Happy Christmas!

Exactly fifty-two weeks ago today on a blistering hot Saturday afternoon, I sent a video to my clients that raised a few eyebrows.

In a sentence, I opined we were heading towards another Global Financial Crisis (GFCII).

The threat of a China trade war had gone up in smoke and consequently, the markets took off like a scud missile towards the sky.

My fear wasn’t just that asset prices were precariously over-valued; it was that we were sitting on a massive global debt bubble that showed no signs of shrinking.

But my biggest concern was what it meant for our Cashcow Portfolio.

Meaning, if we were hit with GFCII there would be a significant cut in dividends, especially for bank stocks. Hence the reason we started selling down in October November 2019.

Most clients didn’t mind this news too much until I mentioned that if anyone was considering retiring, they should wait at least two to three years. i.e. if you have a good job hang onto it.

My reasoning was, we were in an aggressive cutting cycle (interest rates) and that quite possibly, rates would go down further thanks to a slowing economy. This would ultimately have a big impact on retirement incomes.

And then two months later COVID-19 reared its invisible head and our lives were tipped upside down.

I remember walking to work one morning in early March, when a young bloke pulled me up and asked…

“Do you reckon we’ll go into a depression?”

“No I don’t.”

And then after we parted ways I thought to myself, “Heck, what if he’s right?”

It was that dark.

So what does this mean for 2021?

The first distinction I would make is there’s a big difference between a rebound and a recovery.

What I mean is we’ve seen a massive rebound in asset prices, but we haven’t seen the same recovery in the economy. The two couldn’t be further apart at the moment.

In February, the markets were already over-valued and now the NASDAQ (US tech index) is 28% higher than pre-pandemic! Incredibly, 19% of these stocks are insolvent – they can’t meet their repayments in a record low interest rate environment.

But here’s the really scary bit. Government Bonds, which are supposed to be the safest asset class second to term deposits are in an even bigger bubble than the stock market.

And that’s my concern.

This market is now the most expensive market in history and yet investors, analysts, fund managers and speculators keep looking for reasons to justify buying it…in a fragile economy.

It reminds me of the very frothy dot.com bubble of 1999/2000.

Do you remember that…Y2K?

At the turn of the Millennium, we were (apparently) transitioning from the ‘old economy’ of bricks and mortar stocks into the ‘new economy’ of ‘clicks and mortar’. Hello tech stocks!

And now we’re back there again.

Case in point: Tesla.

The Tesla business has a profit margin of 1% yet its stock is trading on a price/earnings multiple of 1,200 times plus (twelve hundred)!

To put that into perspective, a stock with a price/earnings multiple above 20 (twenty) is normally considered expensive.

There is nothing new about this market, we’ve simply gone retrograde twenty years. Both the economy and the markets are being pumped up on hype and borrowed money. Lots of it.

Will you get a vaccine?

This will be the question of 2021…will you get a needle?

The US are now averaging 3,000 deaths a day. That’s the same number of people killed during the 9/11 attacks.

There is just as much at stake for science and the big pharmaceuticals as there is for the economy re the vaccines.

Yet the markets are priced as if world economies have never been in better shape and the vaccines will be rolled out hic-up free. (no pun intended)

If that were the case, interest rates wouldn’t be at ground zero and people wouldn’t be crying out for more aid and stimuli.

This market has the same look, sound and feel as the dot.com bubble of 1999/2000. And when it popped, that correction lasted for two years.

So here’s my Christmas message…

There’s no such thing as a bad market, only a bad strategy.

Have a wonderful Christmas!

Adam