Sunday, October 29, 2017

New bubble in the making; new debt crisis  

We have arrived at the ninth inning of the longest bull market in history other than the 1982-2001 bull. But look, today even our definition of bull market has changed.  Typically, many mean 4 to 7 year market upturns, now we’re suddenly comparing it with the 1982-2001 ‘bull market’. However, I remember that in that ‘bull market’ there were many traumatic downturns such as the 1987 crash; the 1990 Savings & Loans crisis involving George Bush Senior’s son Neil. When George Bush Senior’s “Read my lips” back fired. Oh and 1998 with the Asian Tiger currencies collapsing. I remember the end of the 1982-2001 bull market, now called the Tech Bubble (and crash)? 

The world has dramatically changed and now the FANG or is it FAANG? are driving a new bubble. Their stellar performance reminds me of the Nifty Fifty crash in 1973. Remember Warren Buffett apologizing for mediocre performance in 2000-2001 because a lot of the profits were only made in the ‘.com’ companies while the rest of the market lingered. Remember Nortel that by itself drove the TSX to unheard highs; until it went bankrupt? 
If you look at today’s market, low interest rates have pushed many investors into stocks and lately, ‘Mom and Pop’ investors are returning to the stock market in droves. Salivating at the returns of FAANG stocks and buying index ETFs. I like ETFs, but I fear for the day that the market crashes, when FAANG makes up a disproportional large part of the S&P500 and Dow. Meanwhile, we may be experiencing a bubble in credit as well. A debt crisis that has, thanks to QE and other stimulating central bank policies and unabated government spending, nearly doubled U.S. national debt (and that of many other countries) over the last decade.  If you forget provincial debt in Ontario, thanks to Steven Harper, Ralph Klein and Paul Martin we have a relatively low federal debt; but Trudeau is rapidly ‘correcting’ that. We went through so much pain in the Canada of the 1990s, but the Millenniums have forgotten that painful lesson and adore the disastrous second Trudeau. Really, it is uncanny… So Father, so Son. In economic disaster as well as in divisiveness the Trudeaus always shine!  Everyday now we learn about the crookedness of the Clintons and the parallels to the Trudeau family empire are striking. Not that the rest of the political establishment is so much better. Look, every politician benefits from larger government. And even if a guy like Trump seems to fight the ‘Deep State’ he is being swallowed alive, if he was not already part of that same corrupt system.

But we are talking about a stock market bubble, Mom & Pop are starting to believe that the market is not coming down. Gurus are increasingly optimistic. Then there is the cryptocurrency bubble. Yes, it is revolutionary just like the dot.com in 2001 when we were talking about the ‘New Economy’. Cryptocurrencies are a response to high government debt; loss of confidence in fiat money, as well as disgust for the deep state and elitist government system that we have now throughout the world. The hunger for more power by strongman politicians is scary and if not halted may lead to a 3rd world war as discussed in an earlier blog.  But… the patterns of a new bubble are deeply embedded in today’s markets.  Look at bond markets, at the stock market and the cryptocurrency markets.  Traditional investments are languishing by comparison. Commodity bear markets seem to be ending, but… what would happen with the next crash not that far in the future?  Say one or two years.  Well there maybe a silver lining: a one term Trudeau, Notley and in BC NPD/Green government. Possibly a one term Trump as well.
But first the bubbles will rise higher than most of us will think is possible.  Way back, I guessed that the TSX would be peaking around 18,000 but that has been taken much longer than I expected. I don’t think I know where and when it will peak. But we have definitely entered the musical chairs stage of the 2009-2018 bull market. So, when you have big profits, especially in the FAANG stocks be not afraid of taking them and hold cash, or better gold. The banks and financial industry have been doing terrific for decades, the exception was 2008, but Canadian banks escaped most of that and are currently again on a rocket trajectory that probably lasts into the new year. But the Toronto and Vancouver housing market bubble weighs heavily on them. Don’t grow complacent. This is not a time to sleep at the wheel; be ready to let your profits ride and jump at the sign of trouble.  

On cryptocurrencies and blockchain. It is a very promising technology but right now it is clearly in a speculative bubble. I don’t think it will go away and it may even become mainstream over the next 15 years or so. Especially if we go through yet another major crisis of financial of confidence.  I hate to say those things, but it is likely we will go through another big debt crisis soon after the current bubble bursts. Based on history, just like after the tech crisis, crypto currencies will be out-of-fashion for several years before it will truly take off. During those years of consolidation, you may discover and invest in the survivors who likely will be at the root of a tech and banking revolution. In the meantime, there is a good chance that gold will shine. This is of course all speculation. If the next crash would be mild, it does not pay to sell off a lot of your stock holdings (where would you place the proceeds? In Canadian or U.S. dollars; gold or silver may be better). There are a lot of problems underlying the current ‘boom’ and many of those may come to a head during the coming crash. Consider physical assets; diversifying in cash; gold and silver bullion and Calgary real estate, which may be stable as commodities likely will recover but very slowly if there is a near future crash.
Good news is that Jason Kenney has just been elected as leader of Alberta’s UCP (on the first ballot). With the Carbon tax for pipelines deal severely back fired; Alberta’s current lacklustre economy and a possible new economic crisis; Mr. Kenney may have all the wind in his back during the next election and we won’t see here another NDP government for 40 years. Is that good for Alberta; this mono-party system?  I doubt it; but alternative political parties have proven to be an even worse choice.  

Don’t become complacent on the way to this bubble’s peak. The crash may come when everybody feels most confident!

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