Making a Buck in 2020: The Stock Market Frenzy

Dear Reader,

Much of Victoria is back into lockdown this week.

That’s five million people, or about 20% of Australia’s population, spending most of their time at home.

I took a stroll around Melbourne’s CBD the day before the lockdown and things are quite gloomy out there on the streets.

There’s a lot of concern for the future, plenty of business owners worried about their livelihoods.

Melbourne’s second lockdown is bringing home the point that things can still change quickly.

It’s not just Melbourne though.

Abroad, cases are rising in the US, with states scaling back plans of reopening. Unemployment is increasing.

The idea of a V-shaped recovery is fading quickly.

On the other hand, there is also a lot of euphoria out there too…mainly on markets. The stock market is offering a stark contrast to what you may see on the streets.

Have We Hit the Bottom? Financial Expert Warns Not Yet. Learn More.

The Stock Market Frenzy

The Chinese stock market, for example, is going bonkers.

At time of writing on Friday, The Shanghai Composite Index has increased by 28% since March so far.

Bloomberg ran a small feature on the frenzy this week:

Like millions of amateur investors across China, Min Hang has become infatuated with the country’s surging stock market.

“There’s no way I can lose,” said the 36-year-old, who works at a technology startup and opened her first trading account in Beijing on Tuesday. “Right now, I’m feeling invincible.”

Five years after China’s last big equity boom ended in tears, signs of euphoria among the nation’s investing masses are popping up everywhere. Turnover has soared, margin debt has risen at the fastest pace since 2015 and online trading platforms have struggled to keep up. Over the past eight days alone, Chinese stocks have added more than $1 trillion of value — far outpacing gains in every other market worldwide…

What’s behind the frenzy? Government spending. As the Australian Financial Review explains:

Facing a coronavirus-battered economy, Beijing is speeding up an infrastructure build-out to stimulate growth, vowing to spend an estimated $US1.4 trillion ($2 trillion) over five years on areas such as 5G, industrial automation and cybersecurity.

This enthusiasm has propelled a fast and furious surge in stocks. The tech-heavy ChiNext Index is up 46 per cent this year, and sports an eye-popping valuation of 35 times 2021 earnings. That’s above the Nasdaq Composite Index’s 27.5 times, which is already expensive and reason enough for the rally to fade.

Investors are smart to play in fields where the fiscal dollars are. But it’s also a dangerous game. What’s recurring income and what counts as extraordinary items? Once we remove government subsidies, the valuations of China’s tech darlings become even airier.

Helicopter money can come in many forms. First and foremost, Beijing is a large client. Even before the coronavirus, the government was the biggest buyer of IT security, accounting for 27 per cent of total spending last year, according to IDC. […]

While it’s great Beijing is tending its tech gardens right now, the question is whether and when it will pull the plug.

Is the rally sustainable?

So far, it looks like China has had some success in containing the virus. Their economy is restarting.

But across the globe, demand is slowing. This is quite an issue for a country whose exports make up 20% of their GDP.

And then there is the issue of high debt, and rising economic tensions between China and the West.

The world is shaping up to be a much different place than before the pandemic.

But back to the market frenzy.

Even with the resurgence of the virus, US markets are close to levels before the pandemic. The NASDAQ is treading even higher than pre-pandemic times. Even with the economy looking much now different than back then.

Take New York, the state is starting to reopen, but public transport is down 53% from the time before coronavirus. Restaurants have had a 95% drop of outdoor diners from this time last year.

People are staying indoors to avoid catching the virus.

The economy is weak, jobs are fading and earnings are very much in question with companies pulling guidance.

This should be raising red flags. Instead the herd is jumping into the stock market.

One of the reasons is, well, there aren’t many alternatives.

It’s not easy to make money with unemployment rising and stagnant salaries. Housing is still expensive. At the same time saving accounts are paying meek returns.

This all pushes towards taking on more risk.

On the other hand, there is the fear of missing out on the rally. Especially as central banks continue to support markets and provide liquidity to prop up the system, much like they did after the global financial crisis. All this liquidity is distorting the markets, and fuelling a rally.

But things remain very much unpredictable.

So far, it’s working…until it doesn’t and everyone runs for the exit at the same time.




Selva Freigedo,
Editor, The Rum Rebellion
PS: In this free guide, discover how a currency crisis could drain the supply of circulating cash…and how you can keep your standard of living when going through it. Download the free guide now.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion