|
|
Musings Report 2020-6 2-8-20 Extreme Caution Ahead
You are receiving this email because you are one of the 800+ subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Thank You, Contributors!
Thank you, Christopher L., Mark H., William C., Brian M., Robert M., Dennis G., Betty W., David E. and Michael M. for your renewing your extremely generous support of my work, and welcome new (or returning) patrons / subscribers Giussepe D., Randy S., John G., Todd W., Indy's Choice and Dan B.--thank you very much!
Extreme Caution Ahead
I've been making the case for the past week (see Highlights of the Blog below) that the coronavirus pandemic will be far more consequential economically and socially than is generally recognized for two basic reasons:
1. The coronavirus cannot be stopped from spreading globally
2. China's economy and the global economy are far more fragile than most people understand and therefore the pandemic is more than enough to push China and the global economy into a recession that will self-reinforce into a depression due to the global extremes of speculation, debt and leverage.
If this thesis tracks reality more closely than complacent confidence that the pandemic will soon end with near-zero financial / economic consequences, that would suggest extreme caution regarding at-risk investments would be prudent.
Two dynamics suggest caution:
1. Narrowing of stock market leadership
2. Pavlovian response to central bank stimulus
When the stock market increasingly depends on a diminishing number of high-flying stocks to power new highs, this narrowing of market leadership is a classic indication that the speculative bubble is nearing a peak, at which point a crash becomes a risk every investor must consider.
Tesla's rise from around $250 a few months ago to almost $1,000 per share is indicative of this dynamic. Most of the recent gains are the result of monumental increases in the value of a handful of big tech stocks: FIGMAAN (Facebook, Intel, Google, Microsoft, Apple, Amazon and Netflix).
This handful of stocks led the broader market higher in the last quarter of 2019, but last week's new highs saw a marked decline in the number of stocks above their 150-day moving average--a fundamental measure of the bullishness of the trend.
When broad market advances in markets including 3,000+ companies are dependent on unprecedented advances in fewer than 10 stocks, that's an extremely fragile advance, as any weakening in the handful of leaders will bring down the entire market.
Last month I prepared this chart depicting the Federal Reserve's stimulus compared to the size of the U.S. stock market.
The point was to question the received wisdom that the Fed's money-creation directly caused the stock market to add trillions of dollars in valuation.
Given the enormous size of the U.S. stock market (now $34 trillion) and the global stock markets ($85 trillion), could China's recent stimulus of $300 billion actually move markets that are 285 times larger than the stimulus?
It seems likely that what's actually driving markets higher is a Pavlovian response by speculators: central bank stimulus will push stocks higher, so let's borrow money and buy more stocks right now. This front-running central bank stimulus doesn't necessarily require access to central bank funds, it can draw upon private-sector credit and cash.
In other words, most of the money being poured into stocks is private-sector money, and some consequential percentage is borrowed or leveraged (borrowed on margin, etc.).
Put another way: if a central bank makes $300 billion available in the global financial system (of roughly $330 trillion), that $300 billion doesn't have to go into stocks. It could flow into gold, commodities, bat guano, real estate, bitcoin, bonds, junk bonds and so on.
Since there is nothing but speculators' Pavlovian response tying central bank stimulus to higher stock markets, this link is vulnerable to being broken. Should it break, central bank stimulus will no longer push markets higher.
For more on the fragility of global stock markets' relentless advance, I recommend reading Lance Roberts' latest essay:
The Next "Minsky Moment" Is Inevitable.
The risks ahead include everything from a short-lived decline in stocks to a full-blown crash as the world awakens to the consequences of the pandemic. This could manifest as a short-term bobble in global growth or the end of the entire bull market that started in 2009. Nobody can predict with any confidence how this will play out, so extreme caution is a prudent starting place.
Highlights of the Blog
The Pandemic Isn't Ending, It's Just the Beginning of Global Disorder and Depression 2/7/20
Pandemic, Lies and Videos: What Were We Thinking? 2/6/20
When China's Supply Chains Break, so Will the Delusion the U.S. Economy Is Invulnerable 2/5/20
Projecting "Wave 2" and "Wave 3" of the Coronavirus Pandemic 2/4/20
Best Thing That Happened To Me This Week
My page views per month more than doubled from 400,000-450,000 per month to over a million per month in the past two weeks. Perhaps this reflects an increasing demand for independent commentary and analysis.
From Left Field
NOTE: Many of the coronavirus articles are from the New York Times and the Wall Street Journal, as their reporting has been the most comprehensive in the MSM.
As New Coronavirus Spread, China’s Old Habits Delayed Fight: At critical turning points, Chinese authorities put secrecy and order ahead of openly confronting the growing crisis and risking public alarm or political embarrassment.
Wuhan Coronavirus Looks Increasingly Like a Pandemic, Experts Say
The US is a lot more corrupt than Americans realize, and the problem goes much deeper than Trump
"Ghettos" Colleges: How Paris Became an Apartheid City
Earth about to enter 30-YEAR ‘Mini Ice Age’ with -50C temperatures in coldest regions, scientists warn
Paris Still Failing to Integrate-the-Poor, as Required by Law: The City’s Socialist-Communist Government Is at a Loss as to Why
Coronavirus Pummels Wuhan, a City Short of Supplies and Overwhelmed
Coronavirus Closes China to the World, Straining Global Economy
China, Desperate to Stop Coronavirus, Turns Neighbor Against Neighbor
China Is About to Find Out Whether Its Mass Quarantine Worked "This is more and more like flu, which is like trying to stop the wind."
Losing Track of Time in the Epicenter of China’s Coronavirus Outbreak: People in Wuhan line up for groceries and medical checkups — and are skeptical of official reassurances.
Why Texans Don’t Want Any More Californians: Migrants from the Golden State could change the character of their new homes.
‘Admit Your Mistakes, Repent’: China Shifts Campaign to Control Xinjiang’s Muslims (via Maoxian)
The Subtle Muckrakers of the Coronavirus Epidemic:
Reporters and citizen-journalists in China are asking hard questions about the crisis. Why is the government letting them?
Professor Neil Ferguson on the current 2019-nCoV coronavirus outbreak. (10:36)
"One of the penalties of an ecological education is that one lives alone in a world of wounds." Aldo Leopold
Thanks for reading--
charles |
|
|
|
|
|
