Make sure you read to the bottom today. You’ve got a job to do!
Today’s Profit Watch contains a thought experiment. It’s whether I’m wrong.
As you may know, since the start of 2019 I’ve advised staying ‘cautiously bullish’ on Aussie stocks.
It’s held us in good stead for over 12 months now.
Yesterday, the ASX 200 touched record highs again — if only for a fleeting hour or so.
Are you worried about a big drop? Probably not.
And there’s a key point there? Big stock market turns happen when we all least expect it.
Mr Market’s job is to fool all of us, as much as possible.
Could it be the fuse is lit and I’m neither smelling the smoke or hearing that burning sound?
Let’s delve into the case for the bear to get his grip on us over 2020.
Poker champ Annie Duke calls this kind of thing ‘scenario planning’…
Did the richest man in the world just ring the bell?
My colleague Jonathan Evans sent me a link yesterday. It was on Amazon supremo Jeff Bezos’s new house.
The notable point was the price tag. It cost $245 million in Australian dollars.
These signs of extravagant excess can often be a signal of the market peaking.
Now, you could have said that back in late 2018, too.
I can say that with confidence because I made a similar point exactly then. I remember it was like yesterday.
I was sitting in a hotel in Baltimore with snow falling outside. A major piece of art went for a record price in that week.
And here we are, with stocks higher again.
But there is one big difference between now and then.
It helps to have been around a long time to see this.
Back in years 2011–14, the media wheeled out every stock bear and doomster to scare the pants off everyone.
You don’t hear from those guys so much anymore. Generally, the news and commentary are why stocks can keep making new highs.
It always pays to pause and reflect when you’re on the same side as the herd.
That wasn’t the case in January 2019. It felt difficult to say be long stocks then. It doesn’t now.
Perhaps I’m feeling a little too cosy in February 2020.
Here’s another point to watch…
Mr Market throws a joker out of the pack
All last year I said the biggest ‘asymmetric’ trade we could find would be something that sent interest rates up.
The market is saturated in the idea that rates will stay low, and for a very long time. Even Greece can borrow for a pittance.
Every wannabe hero economist points to demographics, debts and technology to make their case.
They may be right. Odds are they will be right. But it’s so accepted as gospel that there’s no money in backing the idea with money now.
There’s only a big payoff in something that upheaves any cosy consensus like this.
That would be a sharp rise in rates due to unexpected inflationary pressure.
I’ve pointed to the oil market for a long time. It’s big and important enough to send a shudder through global stocks if it got out of hand.
The fundamentals, and a few potential wildcards, suggested just such a scenario was in play over 2019 and early 2020. But it hasn’t happened.
But 2020 has produced a wildcard — the coronavirus.
We have no way of knowing where this leads.
It could be that the demand slump leads to bad loans in Chinese banks.
It could be Apple’s supply chain is disrupted and it cuts their earnings forecast. It could be…
The scenarios are endless. They could be nothing, minor — or major.
However, there’s a reason why financial experts and risk managers use the word ‘contagion’ to describe a financial panic…
Jim Rickards: Give me your view
There’s usually an unseen link from one problem to the rest of the financial ecosystem.
It can begin with one bank or broker going bankrupt as the result of a market collapse (a ‘financial patient zero’).
But the financial distress quickly spreads to banks that did business with the failed entity…and then to stockholders and depositors of those other banks and so on…until the entire world is in the grip of a financial panic. A bit like what happened in 2008.
Could coronavirus be a final tipping point? It’s not like anyone in financial markets understands the biology behind this.
We have no way of knowing right now. My colleague James G Rickards, a capital markets veteran, has a lot to say on the potential implications.
I went over this material yesterday. He may not be right. You can decide for yourself. But I don’t want to hear from people that agree with me.
I want to know what the men and women on the other side of the trade are saying. Only one side can be right, and it’s our money on the line.
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