- (Market truism) Bubbles never pop…
- … when the mainstream is looking
- Ray Blanco: one metric that hints we’re safe (for now)
- The markets got “new issues”
- Economic numbers reinforce weak recovery
- Team Biden and up-in-the-air tax policy
- A reader pushes back on Texas’ deep freeze and renewable energy… The 5 doesn’t take sides on climate change… but asks the question: Who decides?
Everywhere you look, the business press is telling you the market is a bubble on the verge of bursting — which is almost a sure-fire indicator that it’s not.
It’s true that prices of U.S. Treasuries are falling — which has the effect of pushing yields higher. A 10-year note yields 1.3% this morning, the highest in nearly a year.
But do rising interest rates have to mean trouble for the stock market — as the Financial Times headline implies?
That’s not how it works when the economy is recovering, however weakly, from a recession. And the numbers we shared yesterday on retail sales and industrial production point to recovery, however weak.
And then there’s this…
Ah yes, the “Buffett Indicator” — which is the market cap of all U.S. stocks divided by the dollar value of U.S. GDP.
It is indeed at record highs, higher than at the peak of the dot-com bubble in early 2000.
But in early 2000, the Federal Reserve was slamming the monetary brakes — reversing an unprecedented round of money printing in anticipation of a global “Y2K” computer meltdown that didn’t materialize. A flood of EZ money making its way to Wall Street was suddenly shut off.
Now? The minutes from the January Fed meeting, released yesterday, said that “economic conditions were currently far from the committee’s longer-run goals and that the stance for policy would need to remain accommodative until those goals were achieved.”
“Accommodative” is Fed-speak for “Money printer go Brrrr.”
Market truism: Bubbles never pop when the mainstream is wringing its hands about the existence of a bubble.
No one remembers now, but there was similar hand-wringing around this time three years ago. Stocks were going through a sharp sell-off at the time — the fallout from a very crowded trade in ETFs keyed to low market volatility.
In our Feb. 13, 2018, edition, we noted that…
- Former Fed chair Alan Greenspan had recently warned of a “stock market bubble”
- The Wall Street Journal was carping that “this crazy, expensive stock market is for speculators, not investors”
- And Moody’s Analytics chief economist Mark Zandi said, “The only other time in the past half century that stock prices have been so highly priced was during the tech bubble.”
Again with the highest-since-the-tech-bubble references. But on that day, we cited figures suggesting only an 18% probability of a bubble at that moment — when the Dow was 24,567.
This morning, three years later, the Big Board is nearly 7,000 points higher.
Again, bubbles don’t pop when the mainstream frets about bubbles. Instead, they pop when the mainstream and the masses deny the existence of a bubble. That was the tell for the dot-com bust starting in early 2000 — people believing it was a “new era” when clicks and eyeballs mattered more than sales and profits.
But if you’re looking for definitive proof that the bubble’s bursting is not nigh… our tech and biotech maven Ray Blanco has found it.
“One simple metric,” he says, “gives us a huge hint at whether stocks are likely to continue their rally in 2021 or whether the music could abruptly stop, leaving investors scrambling for chairs. Better yet, that metric also points us to one of the best places to position ourselves for the weeks and months ahead.”
The metric is… new issues.
“New issues refer to the issuance of new stock by companies,” Ray explains, “whether through an initial public offering (IPO) or one of the mechanisms we saw gain popularity last year, a special purpose acquisition company, better known as a SPAC.
“Since new issues tend to be some of the most exciting names on the market, they’re also the strongest magnets for speculative dollars when investor dollars flow freely, and they’re also the first area to see weakness when the bull begins to roll over.
“In the past year, 172 new stocks have begun trading — totaling $85.5 billion in new market capitalization added to investor portfolios. On average, stocks that have gone public in that year timeframe have returned 77.5% during the intervening months.
“That’s stellar average performance. And it indicates that investors continue to be eager to pile into new issues, even now.”
Perhaps you won’t be surprised to learn that technology is grabbing the lion’s share of this new-issue money.
“Tech deals made up more than half of all the deal volume we’ve seen enter the market in the past 12 months,” says Ray. “Add in companies in other industries whose main disruptive lever is technology and it’s clear that a very large chunk of the new names hitting the market fall inside our wheelhouse.
“Right now, the deal pipeline continues to look robust. As I write, there are 133 tech-focused SPACs currently in ‘search mode,’ seeking out acquisition targets to bring public. On top of that, big-name tech and tech-adjacent firms like Affirm, Instacart and Robinhood are expected to go public via the traditional IPO route in 2021.”
But why now? What’s pushing new issues higher?
Yes, Fed money printing is at work for sure. Ray readily acknowledges that.
But ponder this: “Four of the seven biggest publicly traded companies today — worth a combined $3.4 trillion — were founded in 1998 or later. We’ve never seen business ideas impact our daily lives so fast or so deeply. And that’s hugely exciting as a tech investor.
“At the same time, stocks ‘work’ again. For years, founders have turned to the seemingly unlimited capital from venture funds and other private investors rather than deal with the nonstop headaches and scrutiny of becoming publicly traded. Today, there are about half as many publicly traded companies as there were in 1997.
“But with SPACs gaining popularity and new attention on the upside potential afforded by the public equity markets right now, that’s finally changing.”
Ray’s bottom line: “With plenty of investors hemming and hawing about what happens next for stocks, new issues suggest that this ride ain’t over yet. Instead, opportunities abound for tech investors and the broader market in 2021.”
And one of the opportunities that has Ray most excited right now is a tiny player that might hold the key to Tesla’s plans to finally make electric vehicles accessible to the masses.
If events play out the way Ray anticipates, you could make 10 times your money in the space of only three months. See for yourself at this link.
To the markets — where the major U.S. stock indexes are taking a sorely needed breather. You can’t have a bull market without sell-offs along the way.
At last check, the Dow is down 1% from yesterday’s record close — putting it at 31,303. The S&P 500 is down a little more sharply, back below 3,900. And the Nasdaq is down hardest — off 1.6% at 13,738.
The earnings-season headliner is Walmart — whose profits missed expectations and whose 2021 guidance is disappointing. WMT is down 5.7% as we write.
Alas, money flowing out of stocks isn’t moving toward precious metals. Gold has moved little in the last 24 hours, still stuck around $1,774. Silver is about to lose its grip on the $27 level. But platinum has stabilized around $1,250.
Bitcoin is up slightly at $51,717.
The economic numbers of the day are a mixed bag, reinforcing the “weak recovery” theme. Permits for new housing crushed expectations — up 10.4% in January. The “Philly Fed” survey of mid-Atlantic manufacturing looks strong, as it has for eight months now.
But the little chart of horrors is moving in the wrong direction. New jobless claims in the week ended last Saturday rang in higher than expected… and the previous week’s total was revised upward.
And at the risk of repeating ourselves, the number is still higher than it was at the worst point of the 2007–09 “Great Recession.”
Once the Biden administration gets its $1.9 trillion “stimulus” in the rearview… what happens to taxes?
Jim Rickards is back today as he helps us continue to tease out the Biden agenda for the first two years — which might be the president’s only opportunity to make policy with fellow Democrats controlling both houses of Congress.
“Democratic tax legislation will be historic both in its sweep and the size of the tax increases,” Jim says. “The individual top tax rate will be raised from 37% to 39.6%, where it was under Obama. Capital gains will be taxed at the same 39.6% instead of the current 20% [on incomes over $1 million a year]. Corporate taxes will be raised from the current top rate of 21% to a new top rate of 28%.
“Other likely proposals include eliminating many business and itemized deductions. The impact of this is to raise effective tax rates even if statutory tax rates stay the same because of lost tax benefits on the deductions.”
Those are the broad outlines: “There are widely divergent views on tax policy within the Democratic Caucus in Congress,” Jim reminds us. “It will take time to negotiate and compromise on those views before discussions with Republicans even begin.”
Or maybe nothing will come of it at all, if history rhymes. Coming out of the “Great Recession,” Barack Obama ultimately held off on any income tax increases until he’d secured a second term. And Republican control of the House was no obstacle.
“Instead of spreading lies about green energy going offline causing the Texas blackouts,” a reader writes…
The reader copied and pasted a lengthy Associated Press article that said, in part, “In reality, failures in natural gas, coal and nuclear energy systems were responsible for nearly twice as many outages as frozen wind turbines and solar panels, the Electric Reliability Council of Texas, which operates the state’s power grid, said in a press conference Tuesday.”
A careful reader would note we didn’t say green energy was the sole cause. Nor did we weigh it against other causes. That’s way out of our league. We simply said it was likely the transition in Texas’ energy mix over the last decade was a factor.
It appears that the aforementioned ERCOT — one of those horrible “public-private partnerships” that’s a cover for sheer crony capitalism — cheaped out on maintenance across the board. Nothing was properly winterized — especially not the natural gas pipelines whose failure accounted for the lion’s share of power cuts.
Ditto for the wind turbines. “In Northern Europe, wind power operates very reliably in even colder temperatures, including the upper Arctic regions of Finland, Norway and Sweden,” University of Sussex professor Benjamin Sovacool tells Newsweek. “As long as wind turbines are properly maintained and serviced, they can operate reliably in temperatures well below zero.”
Bigger picture: Whenever we address “climate change” in these virtual pages, we do so not to take sides but rather to raise the critical question of “Who decides?”
We reprise a passage by Citadel econ professor Richard Ebeling that we ran in late 2019: “Practically every one of the proposals being made to deal with the claimed problem of global warming sees salvation in the caring and tender arms of those in governmental authority.
“From carbon taxes to the Green New Deal, politicians, bureaucrats and self-selected ‘experts’ are to regulate and centrally plan the environmental redemption of the world.
“The master planners within nations and in international, intergovernmental planning agencies are to decide the fate of mankind, that is, by those who arrogantly claim to possess the knowledge, wisdom and ability to set the planet right, and all of them with asserted unbiased and selfless motivations and intentions.
“Nearly nothing is to be out of their purview and power: where and how we shall be permitted to live and make a living, the foods we are to be allowed to eat, the clothes we will wear and the means of transportation by which we get around.”
That’s what the guy in Massachusetts meant by “breaking the will” of everyday homeowners and drivers, no?
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. We suspect one other factor that’s making “bubble babble” a thing right now is resentment from the Establishment against the WallStreetBets crowd on Reddit.
The Redditors showed up the power elite in the most humiliating way. The lucky ones collected a payday the elites believe they didn’t “deserve.” And the unlucky ones didn’t care that they lost money; they were taking one for the team.
The GameStop-Reddit-Robinhood phenomenon is the subject of hearings by a House committee today. We’re certain they’ll skirt the core issue that gave rise to the phenomenon in the first place — revenge for 2008. Can’t talk about how the problems that led up to 2008 were never solved, can we?
As such, the hearings are sure to generate more heat than light. At best, we can only hope they’ll generate a laugh or two — which we’ll pass along tomorrow.
