The tale of the old and young bull has been passed down through the ages…
‘The old bull and the young bull were standing at the top of the hill overlooking a paddock of many gorgeous young heifers. The young bull said, “Let’s charge down the hill, knock over that fence and service one of those heifers each”. The old bull wisely replied, “Why don’t we saunter down the hill, open the gate, take a sip at the water trough and then service ALL of those heifers?”’
The moral of the story is…hasten slowly and (potentially) enjoy far greater rewards.
Rightly or wrongly, I’ve been pigeonholed as a ‘permabear’…so I can’t be the old bull.
Rather than waste valuable space on why this labelling is a complete nonsense (what will I be called when I start recommending an overweight position in shares AFTER the crash?), I’ll go with the flow…and wear with pride the moniker of…old bear (even though it does sound like something out of Goldilocks).
In The Daily Reckoning on 20 November 2015, I wrote:
‘The technology trend is all about cutting out human (high labour cost) involvement.
‘Perhaps we’ll see a complete 180-degree reversal and people move out of the cities and re-populate regional towns. Looking for a lower cost and better-quality life — growing veggies, collecting their own water and harnessing solar power.
‘The technology trend is going to be a global deflationary force. This deflationary pressure could be compounded if there is a collective re-evaluation of “what’s really important in life”.’
My observation was made from the vantage point atop the hill of history.
Shifts in culture, trends and social mood can take decades — even centuries — to swing from one end of the spectrum back to the other.
Prior to the Industrial Revolution, agricultural production played a major role in the economy. Rural and regional centres prospered.
The introduction of mechanisation lowered the demand for labour in rural areas and created employment opportunities in city-centric manufacturing plants.
The migratory trend from country to city was the death knell for many a once thriving rural township.
Several years ago, complaints about urban overcrowding; traffic congestion; increased commuting times; inner-city crime rates and the growing shortage of affordable housing, started appearing more frequently in the media.
Had the pendulum swung too far? Were people questioning the merits of city life?
Would technology — in replacing human labour — be the catalyst for a reversal in the decades-long migratory trend?
Little did I know a pandemic would be the spark that made people weigh up their lifestyle choices.
And therein lies the lesson in identifying trends in advance. You never know when the straw will be placed that makes the camel buckle…all you know is the load is getting heavier and sooner or later something gives.
As reported by 9News on 1 February 2021 (emphasis added):
‘“Internal migration data shows more people are leaving Sydney and Melbourne for regional areas, resulting in a transition of activity from the metro regions to the outer fringe and regional markets,” CoreLogic’s research director Tim Lawless said.’
Which has resulted in…
‘Home values across Regional Victoria and Regional NSW rose 1.6 per cent and 1.5 per cent respectively in January compared with a 0.4 per cent increase in home values across Melbourne and Sydney.’
This migratory trend is not unique to Australia.
From the Financial Times on 22 January 2021 (emphasis added):
‘…the number of Londoners departing the city and buying homes elsewhere has increased. Estate agency Hamptons International estimates that departing Londoners bought 73,950 homes outside the capital last year, the highest number since 2016 — and the highest proportion of sales outside of London since before the financial crisis.’
Is the pendulum swing a knee-jerk reaction or, thanks to improved infrastructure and rapidly changing technology (faster transportation links, Zoom, 5G internet), a more permanent shift back to regional re-population?
I’ll answer that question shortly.
But before I do, another trend this old bear spotted — several years ago — from history’s hilltop, was that of an overpriced and overhyped US share market.
With the benefit of hindsight, I fully appreciate (and accept) this call was way too early.
What was once overhyped and overvalued, has now gone onto become — in the words of legendary bubble-spotter, Jeremy Grantham — ‘one of the great bubbles of financial history.’
When making a judgement call on the allocation of capital, you can only act on the information you have at the time.
The Hussman MAPE (margin-adjusted PE) chart has (over a 90-year timeframe) an impressive 89% correlation between its forecast 12-year return and actual return. That’s forecasting power you do not ignore.
With that in mind, when the MAPE multiple reached and began to exceed the pre-GFC valuation peak, do you exercise caution or wait to see if it’ll test the most infamous market peaks in history (1929 and 2000)?
I bailed early.
Source: Hussman Strategic Advisors
As we can see, the US market brushed off the pre-GFC highwater mark and kept on going.
And, when it sails past the extreme overvaluation level reached at the two most famous peaks in history, do you:
a) buy into the belief that it’s different this time…
b) take heed of what Jeremy Grantham says about this being one of the great bubbles in history and exercise even more caution with your capital?
If the bursting of those past great bubbles is any indication of what awaits, we can expect all paper profits made since the GFC (and, possibly more) to be swept away in the outgoing tide of investor panic.
Unless of course, it’s different this time…which means the most expensive US market in history continues to become even more expensive and never suffers the same fate as the 1929 and 2000 bubbles.
If you believe that, call me…I have a palace in central London to sell you.
For me, it’s a question of ‘when’ not ‘if’ this happens. When will that straw be placed and the trend changes? Tomorrow? Next month or next year?
That’s an extremely dangerous game to play with your capital.
You are playing Russian Roulette with a market that’s got (at a guess) four, maybe five bullets loaded in a six-chamber gun.
When this history-making bubble does meet its pin, be prepared for another massive and unexpected shift in social mood.
Ray Dalio (another Wall Street legend) recently published a seminal work titled ‘The Changing World Order’. After researching the patterns of rising and falling empires over the past six centuries, he wrote:
‘…going from one extreme to another in a long cycle has been the norm, [is] not the exception—that it is a very rare country in a very rare century that doesn’t have at least one boom/harmonious/prosperous period and one depression/civil war/revolution, so we should expect both.
‘Yet, I saw how most people thought, and still think, that it is implausible that they will experience a period that is more opposite than similar to that which they have experienced.’
What this old bear sees from history’s hilltop is a stock market collapse that heralds in a depressionary era. One, that — in the current booming and ebullient market environment — seems so implausible, just whispering about it could see you carted off to the looney bin.
Perhaps history (which is a record of human nature down through the ages) will not rhyme this time. Perhaps man has finally learned how to temper the emotions of greed and fear.
That’s for you to decide.
Should, what was once considered far-fetched become our reality, then I expect we’ll see a collective reassessment on what’s really important in our lives.
This is why I think the migratory trend to areas more aligned with society’s newfound values, is likely to become a fixture rather than a fade.
And if history does happen to rhyme, watch for this old bear to transform into a bull…one with a twinkle in his eye.
Editor, The Rum Rebellion
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