We have recently written a couple of posts about the “exuberance” that has invaded the market since the election. Such is often seen near short- to intermediate-term peaks in markets as investors go “all-in” without a net.
It was on December 5th, 1996, during a televised speech, that Fed Chairman Alan Greenspan stated:
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
It is an interesting point that the U.S. has sustained low rates of inflation combined with monetary and fiscal stimulus, which have lowered risk premiums, leading to an inflation of asset prices.
Interesting article that our friends over at Integrated Wealth Management thought you’d enjoy. ~Ed. While the market has rebounded significantly since March lows, the recovery has primarily been driven by a handful of tech stocks, while cyclical stocks in energy, industrials and real estate have lagged. But conditions appears to be forming that cyclicals may be poised to reward investors more during the recovery from COVID. Click to read article.
The $100B+ Housing Debt Bubble Is Going To Burst
“Being self-employed, I don’t like to add extra bills or burdens, and with a moratorium, there’s no guarantee that later I won’t be further into debt.”
Lucy, freelance photographer, Colorado – July 2020
Lucy’s concern about accumulating debt echoes across America. Millions of renters and homeowners are anxious about paying both their monthly housing bill and a ballooning debt balance.
Based on present missed payment rates, consumers will accumulate at least $100B in housing debt by January 2021. The following model describes a set of linked health, social and economic events. These events are likely to unfold in next 6 months. An uncontrolled wave of virus infections drives the cascading economic impact:
Virus growth uncontrolled > economic activity contracts > unemployment rises
> personal income falls > consumers miss rent and mortgage payments
> rent and mortgage payment moratoriums fail > consumers use credit cards to make payments
> small business apartment landlords & homeowners default on mortgages (debt bubble bursts)
> consumer spending dives
Our analysis starts by examining the virus 3rd wave and a likely increase in lockdowns.
Virus Growth Uncontrolled
On November 2st the U.S. had a 44% increase in daily COVID-19 to 93,581. The chart below indicates the second wave of infections did not decline to the first wave low. Thus, experts forecast a third winter wave peak of cases will be higher than the second spring wave peak.
Hospitalizations are rising in 42 states. Nineteen states report their highest hospitalization rate since the pandemic began in March. Uncontrolled virus infections will result in more partial or full lockdowns of intense social activity businesses including, hotels, restaurants, bars, theaters, sports stadiums, indoor arenas, offices, transit, airlines, hair salons, and personal services. An indication of what the U.S. may face soon is unfolding now in the United Kingdom, Germany, and France. These EU countries are tightening pandemic restrictions at levels not seen since last June. Meantime, U.S. businesses, such as internet entertainment, technology services, eCommerce and, socially distanced grocery stores, will continue to grow…CLICK for complete article
Some of my favorite movies are when a group of investigators tracks down “wrong-doers.” At first, they have only a few clues that are disparate and have little context. However, as the movie progresses, the clues coalesce into a meaningful outcome of catching the villain. In the financial markets, our job as investors is much the same. However, at the peak of bull market cycles, investors begin to ignore evidence at their financial peril.
Let’s take a look at the clues which may be more meaningful than individuals are currently assuming.
Clue 1: Valuations Expensive On Every Level
“Market bubbles have NOTHING to do with valuations or fundamentals.”
I have touched on the impact of valuations and forward returns. Currently, these fundamental concerns remain devoid of attention by investors chasing short-term performance. Despite the March selloff, record numbers of unemployed, and a deep recession, the markets remain near all-time highs.
“We are in a crisis, the worst crisis in my lifetime since the Second World War. I would describe it as a revolutionary moment when the range of possibilities is much greater than in normal times. What is inconceivable in normal times becomes not only possible but actually happens. People are disoriented and scared. They do things that are bad for them and for the world.”- George Soros
As shown in the chart below, the S&P 500 is trading in the upper 90% of its historical valuation levels…CLICK for complete article
Our friends at Integrated Wealth Management thought our readers would be interested in this article. ~Ed.
A survey by the deVere Group polled 752 investors with more than $1 million in investable assets about the biggest mistakes they made investing. The number one reason was fixating on historical returns as guidance vs. assessing what investment strategies will be most effective when looking into the future. As Wayne Gretzky famously said, “go to where the puck will be”. Click for full article.
Here’s an article that our friends at Integrated Wealth Management thought you might enjoy. ~Ed. Well he said it in the waning moments of the presidential debate – Joe Biden wants to shut down the oil and gas industry. Did he just nail the coffin for Democrat hopes in key swing states of Texas and Pennsylvania? It will be interesting to see how investors in the energy sector react if the Democrats win come November. ~Sandor Kiss, Integrated Wealth Management.
President calls on voters in swing states to take note, while Biden says Trump is taking everything out of context…click for full article.