Stocks took a breather in the US overnight.
The Dow and S&P 500 finished lower, while the NASDAQ closed up marginally. However, the Russell 2000, the benchmark small-cap index, slumped 1.77%.
Famed bubble watcher Jeremy Grantham captured the end of day headlines following an afternoon interview on CNBC.
‘My confidence is rising quite rapidly that this is, in fact, becoming the fourth, real McCoy, bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we’re in one. And the chutzpah involved in having a bubble at a time of massive economic and financial uncertainty is substantial.’
Of course, being in a bubble and being at the end of one are two different things. And as Grantham acknowledges, they can go on for a long time and inflict a lot of damage. Presumably he’s talking about those few rational investors who have chosen to stand aside and wait for the inevitable.
According to Marketwatch:
‘Gratham painted a very dire picture of the investment landscape in the U.S., suggesting that rampant trading by out-of-work investors and speculative fervor around bankrupt companies, including car-rental company Hertz Global Holdings Inc. HTZ, +2.56%, reflects a market that may be the most bubblicious he’s seen in his storied career.
‘“It is a rally without precedence,” he told CNBC, noting that the run-up comes amid a period in which U.S. economic health is at a low point, with millions of people out of work and bankruptcies likely to continue to rise due to a slowdown in business activity and closures that have come in the aftermath of lockdowns implemented to curb the spread of the deadly COVID-19 pathogen.’
None of this would be possible without the assistance of the Fed. Its balance sheet has increased from around US$4 trillion at the start of March to US$7.2 trillion now.
A game of hot potato…
That is, it has purchased US$3 trillion worth of assets from the market, ranging from government debt to corporate bonds with newly created cash.
No one really wants to hold that cash right now. They just want to use it to buy something else. So there’s a game of hot potato going on with all the extra cash in the system. And it’s a game that bids prices up like crazy.
Grantham, however, takes the opposing view. When asked what level of exposure investors should have to US equities, his response was:
‘I think a good number now is zero and less than zero might not be a bad idea if you can stand that.’
My guess is that very few can stand that…
With US stocks back near record highs (or the NASDAQ at all-time highs), you’d think Fed boss Jerome Powell would be ready and willing to ease back on some of the stimulus measures.
Not a chance. As the Financial Review reports today…
‘“We at the Fed need to keep our foot on the gas until we are really sure we are through this, and that’s our intention, and I think you may find that there’s more for you to do as well,” Powell said in testimony via a video link to the US House of Representatives Financial Services Committee.
‘“It would be a concern if Congress were to pull back on the support that it’s providing, too quickly,” he said.’
Great, now we have an unelected bureaucrat telling elected politicians they need to spend more of other people’s money.
So what should you do?
Ride the bubble until it pops, or get out?
Thankfully, the Aussie market isn’t as crazy as the US. While some stocks have recovered quickly, there are plenty of pockets of good value in the Aussie market.
Still, it will follow the US regardless. Right now, stocks are more about liquidity and central bank support than fundamentals like ‘valuations’.
While it is impossible to predict when bubbles will pop, in the good old days at least bubbles had their origins in strong fundamentals.
This one, however, was borne out of a potential economic disaster.
It has resulted in nearly US$3 trillion in fiscal stimulus as well as the more than US$3 trillion in monetary stimulus mentioned earlier.
In other words, this stock market boom is largely built on fiscal and monetary stimulus. But now, the fiscal stimulus will soon be wound back, and the monetary stimulus is flattening out.
That could well leave the liquidity-induced, rapid stock market rise running out of puff very soon.
In relation to the Aussie market, we’re at an interesting juncture.
The chart below shows the ASX 200 using weekly data. Weekly, as opposed to daily data, is less ‘noisy’. It is therefore a better way to view things from a ‘big picture’ perspective.
Note how the rally has now recovered 50% of the March collapse. Such mid-points are important levels to take note of.
If the ASX can break through here (on a weekly closing basis), it suggests this rally can continue. But a decent rejection from this level would be a real concern.