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Bull Riding is Dangerous – But Investors Piling On (#66)


This Bull Market has been in full flight, galloping headlong while smashing record after record. Institutional and private investors are giddy with delight, as it seems this Bull will run indefinitely. And it might, considering the consistent and heavy intervention in the Markets by the Federal Reserve and the major Central Banks, keeping the interest rates ultra-low, while flooding the Markets with cheap money so asset prices can sustain their over a decade long flight.

For the wealthy institutions and private investors, those with above average borrowing power, this has been the golden-age of unprecedented, massive, governments’ and Central Banks’ largesse - with ‘wealth creation’ through asset price boosting through cheap money, as the one-way fast track to almost riskless extraordinary investing heaven.

The gain in wealth through asset price appreciation (almost risk-free) has been simply extraordinary. Unfortunately, it has also widened the wealth gap immensely, between the asset rich wealthy, and the ordinary people that depend on month-to-month pay-checks for their living. But then, in these far-right ‘Conservative’ times, who’s worried? So far for those who are (worried), without the political power to change anything, it has been purely academic.

The result of this extended ‘Quantitative Easing’ period has been an extraordinarily long records smashing ‘Bull Market’, with almost zero volatility, with the Federal Reserve and the Central Banks having the investors back. And, the other more dubious result has been, the distortion and destruction of normal ‘price discovery’ in the so-called free-markets, as intervention by Central Banks became a constant.

So now there is an almost unanimous consensus that this Bull Market is hot and running, and everybody from famous Billionaire fund managers to the private investors want to be on the Bull, for the ride of a life time.

So the question that invariably rises (persistently) is – are all the natural laws of economics and investing suspended (?), with the Federal Reserve and the Central Banks able to give governments ‘on-command’ economic growth, without recessions, year after year, and extraordinary ‘wealth creation’ through asset price increases through an endless supply of cheap money; returns without risk?

The last decade or so would certainly seem to indicate that the answer is, on the whole, an unqualified: Yes!

Year after year, economic growth and record setting asset price increases has been maintained, more or less uninterrupted (or interrupted very briefly) - and now into 2020, the bull-run seems to be gaining speed and strength, in spite of all the geo-political storms that broke and then dissipated, and in spite of all the dark clouds that still constantly hover over the horizons.

Yet doubts linger whether the ‘gods of Central Banks’ can really control the Markets indefinitely.

For, surely as the distortions in the markets and economies build with this extraordinary level of interventions, sometime, something is going to spin out of control and start a domino effect that will threaten this whole Central Bank construct, and the small doors to the exit will once again prove inadequate for the panicked stampede that will ensue.

As the galloping Bull attracts a growing ridership, almost unanimously (as the growling Bears have been shamed into uneasy silence) the risks rise automatically, even from the very unanimity of the consensus itself.

But there are other more arcane reasons to worry about – not the least of them are the now discredited economic fundamentals that seem to have been circumvented by the Central Banks forever.

While the US economy is now lauded as very robust, and without any material signs of weakness, the growth rate is not extraordinary by any means, but rather quite ‘normal’ by historical perspective at around 2% on average (2019 numbers).

China’s estimated latest GDP numbers came in at about 6.1%, which would indicate the slowest rate of growth in a very long time for that growing giant.

And the latest global GDP growth rate numbers, estimated by IMF (revised down), are 2.9% for 2019 and 3.3% for 2020. These numbers prompted the IMF to label the global economy as ‘sluggish’, but we would venture to say that they are almost anemic, considering previous ‘normal’ global growth rate figures of above 5%.

The above numbers would suggest a weak global economy, and not very ‘robust’ US and China economies. And, China’s numbers may be a lot lower in reality, if one adjusts for the inevitable ‘optimistic’ boost given by the Chinese government.

The other major economies of Europe (EU), UK, and India are not exactly burning up the turf either, and may actually be struggling with their own challenges as there are geo-political troubles that are plaguing the various countries around the World, which each by themselves would be great cause for concern in normal times.

There is the Boris Johnson’s ‘Hard Brexit’ and the struggling UK economy.

There is Trump’s Impeachment troubles, and trade wars, for the US.

There is India’s Narendra Modi’s policies with political and economic turmoil.

And of course, there is the Middle East, with an enraged and revenge seeking Iran, a very troubled Iraq, and the war torn Syria and Libya – to name just the most prominent of the global geo-political problems.

But in these seemingly abnormal times, the stock markets are flying high, and ever higher, as if the dawning of a global nirvana-like-state was very nigh, and all the political and economic turmoil roiling the World was literally non-existent.

After the Phase-1 trade deal between China and the US, the markets are pretending that trade troubles are over, even though the so called ‘trade deal – Phase-1’ was in fact just a temporary truce between the two contestants, as an embattled Trump tried to chalk-up political ‘wins’ to bolster political support at home.

But, the trade rivalry between the US and China is far from resolved, and is bound to flare up again as soon as Trump has a bit of political relief (and possibly even if he is not there), as the Democrats are not entirely happy with China’s past cheating ways, and are determined to hold it accountable even if in a less drama filled way than the overtly theatrical Trump.

More trade disputes with other regions are surely on the way (if Trump remains as President), not the least of which is the growing tensions between the US and the EU, inflamed regularly by Trump of course.

Russia’s political rise, globally, under the increasingly entrenched and dictatorial Vladimir Putin, is also at some point going to create a confrontation with the increasingly uneasy and embattled United States, especially if Putin loving Trump and his subservient and compromised Republicans lose political power at the next election.

And then there is the growing economic menace of unaddressed Climate Change.

The destructive conflagrations of the past years in western Canada, California, and the present ones of the Amazon and Australia, combined by ever more severe weather events, and the rising ocean levels, present an increasingly rising cost to humanity, both in economic damage, and to loss of human and animal life around the World. And even if the global and business leaders do finally decide to take drastic action to reduce the international rising temperatures (highly unlikely), it will be years before any action taken today will bear any mitigating fruit to make any difference at all. In the mean time the costs of decades global neglect regarding the dangers of Climate Change is going to exact a heavy price, economically.

Yet in Davos, the World’s elite are meeting today with a generally buoyant mood - as all in all, and in spite of their various concerns, they feel very good with the way their wealth and power has grown under the recent prevailing conditions.

That is proof of the power of the endless money printing ability of the Fed and the fellow Central Banks, to make the rich richer in almost all the countries, regardless of risks, political, economic and climatic.

Apart from the pesky niggles of questionably high valuations of the stock markets as a whole in the US, there are the nose-bleed valuations of the FAANGS – Facebook, Amazon, Apple, Netflix and Google (now Alphabet) - whose individual market capitalizations are bigger than some countries’ economies, and which collectively are skewing the entire markets dangerously.

Having said all that, the stock markets in the US seem to have entered an ‘euphoric state’ as the Bull Market charges onward and upward, seemingly endlessly, and all caution is being brushed aside as everyone piles on for the greatest Bull Ride.

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