As you probably know by now, US stocks were smashed last night.
The NASDAQ slumped 5%, while the S&P 500 fell 3.5%.
Gold, silver, oil and copper all fell too.
Bonds were the only safe haven, but prices were steady, rather than up.
Even the US dollar couldn’t muster much of a rally.
Is this the start of a bear market?
So, what we have here appears to be a general market liquidation. Risk assets plunged, but defensive assets didn’t budge.
There is little doubt that US stocks are in a melt-up phase. The question is whether this is the start of a bear market, or a brief and violent flush out before another speculative ramp up to new highs.
I don’t know. But investing is about probabilities, not certainties. And in my view, the probability of a deeper pullback/correction/bear market is high here.
As I’ve pointed out here and elsewhere, the recent melt-up rally — particularly in US tech stocks — was more about ‘defensive’ positioning in a broken economy, rather than a reflection of a return to good times.
‘Everyone knows that everyone knows’ tech was the place to be in a post-COVID world.
And with everyone locked up at home, with government stimulus money burning holes in pockets, sports betting off the table and casinos closed, the stock market became the only game in town.
As a result, Apple stock went and did this, as everyone piled in…
I don’t care what your fundamental justification is, parabolic melt-ups are ALWAYS dangerous. Gravity always wins.
The selling of tech stocks overnight was broad-based too. 80% of NASDAQ-listed stocks finished lower on the day. The punters aren’t just selling the highflyers…they are dumping EVERYTHING.
Obviously, the selling will hit the Aussie market today.
ASX 200 futures point to a near 2% decline. I wouldn’t like to be holding the local ‘tech’ stocks today. They will fall much harder than the market.
I say ‘tech’ in quote marks, because some of these highflyers (the buy now, pay later stocks) have only the thinnest veneer of productivity enhancing technology supporting them. As I wrote in The Insider on Wednesday, when mentioning the craziness of Tesla’s valuation (PE of 445 times!):
‘A similar level of insanity has hit the local “tech” sector. Our “buy now, pay later” stocks are Australia’s version of high-growth tech companies. But they are really just old-fashioned consumer credit companies, with a 21st century lick of paint.
‘I’ve said this before, but if you’re relatively new to the stock market and are playing around in these stocks, you need to be very careful. If you don’t have a risk management plan, you’re almost certainly going to get burnt.
‘If you own companies simply because they’ve been going up, and hope they go up more, get out…now.’
By the way, The Insider is a complimentary subscriber-only publication. If you subscribe to any of our products but aren’t getting it, you can sign up here.
I also pointed out that the Aussie market hadn’t run up as much as the US, and that the crazy valuations were mostly confined to a small corner of the market.
Many of the larger stocks are actually trading at decent valuations.
But this comes with a caveat. There are two big risks bearing down on the Aussie market, and I’m not sure prices have factored these risks in.
The first is China. I’ve written about this extensively. You can read about Australia and China’s historic bust up here. And while this fractured relationship is now hitting the headlines almost daily, the market isn’t looking far enough out when assessing the risks.
Here’s a good example. It’s from Jennifer Hewitt’s article in yesterday’s Financial Review:
‘Australia’s immediate problem is the rapidly accumulating cost of its very own trade war with China that goes well beyond issues of technology security in a digital world.
‘The iron ore industry remains gloriously impervious to diplomatic friction due to the absence of readily available alternative supplies. Almost every other Australian export is clearly at ever greater risk from a regime determined to demonstrate the high price of offending China.
‘The latest salvo from Beijing against barley exports from Western Australia’s CBH Group is insultingly spurious, with allegations of “harmful weeds” in the grain despite meeting Australian high quality testing standards.’
See the problem?
This ‘China risk’ still has time to play out
People think iron ore is impervious to the ongoing trade tensions. And they are, if you’re just thinking of things from the supply side. (Although even that ignores Brazil’s short-term supply problems).
But on the demand side, its another issue. China’s recent strong demand for iron ore is all about state directed lending in order to climb out of the COVID hole.
On the surface, China’s recovery and economy look strong. But underneath, the fragilities are building. Go here to learn more, including why the yuan is at risk of a devaluation. The last time that happened, it wasn’t good for commodities.
This ‘China risk’ still has time to play out. It might not be until we get into 2021 that it becomes apparent (which is why you should prepare now). The more immediate risk for the Aussie market is ‘death by bureaucracy’.
Australia’s state premiers and their unelected health bureaucrats are driving the Aussie economy into the ground. What’s happening is quite extraordinary.
As Paul Kelly writes in today’s Australian:
‘Most of the premiers — not every one — are betraying the compact of free movement within Australia, along with humiliating Prime Minister Scott Morrison.
‘Deny free movement and you deny the essence of nationhood. This is the sad plight to which COVID-19 has reduced Australia. Our unity is smashed; our prospects for national economic recovery are compromised; and our culture has reverted to a reactionary Fortress Australia on state lines.
‘Our constitutional inception 119 years ago never envisaged this fracture and it is entirely possible the populist champions of provincialism are acting unconstitutionally. But premiers Annastacia Palaszczuk and Mark McGowan have found a golden path to unimagined popularity.’
And there’s the rub, dear reader. All this is done for personal and party power, under the guise of keeping you safe. It’s a national disgrace. We all should be ashamed of what is happening to our country.
Editor, The Rum Rebellion