Avoid the ‘crash we have to have’

Friday, 16 February 2018
Melbourne, Australia
By Kris Sayce

  • On the way to a record high?
  • We agree, Mr Dalio
  • Like the internet

If you’re not reading Vern Gowdie’s work, you really aren’t doing yourself any favours.

The world’s markets fell more than 10% last week.

Since then, they’ve rebounded. But while many may think that it was ‘the correction we had to have’, we’re not sure the next ‘correction’ will be so routine.

Our view is that last week’s market action is simply a taste of what could be a much bigger collapse within the next two years — the crash we have to have.

To understand more about how and why the next collapse could happen, make sure you listen to Vern’s take on the markets now. Details here.


Overnight, the Dow Jones Industrial Average closed up 306.88 points, or 1.23%.

The S&P 500 gained 32.57 points, or 1.21%.

In Europe, the Euro Stoxx 50 index closed up 19.8 points, for a 0.59% gain. Meanwhile, the FTSE 100 added 0.29%, and Germany’s DAX index gained 0.06%.

In Asian markets, Japan’s Nikkei 225 index is up 360.66 points, or 1.68%. China’s CSI 300 is up 0.8%.

In Australia, the S&P/ASX 200 is up 2.91 points, or 0.05%.

On the commodities market, West Texas Intermediate crude oil is US$61.72 per barrel. Brent crude is US$64.73 per barrel.

Gold is trading for US$1,359.27 (AU$1,706.66) per troy ounce. Silver is US$16.91 (AU$21.23) per troy ounce.

The Aussie dollar is worth 79.64 US cents.

Bitcoin is US$10,078.23.

On the way to a record high?

As we suspected, last week’s correction didn’t turn into a full-scale collapse.

And although the market hasn’t yet recovered to the previous record high, as we noted last week, we wouldn’t be surprised if it did so soon.

chart image

Source: Bloomberg
Click to enlarge

Investors are excited again.

Last week, the market feared rising interest rates.

This week, the market relishes rising interest rates.

Good news for bulls.

But with a market that fickle, we’d advise those bulls not to forget just how quickly the market can turn.

We agree, Mr Dalio

We read the following with interest from Bloomberg:

Ray Dalio, billionaire philosopher-king of the world’s biggest hedge fund, has a checklist to identify the best time to sell stocks: a strong economy, close to full employment and rising interest rates.

That may explain why the firm he created, Bridgewater Associates, has caused a to-do the past two weeks by quickly amassing an [sic] $21.65 billion bet against Europe’s biggest companies. The firm’s total asset pool is $150 billion, according to its website.

As checklists go, we figure that’s one of the better ones we’ve seen.

It makes sense. Investors buy stocks in anticipation of an improving economy.

You can measure whether an economy has improved (at least theoretically) by looking at its apparent strength, at the unemployment level, and whether interest rates are going up.

However, most investors don’t know and can’t tell when an economy is about to get worse. That’s why stock markets in particular tend to ‘over shoot’ and go higher than they otherwise should.

While we find ourselves agreeing with Mr Dalio’s company on that score (yes, confirmation bias), we cast our mind back to a story from just a couple of weeks ago.

As reported by CNBC on 23 January:

Bridgewater Associates founder Ray Dalio said the tax cut could lead to some big gains for the U.S. stock market.

“We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws,” Dalio told CNBC on Tuesday from the World Economic Forum in Davos, Switzerland.

The investor said we’re in the late part of the cycle and predicts we will see “a market blowoff” rally, fuelled by cash from banks, corporations and investors.

“There is a lot of cash on the sidelines.… We’re going to be inundated with cash,” he said. “If you’re holding cash, you’re going to feel pretty stupid.”


Everyone tells us the US economy is improving. Admittedly, we’re not really sure we believe that.

The unemployment rate is at 4.1%. That’s the lowest level since December 2000.

And as for interest rates, the US 10-year bond yield is at 2.9%. That the highest it has been since September 2014.

More than that, the yield has more than doubled since the July 2018 low:

chart image

Source: Bloomberg
Click to enlarge

We like Mr Dalio’s checklist.

A strengthening economy.

Low unemployment.

Rising interest rates.

We like that as a reason to short-sell European stocks.

We like it as a reason to short-sell US stocks too.

We wonder if Mr Dalio’s Bridgewater Associates will soon change its tune on the direction of the US market.

Like the internet

When the price of cryptocurrencies soars, we crow about it.

When the price of cryptocurrencies slumps, we seem to be a little quieter about it.

We’re only human. So hopefully you’ll forgive our recent bashfulness on the subject.

It doesn’t help that your editor has been and remains an ignoramus on the matter.

Besides, just as we may have hollered just a little less as the bitcoin price fell, it’s also true to say that the mainstream press has hollered a little less as the bitcoin price has rebounded.

As we write, bitcoin is now above US$10,000. The days of it sinking below US$7,000 seem far behind us…even though it was only just over a week ago.

chart image

Source: Bloomberg
Click to enlarge

Now of course, we wonder what comes next for cryptocurrencies.

The chart shows the classic pattern of any new trend that’s vying to become mainstream.

The early adopters go wild with enthusiasm, pushing the price sky-high. Unfortunately, in their excitement, they push it higher than the market can cope with.

Think of the NASDAQ stock bubble…or even the roll-out of fibre-optic cabling in the late 1990s and early 2000s.

Visionaries saw a bright future and a huge demand for super-fast internet access.

The trouble was, at the time, the hardware and software technology hadn’t had the chance to develop.

It would have been the equivalent of 19th Century engineers constructing 12-lane highways, to enable the fast movement of goods…when the only means of road transport was the horse and cart.

But now, 17 years later, the hardware and software is more than a match for the capabilities of fibre-optic broadband.

And the internet and tech stocks that survived the dot-com bust, and those that came after it, are now benefiting from the growth.

We believe the same stands to happen to bitcoin and cryptocurrencies. The irrational, and arguably idiotic, boom period has ended.

But that also likely means the quick gains are over too. Although, we concede that may be relative to what we’ve seen before with cryptos, and what we usually expect to see from stocks.

It seemed common for cryptos to gains hundreds of percent in a matter of hours. Perhaps you’ll no longer see those kind of gains. Maybe you’ll have to wait a few days instead!

We only half jest. We agree with our in-house crypto experts — Sam Volkering and Ryan Dinse — that the best gains for cryptos are still ahead of us.

That’s why it may make sense to include cryptocurrencies as a small (and we mean, tiny) part of an investment portfolio.

The risk, of course, is that rather than cryptos going on to dominate the world, the whole system falls flat on its metaphorical face. That’s a risk. Hence, why we only advise a tiny exposure.

After all, if that did happen, cryptos wouldn’t be the first fledgling tech or innovation to disappoint after such a promising start — 3D movies anyone?

As it happens, right now, your editor and Sam Volkering are working on our first crypto investing summit. We’re still figuring out the details, but we want it to be a valuable, useful, and actionable event.

We’ll reveal more details as it comes to hand. In the meantime, if you’re not yet familiar with bitcoin and cryptos, and are keen to learn more, we suggest checking out Sam Volkering’s Secret Crypto Network service.

Sam has literally written the book when it comes to crypto investing. Check out what he has to say, and find out how to download a copy of Sam’s book here.