America is Back !
Whether on the way in or on the way out, Donald Trump has been the most destructive President in the history of the United States of America . Thank God, the American People made the right choice and we can look forward to a restoration of the America we used to like and admire.
Joe Biden will be a great President and his conciliatory skills and more balanced approach of the world will be beneficial not only to the American people but also to the rest of the world.
The nightmarish years of Donald Trump are over and his Presidency will have left America the most divided, the most indebted and the most speculative market of the planet. What is truly amazing for foreign observers is how many intelligent and educated Americans could have supported such a President.
He inherited a sound economy from Barack Obama but his abrasive, divisive, confrontational, short-term driven actions have left America in a dire state of affairs.
What is for sure is that the Republican Party will actually benefit from his defeat and revert to their traditions of rule of law and democracy. Many Republican senators must be relieved of not having to go through another 4 years of his unpredictable and destructive ways.
Indeed COVID caused massive damages to him and the rest of the world and we stick to our view that this unusual virus may not be of a natural origin. We would not be surprised to see some kind of cure coming out soon and eradicating it, a cure probably coming from China where the the Government is already using a vaccine on a massive scale.
Joe Biden now has a huge task of appeasing America and building a consensus between the two political parties to re-build and repair America. His skills and long time career in Washington will be an asset as will be the presence of the first woman in the post of Vice President.
America is truly back and this is good news !
Nevertheless, the US economy will take years to recover from the Donald Trump era and come back to its pre-Covid employment and growth rates.
Taxes will have to be hiked, Joe Biden will concentrate on the middle class and the poor and the manic focus of the exiting Present on the stock market will come to an end.
Inequalities, anti-racism and deficits will come back to the fore and even the speculative bubble in equities will become an issue in US politics.
A Democratic-led Senate could be the one thing that Biden needs to do his job properly but we actually believe that even without a majority in the Senate, Joe Biden has enough political skills and experience to build a consensus with a republican-led Senate.
The REAL issues will now come back to the forefront and boosting stock prices even higher will not be Joe Biden’s priority.
The main winner of last Tuesday’s elections will be China.
It is clear that Joe Biden will normalise the relationship between America and China and he will rebuild international trust and concertation. This is an enormous plus for the world economy and we expect sanctions on China and Chinese corporations to be lifted soon.
America needs China and the Chinese consumer market and Joe Biden knows that full well.
The ties between America and its direct neighbours will improve as will the relationship with the UK, Europe and most international allies of America. Nato will be reinforced and America’s standing in international organisations restored. Multilateralism and globalisation will come back to the fore and that is extremely good news.
Maybe the only area where the Trump Presidency will have brought positive consequences is in the Middle East by bringing the Arab Nations and Israel togethe . It remains to be seen whether the Biden administration will modify materially its policies vis a vis the Iranian regime and our take is that it will not.
The Obama experience of the JCPOA has been learnt and Iran’s destabilising actions in the Middle East will now be an integral part of any negotiations between the USA and Iran.
Lebanon’s Hezbollah will be at the center of those negotiations as will be the situation in Yemen, Syria and Iraq.
Russia and Turkey will have to revisit their global and Middle Eastern positioning as well, facing a more cohesive international community.
Animal spirits deliver the best weekly gains in years
The US election week saw a massive jump in global equity markets delivering the best weekly performance in years as hedge funds and speculators started bidding stocks up when it appeared clear that Joe Biden was taking the lead and the Blue Wave was not happening.
The October sell-off had much to do with global investors raising cash ahead of the most polarised US election in years. Fear of missing out drove investors to bid up shares relentlessly led by technology stocks..
Bullishness was also fed by the decision of the FED to stay put and re-affirm its stance that it would stay ultra-accomodative while the US job data came on the strong side as well. It was also fed by the stalemate on the Senate elections, pushing back the chances of massive economic stimulus and sending bonds higher.
Investors have been betting that the only way forward was for massive support by the FED in the absence of fiscal stimulus for now. But they may be disappointed…
The Blue wave did not materialise and the Senate is now on a tie with 48 seats for each Party. However, two seats are being put to the vote again. If only one of the seats goes to the Democratic candidates, then the majority will go to the Democratic Party thanks to the President of the Senate having double voting rights. Moreover, the victory of Biden may make the democrat candidates benefit from Joe Biden’s victory momentum.
Nevertheless, we stick to our bearish view on equities as the sharp volatility and massive breadth tells us that speculation is at extremes as is investors bullishness.
Frankly, nothing in the environment has changed to justify the extremes of valuation reached by equities in the US and Japan while all the signs of a bubble are prevalent making the environment extremely dangerous in our views.
The Greatest Bubble in history is about to burst
This obviously means taking a lot of volatility, but the US equity bubble is very much here and it is coming to an end very soon.
Volatility is actually a sign that we are nearing the tipping point.
Over the years, we have analysed virtually all of the stock bubbles in modern history, including the first one in the early 1700s before we had stock exchanges in the late 1700s: the South Seas Bubble.
Bubbles have an exponential pattern to them that is proven time and time again in every asset class and in every country. They tend to crash back to about where they
started in half the time it took them to build up. Some extreme stock bubbles are
much shorter. The Shanghai bubble went up 6 times in two years and then crashed 70% in just one year—in half the time it took to build up.
Most major stock bubbles are like the one from late 1924 to late 1929 and the one from late 1994 to early 2000—they last about 5 years and then crash in 2.5 years or a bit more.
The Japanese Nikkei bubble was the longest we studied, at nearly 6 years long with a nearly 3-year crash.
Because unprecedented and globally coordinated quantitative easing and stimulus by central banks has directly fed financial asset bubbles, especially stocks, this latest great bubble has set records on all levels.
It is the longest, it has had the most extreme gains, and it is the most global. If you measure this bubble starting after the first rebound rally and its correction into late 2011, it has lasted 8.3 years (as of the February 2020 top) in most stock indices around the world.
That equates to almost 9 years for the Nasdaq, which was almost alone in making new highs into early September—and which is now likely to see slight new highs again in early December or so.
The following chart is on a logarithmic scale and it shows that we are a the confluent of two major long term resistances that have already failed to be broken. It also shows the impact of monetary stimulus against all the fundamentals in the past 7 months, where liquidity propelled equities again to that double trend line without succeeding at breaking it.
Last week’s speculative burst is taking it there again. But no new highs have been made save for Japan that recorded a new 29-years high on Friday.
We called the September 2nd as the final TOP in the secular bull market that started in March 2009. Very few investment houses today dare to say the same. Nevertheless, that top created a minor throw-over of the intersection of these two exponential trend lines.
The stock bubble since 2009 is obviously even more exponential, as occurs in all bubble patterns. We could see this throw-over go a bit higher, probably sooner rather than later— and likely just after the election, if we see a new high on the delayed second stimulus plan.
Conversely, a Democratic victory in the repeat elections for the Senate could send everything down the drain.
On the Nasdaq, the following chart shows the exponential top trend line for the broader bubble since 1983. This chart is on a log scale such that the straight-line trend through the tops is actually an exponential progression.
As we can see from the shorter chart below, even last week’s powerful move failed to make a significant break yet while the divergence with the Moving Average Convergence divergence indicators are a sign that the momentum is weak.
Moreover, there has been very very few instance in history where such powerful advances were followed by so little stocks in the universe.
That pattern almost always means a final top is being put in.
We could either make a slight new high after the election by early December if a strong stimulus plan comes quickly, or the top could already be in and either way, we’ll crash to at least the March 2020 lows by around April of next year
More importantly, the final bottom of the bursting of the bubble will not be in until around December 2022. On the Nasdaq, it will likely be down 89% or so, as in the 1929–1932 crash—much lower than projected nearer term on the chart above.
Make no mistake : This is the greatest stock bubble in history. It is more extreme in length and valuation than any other—and it is part of the most global overall financial asset bubble in history, as real estate, bonds, and commodities, including gold, have joined in.
It isn obviously not easy to stick to one’s analysis in the face of such massive speculation and breadth.
But Today’s equity market is seeing the same divide between investors as America is divided politically.
On one hand you have seasoned investors like us and many very successful hedge fund managers who are managing money rationally and focus on fundamentals, technicals and macro-economics,
One the other hand you have millennials or 30 somethings that are punting the markets massively through zero commission brokerage accounts and taking their clues form social media forums such as reddit or instagram… They are just buying their trends and following their gut feelings …
There is nothing new about this … it is again the hallmark of bubbles !
Remember Bitcoins in December 2017, the nearest bubble bursting of our time.
We are showing below the weekly charts of the main indexes and they clearly show where we stand.
As can be seen from the above, Last week’s moves have NOT yet changed the global picture and the knee jerk reaction may have no follow through…
And even if it did, as we have seen from the major long term charts above, the picture will not change even with a marginal new high isn the Nasdaq.
The only area that is truly positive is emerging markets and the Asian Pacific region, with majore breakouts in the making in Japan and China’s indexes.
These explain our strategic long positioning on China and the HSCEI in particular as it is about to break out of the down trend channel in place since 2018.
We are more wary of Japan that trades every expensively at 40 x earnings and will not be isolated from a global break down in US equities and bonds.
It is a Technology Bubble
We have seen two dramatic, tech-driven bubbles, in 1995-2000 and 2012-2020; two major real estate bubbles, in 2000-2006 and 2013 to 2020; a major commodity bubble, from 2001 to 2008; and, within that, a major gold bubble from 2006 to 2011.
Robert Shiller says that human “animal spirits” will naturally create bubbles when things get too good. Governments only make bubbles much worse by getting involved.
As is always the case with bubbles and their bursting, the last phase is one where the “dumb” money comes in the hardest at the end tends to pile into a narrower range of leading stocks, i.e., the FAANGs (Facebook, Apple, Amazon, Netflix, Google) and Nasdaq 100.
This is EXACTLY what has been happening in the past seven ,months and again last week, where our strategic shorts have all risen by 8 to 12 %, outpacing the broader market. The current narrative is that these stocks will be the survivors for ever and milleniums are piling in trough speculative options.
Even with its biggest October setback since the early days of the Covid-19 pandemic in March, this small group of technology-related stocks remain well up for the year, as evidenced by the 70% gain in the NYSE FANG+ Index. This select group of 10 companies consists of household names as Facebook Inc., Amazon.com Inc., Netflix Inc. and the parent of Google (hence “FANG”). The broader market is not doing as well,.
There are plenty of reasons for the explosion in these stocks. The companies are forecast to have huge earnings in future years, which when discounted back to the present at today’s low interest rates results in large numbers that many believe justify the lofty stock prices.
The risk-free 10-year Treasury note yields about 0.85%, and with that as the discounting rate, $1 in earnings 10 years out is worth 92 cents today, almost 50% more than the 61 cents if that discounting rate were 5%.
The same concept is imbedded in substituting earnings yields, which is the inverse of sky-high price-to-earnings ratios. For the S&P 500 Index as a whole, the 3.8 earnings yield looks much cheaper in relation to Treasury security yields rates than its 26 P/E ratio.
FANG enthusiasts also note that these businesses are relatively independent of the basic economy, which looks to drop well into 2021 as the pandemic intensifies and spreads. In fact, these companies benefit as people work from home, order goods online, play computer games and watch movies.
Then there is the TINA argument — There Is No Alternative – with money market rates and bond yields so low.
However, our forecasting of a prolonged, deep recession with escalating global deflationary pressures in the US due to the massive accumulation or Public, Private and corporate debt, high unemployment and tax hikes, the S&P 500 could drop 30% to 40% as disappointing earnings combine with plummeting P/E ratios.
Most important, investors’ focus on a small group of tech companies implies trouble ahead for all equities. Once again, heavy concentration is the hallmark of bubbles.
That clearly was the case with the Nifty Fifty stocks that riveted investors’ attention in the 1960s and early 1970s.
These equities represented rapidly-growing companies, some based on solid long-term growth prospects, while others were simply fads.
Overconfidence became so extreme they were labeled “one decision” stocks. They had so much promise that investors only needed to make one decision—to buy them—since they would never need to be sold.
Nevertheless, disappointments began to multiply and the favored few shrank to motor homes (Winnebago), hamburger chains (McDonald’s), amusement parks (Disney) and gimmick cameras (Polaroid).
They represented the limbs and outward flourishes of the economy, not the basic guts. By shunning the rest, investors should have anticipated big trouble.
The 1973-1975 recession resulted in what was then the deepest since the 1930s, and what was left of the Nifty Fifty collapsed. Panicked investors lopped a zero off of Polaroid’s stock price, as it fell from $140 to $14.
Then there was the dot-com equity dominance that preceded the tech collapse in 2000, the bank stock bonanza that peaked in 2006 and energy stocks that plunged along with crude oil prices after leaping to a new high share of the S&P 500 in 2008.
Another sign of equity investor discrimination in favor of tech stocks is their rejection of steady dividend payers, even though low interest rates should make attractive these 65 companies that have at least 25-year records of paying and increasing dividends.
The S&P 500 Dividend Aristocrats Index yield of 2.7% tops the S&P 500 dividend yield of 1.7% and is more than triple the yield on the 10-year Treasury note.
Nevertheless, investors have yanked more than $40 billion from dividend-focused mutual funds this year following their $3 billion withdrawal in the same period of 2019. That index is down 4.47% year-to-date.
As the many examples of earlier speculations show, investors’ flights of fancy ultimately collapse, leaving many poorer investors gnashing their teeth.
Nevertheless, speculative periods often last for longer and go much further than rational analysis suggests. That’s because they have left the realm of reality for the land of zeal, hope and imagination that has no logical limits.
Speculations require a continual influx of true believers that move stock prices from the basis of reality to the stratosphere of hope. They end when the pool of new entrants is exhausted, often due to a shock of reality.
Washington’s zeal to curb the power of certain tech companies may be that shock.
Investors would be well-advised to take the current anti-trust actions seriously. This is a legal process that has nothing to do with politics and has the means to break the existing de facto monopoly of these tech companies.
The ball is already rolling and each and everyone of these companies will have to use significant resources to defend themselves from global action.
Bubbles always burst and they always do so in the same way…
To conclude, we reproduce here some significant charts
One is the NASDAQ 100 long term Monthly Chart which clearly shows that the price action of September and October 2020 are marking a MAJOR top after the vertical acceleration of the past 7 months..
Anyone betting that this vertical acceleration can continue for ever after 5 waves of constant price appreciation has a problem… the wake-up call will be extremely rude..
The same applies to APPLE INC, the US largest capitalisation stock
Finally, it is worth reproducing this amazing Chart that plots the Dow Jones index between July 1929 and Nov 1932 and the Nasdaq Index between February 2000 and January 2003.
The similarities are amazing, but they just reflect investors psychology in a bubble bursting.
America is back and this is great news for the American people and the rest of the world…
But it will now have to deal with the legacy of the most destructive President in the history of the USA.
From his ill-timed counter-cyclical tax cuts of 2017 to his ill-conceived trade war with China, his amateurish management of the Covid pandemic and the speculative frenzy he has fuelled by bullying the FED in lowering rates to boost the stock market, Donald Trump has left America in the worst shape it has been in decades.
His mandate ends with massive unemployment, the worst recession since the 1930s, an accumulation of private and corporate debt with no precedent in history and the highest Public debt and Fed balance sheet ever.
Unwinding this will be a long and daunting process, and the priority of the 46th President of the United States of America will clearly NOT be the stock market.
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