket exposure just evaporated to nothing.
The legendary Investor and Analyst Paul Hill, @CapitalPmh on the tweets, mentioned the other day how Banks and Investment Companies can suffer a sort of ‘double-whammy’ where they have bought Assets such as Property using Debt and when the valuations of the Assets falls, they get the problem of their Asset Base dropping in value at the same time as the Debt proportionately becomes a bigger issue. This is a nasty ‘Vicious Circle’ and partly explains why Bear Markets can be so painful. In the Vicious Circle, Companies get in this difficult Debt situation and become Forced Sellers where they have to dump Assets at low prices just to get them away – and that lowering of prices just feeds the falls in Valuations.
Such Stocks also have another inherent problem – because of this Vicious Circle, they tend to be a ‘geared’ play on the Markets and fall faster than everything else (in other words they have high ‘Beta’).
All this clearly sounds pretty unpleasant and I can confirm that the period from when the Dotcom Bubble went ‘Pop’ to the final lows in 2003 was a really tough time for Investors. I was fairly new to the game at that point in time and it really was very miserable – I like to think that with a bit more experience it will be less psychologically difficult and of course I hope I can play things better and not be too exposed to the nasty Down moves of the Bear Market. I am, of course, probably fooling myself !!
In terms of getting out of the Market once we are up around the Peak we should get several chances to do this and bank a lot of our gains that will have amassed from the crazy run up if we have kept our heads and managed our exposures. There are really 2 basic methods:
Another great sign that we are at the Peak, or at least getting near, is when we start seeing Mainstream Television Programmes about Share Trading and ‘Money’ and what to spend it on. Back in the Dotcom days we had the highly entertaining ‘Show me the Money’ where Tom Winnifrith rose to fame from and we had ‘The Money Show’ with the delightful Louise Cooper, which had its own Channel even. Those were the days !!
In a similar vein, when you see a headline on the BBC 10 O’Clock News along the lines of, “Stockmarkets go crazy and are up 60% on the year and the top Banks are telling everyone to buy Stocks”, you know we are at the Peak and you need to get selling.
If you are still not sure we are at the Peak, just check how many Followers I have on Twitter and when I hit 300,000 you will know it is a Bubble. Especially if I am always saying I am being invited to Parties and every Girl and her Dog is telling me which Shares I should be buying !!
One of the impossible things to know is that even if we do get a proper ‘Full-on’ Bubble, we can have no idea when it might actually start to go really crazy and ‘go Vertical’ as it gets near the final stages before the Peak and then the Pop. In the nearer term though I suspect we can be fairly confident that 2020 will be ok because US Presidential Election years tend to be very good – and any dips in such a crucial year will get the Federal Reserve loosening Monetary Policy and keeping the Punch Bowl well and truly ‘spiked’.
In a rather fortunate piece of coincidental timing, I was reading this week’s ‘Investors Chronicle’ dated 31st January to the 6th February 2020, and on page 21 I found the following quote from Jamie Dimon who is CEO of JP Morgan Chase, which is bang on topic:
‘Jamie Dimon, head of the world’s biggest ever bank, is another worried man. At Davos, he told CNBC that “the only thing I have trepidation about is negative interest rates, quantitative easing and the diversion between stock prices and bond prices. It’s one of the great experiments of all time, and we still don’t know what the ultimate outcome is.”’
Something we can be pretty sure of is that even if we don’t get the full-on Bubble which I have been exploring in these Blogs, the Markets have run up so much in recent years that when the next Bust comes it will be extremely painful. I suspect we could easily mimic the Credit Scrunch which walloped us in 2008/9 and this could easily mean a 50% fall on Major Indexes. Smaller Stocks could be hurt even more.
Bearing all this in mind, it makes sense to stay aware and awake to what is going on in the Global Economy and how exuberant the Stockmarkets are getting. However we cut it, once the Bust hits it will be extremely useful to have practiced skills in Shorting Indexes or perhaps Sectors and this is exactly why I have been spending quite a lot of my efforts in recent years in learning how to ‘read’ the Indexes and how to use Spreadbets and similar Leveraged Products like CFDs to be able to Hedge my Portfolio and to profit on the downside.
Anyway, don’t panic but think about what you are doing and ask yourself how you will cope when the final collapse comes – because it will come at some point in time even if we manage to put it off for years and years. No doubt I will be scribbling and tweeting about what I am seeing and there are loads of experienced and sensible Investors on Twitter who will be able to give us warnings of when there is trouble ahead.
In addition, don’t forget that Bubbles are really a ‘once in a lifetime’ opportunity to make huge amounts of Money on the charge upwards and the key is to at least catch some of your gains by Selling near the Peak; and in an ideal world you will also profit on the Collapse by doing some sneaky Short selling on Indexes or Sectors.
Be a Boy (or Girl or Hermaphrodite) Scout and get prepared.
The Blog Series below is just so important – get your head around this and you will be well placed to be successful in the Markets. There are links at the bottom to the first 3 parts:
The Blog Series below is all about Macroeconomics. There are links at the top to the first 3 parts:
The Blog below is all about Trump’s expansionary policies:
This Blog is all about Hedging – a useful skill when things eventually blow up:
The Blog Series below is related to Hedging and you might find it a decent read. There are links to the first 3 parts at the bottom:
The Blog below is a nice short one and talks about the characteristics of Bear Markets:
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