Market Analysis: Andy Kessler Calling the Top (?) 

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?”

* * * * * * * * * * * *

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.


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