Fantastic piece by Andy Kessler in the 7/2 WSJ analyzing the current market *cycle*, what could go wrong and the various potential bells ringing.
(We are currently in a cyclical bull market cycle that began in February 2016; but we are also in a larger secular bull market cycle that began in March 2009. I understand Kessler’s analysis to be aimed at the secular bull market, as most market commentators do not acknowledge the 2011 and 2015-2016 cyclical bear markets. The distinction is important, because if the secular bull market cycle is close to an end, that means a large-scale bear market of 30-50% is in the cards.)
While appropriately hedging himself by acknowledging that we will only know in hindsight, Kessler strongly implies that we are in a mania, not a raging bull market, citing the conditions that led the 1987, 2000 and 2007 manias running out of buyers, and outlining what could go wrong today:
“Today, money is flowing into exchange-traded funds. But because ETFs are weighted by market cap, that money flows into the biggest names: Facebook, Amazon, Apple, Microsoft, Google. Classic momos, or momentum stocks. The church of what’s working now. What could possibly go wrong?
“Sure, the economy is picking up, earnings are growing, and the business is being transformed by mobile, cloud and artificial intelligence. But who doesn’t already know that? On the flip side, we’re at the start of a 30-year cycle of interest-rate raising, nonhousing debt is higher than in 2008, and deciphering China’s direction is as hard as Chinese arithmetic.”
And he ends with the various potential bells (my emphasis):
“Are there any bells ringing now? How about a few months back when someone looked me in the eye and insisted—without cracking a smile—that Uber was a bargain at a $68 billion valuation? Or when, with shades of AOL and Time Warner, Amazon bought Whole Foods for $13 billion—and then its stock went up by more than that amount? Or when Tesla missed its numbers again and the stock rose anyway? Or when the price of a bitcoin, backed by nothing but the faith of devotees, hit $3,000, tripling over a year? Or when Hertz stock rose 14% on news of a deal with Apple for a self-driving car that is still vaporware?”
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It is tough to get secularly bearish without a poor macro backdrop – the appropriate credit signs are just not in place at the moment, and the US economy is nowhere near a recession. Consider, for example: My good friend likes to say that by the time Greenspan “pulled the rug” in 2000 the private lending market had completely dried up. Today? WIDE open.
But as Kessler outlines, the seeds and signs are in place…especially if historically significant valuation metrics are to be believed.
For now, investors looking for a major top should take baby steps. At bare minimum we need a volatile topping framework of multiple 5-10% dips over the course of months.