Strange Times – 26.06.2020

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The Great Virus Bubble of 2020

Stock markets are as expensive as they have ever been. The economy is as bad as it has ever been. What is going on? Fund manager Damian Klassen attempts to answer this question in this article for Firstlinks. Klassen describes four types of bubble:

Manias – these are ‘this time it’s different’ bubbles, for example the South Sea bubble. Not the case today.

Intrinsic bubbles – these assume earnings will grow at an unsustainable rate forever. The huge rally in tech stocks since March has elements of this.

The Greater Fool – where investors don’t believe in the value of the assets they purchase, but assume they can offload them onto a greater fool in the future. Today is not this.

Informational bubbles – where buyers of stocks only buy because they see others buying and assume they know something they don’t. Today’s bubble has elements of this.

Similar to Hans Christian Andersen’s child finally calling out The Emperor’s birthday suit, this bubble will most likely pop when the selling begins. The key to the current rally’s longevity is the willingness of central banks to totally disregard moral hazard and act as the buyer of last resort. This year alone, the Fed has increased its asset base by $3 trillion to $7 trillion. How much longer will it be willing to buy everything.

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The Anatomy of a Rally

Legendary investor Howard Marks ponders the same question in his monthly must-read piece, The Anatomy of a Rally. Marks neatly describes the three stages of a bull market:

Stage 1 – when a handful of perceptive people spot improving signs

Stage 2 – when most investors realise that improvement is actually taking place

Stage 3 – when everyone concludes that everything will get better forever!

His view is that we passed through stage 2 sometime in April and are now well into stage 3. Mr Marks concludes with the following assessment: “The powerful rally we have seen has been built on optimism; has incorporated positive expectations and overlooked potential negatives. It has been driven largely by the Fed’s injections of liquidity and the Treasury’s stimulus payments…As such, it seems to me that the potential for further gains …doesn’t fully compensate for the risk of decline.”

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Source: Saul Eslake

US Presidential Election

November will come around soon. And Trump is struggling through America’s twin crises. The Economist expects him to fare poorly in electoral college votes. The US desperately needs a moderate, non-polarising figure. Is Joe Biden the man?

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Australia Stars as IMF Paints Bleak Economic Landscape

The IMF is forecasting the world economy to shrink 4.9% in 2020 and to rebound 5.4% in 2021. The IMF did note that growth in Australia (minus 4.5% in 2020) is faring much better than other developed economies such as the UK (-10.2%) and the US (-8%). Will Scott Morrison phase out the $70 billion JobKeeper program in September?

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World trade has fallen, though so far not as much as during the GFC, despite a less amenable trade policy environment.

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