Is it a Bubble or is it not? Bubble is in the eye of the beholder

Local market started up and then faded to be a flat day before a pump at the close delivered a slight positive day on another low turnover day. Health Care and Retail were the best sectors while Tech and Banks were the worst. That is three weak turnover days in a row and all three have defied global sentiment. It does look like the month/quarter end asset allocations are starting to play out and it’s holding up more growth/value diversified markets like Australia while negative for growth dominated markets like US. It is clear that the buyers are global investors as small cap and micro cap stocks have been negative for the last 5 days in a row while the market has been up 3 out of the last 4 days. Asian markets had a relief day after recent bashing while clear signal is that the Chinese are tightening and that is influencing sentiment for equities, currency and commodity markets.

The corporate stories of the day were Resolute Mining (RSG) and Netwealth (NWL). Resolute seems to have lost a mine in Ghana. This is the classic sovereign risk when investing in Emerging Markets and where we are in the macro cycle. Emerging Markets are under real economic stress. As we eluded to in previous updates, Emerging Markets are under stress as reflation cycle bites and moves in Turkey, Brazil and Ghana are classic examples. It is not the first time an African country canceled a mine deal and it won’t be the last. Ghana is considered relatively better than most. Expect most African and South American miners to see some derating after this event. We have been positive on the gold miners on inflation outstripping growth, yield and rates in the medium term but we expected Emerging Market risk and only had quality Aussie gold miner exposures. It pays to manage risk before it happens than after it happens. Netwealth and Hub have been the best performers in the fintech asset management platform area. Netwealth update was another classic example of market ignoring the macro and overpaying for the micro. Hub was hit hard as well. Growth stocks with extreme multiples do not have a lot of buffer for things to go wrong. Netwealth and Hub are quality stocks but they will attract lower multiples into the future as market starting to price in higher yields and more risk. Nothing like a double digit bashing in market darlings to get investors to face reality.

That leads to my next point that gets asked all the time. 

The question about…Is it a bubble or is it not? Is tech a bubble? Is property a bubble? Are equities a bubble? Are bonds a bubble? The reality is bubble is like measuring beauty. Bubble is in the eye of the beholder. If you are a growth investors, it is not a bubble. If you are a value investor, it’s frog in boiling water bubble. If you are GARP (i.e. Growth At Reasonable Price Investor), reflation makes it a bubble. Historically non correlated asset classes are now correlated due to all major economies taking rates down below inflation. Reflation is the bubble buster and it’s taking no prisoners. Remember…price is what you pay and value is what you get. Just because you paid a high price does not make it cheap after it falls 50%. Trust me, we have all been there. We are investing to make returns. We are not promoting religion or a way of life. It does not matter what you pay as long as the next person is willing to pay more for what it could be. If that is not the case, you are paying too much. History has a way of proving bubbles do not last and data has a way of separating bubble periods (i.e. more risk than return). Markets are not always logical but reality is undeniable. Paying too for relatively lower risk weighted return over time has never been a profitable long term strategy.

Cheap debt forever strategy by Central Banks have pushed up asset prices in all categories while the underlying logic is broken as they lose control of the bond yields. We are in bubble territory but markets do not reset without catalyst and generally it tends to be a left field event. In every asset class, there are areas of better risk/return than most but in a bus crash, everyone gets hurt. Central Banks are trying to deflate the asset bubbles while trying to avoid the crash. They do not have a good track record with this strategy. They can burn more future growth and buy more time but reality isn’t going anywhere and their strategies are costing more and delivering less. There are always the low probability options like (1) we could have another economic slowdown to weigh down inflation or (2) we could manage better than expected growth forever while deleveraging. But I live in the real world where majority of the population are living paycheck to paycheck with rising inequality and rising cost of living…and that does not add up to better growth outlook. Capitalism is morphing into Socialism by default as politicians choose their own survival in upcoming election cycle. We can lie to ourselves like politicians and central bankers but eventually we all have to grow up and act like adults. If we don’t, the cycle will do it for us.

Comments on US market last close… US market was patchy and positive before selling in the afternoon took it negative. RUSSELL leads the falls -2.23% then NASDAQ -2.01%, S&P -0.55 and DOW flat. DOW was up 200-300 points on opening up stocks but gave that up. Bonds, USD, Gold and Oil higher while Copper lower. Energy and Industrial were the best green sectors while Tech and Retail were the worst red sectors. Suez Canal is being blocked by a broken down cargo ship... just to add to problems and block the global transport logistics and inflation. Oil price got a bite on that as well. It’s a push by growth fundies to get the quarter end without rolling over while passive money to rotate out of equities and into bonds. Looks like that trade will run into April.

Full SUNSET STRIP report with end of day market stats are on the attached link.

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