Things are getting weird out there. Financial markets are exhibiting the same signs of mental illness and instability that our locked-down population is. Protests, bouts of euphoria, distancing from reality, negative real interest rates, forced welfare payments, speculative manias and social media pack hunting. But what does it all mean for the thing we care about in the end as investors? The price of assets and their returns. Especially in the stockmarket.
A few years ago, a friend who runs a foundation for ambitious Australian students asked me to introduce a troupe of them to someone with first-hand front-line financial market experience in London. That’s where all his students wanted to work, apparently.
Tim Price kindly answered the call and unleashed a barrage of, shall we say, “down-to-earth” career advice and insights into markets on the unsuspecting students. You’ve already heard from him in Fortune & Freedom’s past.
Tim is a value investor. He calculates a price he’s willing to pay for investments. And looks for whether the actual price is above or below. If it’s below, he might be a buyer.
But value investing is tough in a world of absurdities, as I mentioned earlier. When everyone is gambling like mad, value investors find it harder to find undervalued stocks. (I can’t reveal what Tim recommends you do here.)
Luckily, Tim also wrote a book called Investing Through the Looking Glass: A Rational Guide to Irrational Financial Markets. Now that’s more like it!
The thing is, since the book came out, things have only become more bizarre. Tim began his recent report with the headline “Unbelievable” and continued with this:
I have been working in the capital markets for 30 years, but I have never been more concerned about market stability than I am now. Things are happening in asset markets that I simply never ever expected to see.
– Tim Price, The Price Report
The list is a rather long one too. But notice how Tim translates this into a worry about what happens next – what he calls “market stability”. Back to that below.
But first, what are these extremes and absurdities we should be worried about?
Signs of a sick market
We’ve covered the drama over GameStop and the Reddit flash mob plenty in the past. That’s not normal action.
Another big giveaway is practically a tradition at this point. The stocks that are based on future tech dreams are booming. But those which struggle to break loose from hard reality, such as commodity mining stocks, are not.
Goldman Sachs keeps an index of stocks that are non-profitable tech stocks. Think of it as a measure of a tech bubble. The index bounced around between 80 and 120 for four years. Then, since the pandemic crash bottomed out, it has shot up to around 400!
That’s absurd. But it’s also what you’d expect if you agree with our commentary of the past. People are panicking out of money because it is being printed like mad. They’re turning to the likes of bitcoin and speculative stocks.
This specumania is exactly what happened in the past when governments spent and printed money like mad. Everything suddenly became “an investment” simply because money is worth less. The worry is that money will become worthless next. But that’s another story. We’re sticking to signs of specumania today.
The next one is volume on the US stockmarket. Remember the narrative we were fed about robots taking over the stockmarket? Automatic algorithmic trading? Well, it may struggle to explain just how much trading on the stockmarket has ballooned.
A Bloomberg chart highlighted by Crescat Capital shows how trading in US shares is about eight times higher than usual and about 3.5 times the previous record high in 2004…
Bloomberg reports it’s the same in the options market:
A similar measure of euphoria in the options market — volume in bullish bets via call options — has itself hit another record.
“We’re seeing so many signs of frenzied speculation,” said Chris Weston, head of research at Pepperstone Group Ltd. “This is part of the retail trader explosion.”
Explosions are great. Just don’t get too close…
Then again, the boom is translating to higher prices. Absurdly high relative to actual profits of companies. Fortune Magazine has this headline: “4 metrics show the stock market is now wildly overvalued”.
Relative to the economy, it’s even more extreme. While the UK posted its worst economic performance for more than 300 years, stocks have boomed…
But what’s the market stability which Tim Price mentioned?
Well, a speculative mania tends to be the climax of a boom. The last bit…
Just before the plunge
Tim Price quotes investing guru Benjamin Graham in his report I quoted earlier:
In the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude to the investment merits of common stocks. Why did the investing public turn its attention from dividends, from asset values, and from average earnings, to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the record of the past were proving an undependable guide to investment; and, second, that the rewards of offered by the future had become irresistibly alluring.
Doesn’t that sound familiar?
Here’s the good news. The UK may well be a fintech hub. But our stock market is more exposed to those stocks which haven’t been caught up in the mania too. Large commodity producers and oil stocks, for example. These have been left behind. And investing in what has been left behind is a much better prospect than investing in what already boomed.
More on that from Nigel Farage here.
Editor, Fortune & Freedom