It’s (another) record

  • Trending higher or lower?
  • The merchants of doom
  • How every bull market ends

This market rally just won’t stop.

That’s a new record high for the Dow Jones Industrial Average.

It’s a record intra-day high, and a record closing high.

Of course, all rallies ‘just won’t stop’, until…they finally do stop.

That’s the problem. The market’s relentless grind higher sucks in as many investors as possible.

After all, what if the market keeps going up? What if the Dow Jones Industrial Average hits 20,000 points…or even 25,000 points…before the next crash?

Heck, worse still, what if the markets never crash again?

Do you really want to still be in cash, all while stocks keep edging higher and higher?

The short answer is, yes. We’ll explain why below…


Overnight, the US Dow Jones Industrial Average closed up 120.74 points, or 0.66%.

The S&P 500 index gained 14.98 points, or 0.7%.

In Europe, the Euro Stoxx 50 added 48.12 points, or 1.67%. Meanwhile, the FTSE 100 closed down 0.03%, while Germany’s DAX index gained 1.33%.

In Asian markets, Japan’s Nikkei 225 index is up 176.93 points at time of writing, or 1.04%. China’s CSI 300 is up 0.61%.

In Australia, the S&P/ASX 200 index is currently trading up by 23.39 points, or 0.44%.

On the commodities markets, West Texas Intermediate crude oil trades for US$46.46 per barrel. Brent crude is trading for US$48.47 per barrel.

Gold is trading at US$1,334 (AU$1,754) per troy ounce. Silver is trading for US$20.14 (AU$26.48) per troy ounce.

The Aussie dollar is worth 76.05 US cents.

Trending higher or lower?

While we’re here in Baltimore, Maryland, on the US east coast, your editor is working to an odd time schedule.

We’re bailed up in meetings all through the day…and then we’re bailed up in our hotel room…[steady]…each evening, knocking out the daily issue of Port Phillip Insider, and answering any questions from our team of staff back in Melbourne.

As a result, we’ve had the chance to tune into the odd half hour or so, which is about as much as we can take, of finance news channel, CNBC.

Although CNBC is mainstream, and generally a cheerleader for markets, even one of their interviewees today was befuddled that both stock indices and bond prices are near or at record highs.

Sure, the yield on two-year US bonds is higher than it was four years ago, during the height of the US Federal Reserve’s money printing program.

But these days, highs and lows are relative.

Look at a five-year chart of the two-year bonds, and you could rightly ask what we’re talking about when we mention record low yields:

chart image

Source: Bloomberg
Click to enlarge

Those bloomin’ yields are soaring. Look out above!

Unfortunately, judged by a longer term, it’s definitely more a case of look out below. Here’s a chart of the US two-year bond, going back to 1978:

chart image

Source: Bloomberg
Click to enlarge

The short term trend may appear to be higher, but the longer term trend (for now, anyway) remains lower.

But don’t get too complacent. Just like the stock market bubble, which must end one day, the bond price bubble will end one day too.

If only we knew when.

The merchants of doom

The Aussie market has ignored all the threats about a downgrade to Australia’s AAA credit rating.

As the news gets worse, it seems, the market plunges its fingers deeper into its ears.

But maybe this news item will catch the market’s attention. From Bloomberg:

The biggest losers after Prime Minister Malcolm Turnbull scraped through to win Australia’s fractious elections could be homebuyers facing higher costs on their A$1.6 trillion in mortgages.

Ooh! That’s one heck of a hefty number.

It’s roughly the same amount as Aussies have tucked away in superannuation.

But a big number doesn’t necessarily mean it’s a safe number.

Despite your editor’s wildest predictions, house prices, and the value of loans against those houses, keep going up.

The chart below shows this perfectly:

chart image

Source: Bloomberg
Click to enlarge

The chart title suggests that low rates have fuelled the demand for Aussie home loans. You could equally say that higher rates from 2009 to 2011 fuelled home loans, too.

The supposed recovery, and the casting of Australia as ‘different’ to the rest of the world, caused many folks to rush into the market to buy a house and secure a loan.

But as we look at the chart, we think to ourselves, why should our bearish view on housing (and stocks for that matter) be any more correct now than it was in 2009? That’s when we called for a 40% fall in Aussie house prices.

Perhaps we should just listen to the folks at Money Morning Trader. Here’s what Callum Newman told his readers earlier this morning:

I wonder what Crispin Odey is thinking right now. He’s the UK-based hedge fund manager and founding partner of Odey Asset Management, who came out in March last year saying that Australia was heading for recession. He said that was true of all countries dependant on China for their national income.

He was “bearish” on China’s growth outlook, placing natural resource exporting countries in the “sick bay”. At the time, he put Aussie banks on a bad debt watch; and he expected the Aussie dollar to fall.

None of that has really come to pass. Resource stocks are now breaking out too.

Even the most credentialed and richest guys in the market can get it very wrong — like we all can. Odey put his money where his mouth was, too. At one point his personal wealth was down £200m.

An article that profiled him in February 2015 suggested he expected share prices to be “devastated — it will be a downturn that will be remembered in 100 years.”

And yet just take the news on China this week. International real estate agency Knight Frank released their first quarter update for 2016, measuring the real estate performance of 150 cities worldwide. The key takeaway was that Chinese cities, of all places (remember the ghost towns?), led house price gains globally in the year to March. Prices in Shenzhen are up 60%, and they’re up 30% in Shanghai.

Suffice it to say, this is a great example of how easy it is to allow opinions to lead you astray and suck you in. That’s especially true when the merchants of doom are out in force.

Callum wouldn’t be having a pop at your editor, and others of our ilk, with his ‘merchants of doom’ talk would he?

We think he may. Regardless, you can check out Callum’s Money Morning Trader service here.

And who knows, maybe he’s right. Maybe property prices and stock prices, and even whiskey prices and golf bag prices, will keep going up.

In truth, that wouldn’t be entirely inconsistent with our view on the eventual rise of high inflation and hyperinflation.

It’s also why, even though we recommend investors hold a big chunk of cash, we’re not cash ‘junkies’. Aside from cash, we recommend holding good stocks, some speculations, and a big old hoard of gold, too.

We’ll be the first to admit that that’s a hedge-your-bets portfolio. But in our view, it’s also a sensible portfolio, given this market.

All we can really say to investors is to avoid the temptation to let the crowd pull you lock, stock, and barrel into stocks. As the market rebounds, plenty of folks will say how the market has gone up X%, while most retail investors have only made Y%.

Don’t fall for it. It’s typically how every bull market ends. The fear of missing out draws almost every last investor into the market.

Stocks may be going up, but we’ll continue to say that we ain’t buying this rally. We’re happy to be an underperformer. Because in the near future, we figure we’ll be proven correct as markets head south.