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After a crazy week

The snippet from last week’s Maven Letter below goes through my sense of the big picture in the wake of a crazy week. Since this was published fix days ago the geopolitical noise has quieted, Barcelona was hit with a terrifying attack (I was on that exact street only 6 weeks ago), and US markets have declined a few days in a row, which is notable given that this long bull market has until now always bounced right back from declines of 1.5% or more like we saw on Thursday.

Maven subscribers have been in on some great stocks of late. I’m just finishing off a summary of those moves that you will see soon – yes, to encourage you to subscribe to The Maven Letter! Macro commentaries like I send out in these Maven Mondays are interesting and help formulate a big picture perspective, but to make money investing in exploration and mining stocks requires action, requires timed buying and selling of active stocks, and that is precisely what I cover in the letter.

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Snipped from The Maven Letter: August 16, 2017...

The Week That Was

What. A. Crazy. Week.

I won’t talk politics, as there is commentary galore available on Charlottesville and North Korea and, more importantly, this is a financial letter not a political one.

That focus, though, means some commentary is necessary – on the impact of recent events on markets, currencies, and gold.

First let’s look at responses in the major markets. In the context of this long, strong bull market, it was notable that markets everywhere fell last week as the nuclear rhetoric ramped up. Global markets rarely all move together, but they did and to the downside.

That all reversed this week as nuclear tensions eased. In fact, on Tuesday markets everywhere gained, an event as unusual as a collective loss.

The other significant market move was volatility. On August 8th, just before the nuclear war of words began, the S&P 500 had gone 13 days in a row with less than 0.3% change. There was NO volatility. The VIX fell to an historic low of 9.67.

Then the nuclear talk began and VIX exploded up (relatively speaking), rising 69% in three days to hit 16.3.

The chart makes the ‘relative’ part of that statement apparent – an ‘explosion’ to 16 still keeps VIX really really low and keeps the spike within normal parameters over the last five years:

(Volatility spiked in August 2015 when Chinese stock markets started tanking; Western markets followed suit but the slides did not last long.)

Today, with traders (and, well, everyone) happy that imminent nuclear war with North Korea is not likely, VIX is back below 12. That despite significant civil unrest in America and a Trump administration unable to accomplish any major policy goals.

My take is the market is complacent about risks but not completely asleep. The bull has been so reliable for so long that complacency makes sense. That will change when threats to the bull become more apparent.

Is that happening? I don’t know. I feel like there is increasing talk of topping, but that may well just be my reading biases at play.

The arguments for the bull to end are the same as we’ve seen for two years now. The market keeps rising but breadth is seriously lacking. The Dow, for example, has been little more than a reflection of Boeing stock over the last six weeks. BA shares have gained 21% since the start of July to reach US$238; since the Dow is a price-weighted index, that gain on such a high-priced stock accounted for 75% of the Dow’s 3.5% rise. The FAANGs continue to have a similar impact on the NASDAQ.

It seems tenuous to me, but it has seemed so for some time. At the end of the day, the great Quantitative Easing Experiment has absolutely created inflation, just not in consumer prices. The inflation is all in stock prices; it’s all a financial game, just one that no one has ever played before.

And it’s a game that is now structurally set up to continue. For one, the Fed might prefer a cooler market but does not want to manage another major crash, so it will do its all to stem a crisis should one appear.

More generally, the bull market simply has momentum. The ever-rising market has become the one piece of proof that things are ok – the economy must be recovering, people must be doing better than they were post crisis, the world must be muddling along the right path, because stocks keep rising!

And it’s a self-feeding machine. Stocks keep rising because everyone believes in the bull market and wants to believe in it the bull market and doesn’t want to miss out on the bull market.

Within that, a huge amount of buying today comes from machines, from algorithms programmed to respond to price movements. Most algorithms are new enough that they are only familiar with this bull market. They take every 2 to 3% decline as a buying opportunity, because over the last eight years that has been the case. So algo buying literally turns slides around.

Index buying also sidesteps the need for stocks to demonstrate actual value. As Q2 reporting wrapped up Merrill Lynch noted companies that beat expectations on earnings and sales in the second quarter did no better, in terms of share price reaction, than the S&P as a whole.

That lack of outperformance sort of captures the markets today – details hardly matter, just buy stocks.

At some point, though, a crack will appear. A political crisis will inject enough hesitation to turn the tide, or a spectacularly failed high-profile IPO will make it obvious that everything is overvalued, or a series of poor economic readings coupled with a president unable to enact any of his promises will stall the ascent (tax reform, regulatory reform, health care reform, infrastructure spending, the wall – none of these are even in sight).

Or a credit crisis will emerge. This possibility deserves real consideration. Auto loans in the US are going into default at record rates. Canadian households are carrying higher debt levels relative to incomes than almost any time in history. US student loan defaults are rising. Corporate lending is declining. US households are more in debt now than they were in late 2007. Credit card delinquencies are increasing.

Whatever causes it, the stall will only end the bull if it can overcome the algos and the index buying and whatever moves – surreptitious or obvious – the central bank makes. But at some point that will all happen simply because a bull market cannot last forever. The fact that political battles – domestic and international – keep ramping up favours a sooner end. And of course favours gold, which would benefit significantly in such a scenario.

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BTW - I really enjoy reading your newsletter - very comprehensive and you do an excellent job of integrating a macro perspective into your analysis.

-RC (August 2019)

28 year investor. This is by far the best description I have ever seen of what's happening and what's going to happen in the uranium space. You are amazing.

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