A Final Goodbye (and Prediction for 2022)

As I mentioned last week, tomorrow will be your final edition of The Rum Rebellion.

From next week, you’ll automatically start receiving The Daily Reckoning Australia. You’ll still hear from Vern Gowdie and Bill Bonner, and Dan Denning and myself occasionally. But The Rum Rebellion will be no more.

For my final essay, I thought it might be useful to describe how I see the state of financial markets right now.

Which is kind of useless, because the market doesn’t care for how I see things. And, to be honest, nor should you.

What did the Bible say? Trust no man?

Something like that.

Anyway, this is my soapbox today, so I’ll have my say regardless.

Firstly, it shouldn’t be controversial to say that the markets are madness.

Exhibit A is the Nasdaq. Here’s a long view to show you the melt-up:

Fat Tail Investment Research

Source: Optuma

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This is what a bubble looks like. It’s continued to inflate this year, with every dip bought.

You can talk about and consider all the short-term reasons behind this dip buying, but the bottom line is that we’re in a bubble of epic proportions.

But if you’ve been reading Vern’s stuff for a while, you already know that.

Here are the top 10 stocks in the Nasdaq 100. They make up over 50% of the index:

Fat Tail Investment Research


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What about the ‘more diversified’ S&P 500?

Apart from Berkshire and JPMorgan, the top 10 stocks are the same:

Top 10 Constituents By Index Weight

Source: S&P Global.com

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For every dollar some unthinking chump puts into a ‘low-cost’ international index fund, this is what they’re getting.

Such a diversified portfolio…

Now, let’s descend into the forest and get amongst the trees.

What’s behind this latest ‘buy the dip’ stupidity?

Well, for one, the global media empire’s fear campaign of the new ‘OMG, Omicron!’ variant didn’t have legs. Viruses mutate. It’s what they do. And they mutate into less deadly variants. Not a good story for the media and politicians whose business models thrive on fear.

The other buy the dip excuse is ‘China stimulus!’.

From Reuters:

BEIJING (Reuters) — China’s central bank said on Monday it would cut the amount of cash that banks must hold in reserve, its second such move this year, releasing 1.2 trillion yuan ($188 billion) in long-term liquidity to bolster slowing economic growth.

The People’s Bank of China (PBOC) said on its website it would cut the reserve requirement ratio (RRR) for banks by 50 basis points (bps), effective from Dec. 15.

The world’s second-largest economy, which staged an impressive rebound from last year’s pandemic slump, has lost momentum in recent months as it grapples with a slowing manufacturing sector, debt problems in the property market and persistent COVID-19 outbreaks.

When China has done this in the past, the liquidity has largely gone into property development. But this time, we know that China is much more concerned about the property bubble expanding again.

So it will be interesting to see where this liquidity flows.

Does it mean the iron ore miners are past the worst of it?

Not at all. In my view, they’re just enjoying a dead cat bounce.

Take BHP Group Ltd [ASX:BHP], for example. It’s getting close to resistance. My guess is it will struggle to get through the $41.50–42.50 area.

BHP Group Prince Otutlook

Source: Optuma

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It’s a similar picture for Fortescue Metals Group Ltd [ASX:FMG]:

Fortesque Metals Price Outlook

Source: Optuma

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But Rio Tinto Ltd [ASX:RIO] is still some way from resistance. It may have more legs than the other two…or it may not even get close:

Rio Tinto Price Outlook

Source: Optuma

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The bottom line is that the long-term supply and demand situation is no longer favourable for the big miners. Their bears markets have only just started.

China has no intention of restarting the property development boom. They’re much more focused on managing the fallout of the forced deleveraging it imposed on the sector earlier this year.

As the Financial Review reported yesterday:

Any pretence that Hui Ka Yan, once China’s richest man, remains in control of events at China Evergrande Group ended this week as state representatives took the majority of seats on a new risk management committee established by the heavily indebted developer.

In a statement issued on Monday night after shares in Evergrande fell to a record low in Hong Kong trading, Mr Hui said the new committee would not report to the board “but will play an important role in mitigating and eliminating the future risks of the group”.

“The working group will take over Evergrande and find third parties, especially state-owned developers, to take over its development projects,” said Chen Long at Plenum, a Beijing-based consultancy. “After that Evergrande is done. Original shareholders including Hui Ka Yan will be wiped out.”

This is a managed decline, with the bulk of the once private company being absorbed into state-owned agencies to avoid contagion.

There won’t be a collapse. But there won’t be a rebound, either.

So there you have it.

The US stock market is a mega-cap-driven tech bubble. And China’s days of iron ore hoovering growth are well behind it.

That should set us up for a very interesting 2022.

To continue following the story, keep reading The Daily Reckoning Australia. If you’d prefer to trust (and follow) no man (or woman), you can always unsubscribe.

So it’s goodbye from me, and thanks for reading.


Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

Learn more about Greg Canavan's Investment Advisory Service.

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