Welcome to The Age of Extreme Markets

Friday, 25 September 2020
Melbourne, Australia
By James Woodburn

Wow, time’s flying.

Which is weird…seeing as the only walls I’ve been able to look at these last few months have been the walls of my house.

But perhaps it’s the markets. The walls of this giant house build higher than ever one day and fall down the next.

Right now the structure is holding up, but for how long?

Not long at all my old friend and Port Phillip Publishing founder Dan Denning ponders in his upcoming October issue of The Bonner-Denning Letter.

It’s a ripper read. It’s not published yet. It’s due out mid-next week. But I saw the pre-public draft this morning.

Here’s a little snippet:

At first, the excessive credit creation “brings forward” growth (and some earnings) and looks profitable to some industries. But the big gains accrue in those sectors closest to the money expansion (the military industrial complex, the finance sector and the Silicon Valley tech giants… But as the expansion in credit produces less and less real GDP growth (or the wealth flows to an increasingly narrow group of investors/sectors/individuals) something else begins to happen.

The expansion in credit begins to change inflation expectations held by the public. As Austrian School economist Ludwig von Mises pointed out in Human Action, the increased inflation expectations in the public are based on a simple, visceral, psychological observation that money is losing value. The inevitable result is what Mises called “The Crack Up Boom,” where a spike in inflationary expectations leads to a system crash. That “system crash” includes the breakdown of civil decorum — and even civilization itself.

Yes, I know, the Austrian theory of an inflationary crack-up boom sparking the breakdown of civil society seems unlikely to mainstream financial and political pundits. If anything, the Covid lockdowns have accelerated deflationary forces that were already strong (globalization, automation, demographics). And politically, the media is conspicuously silent on homicide and violent crime rates in New York City, Chicago, Seattle, and other urban areas. The destruction of private property is apparently now ‘protected speech.

But think of it this way: when people are convinced that bond yields can’t possibly rise and that deflation or dis-inflation will be with us for years to come, that’s an example of an extreme view that’s due to be challenged. And when the media is silent on the crack up of “Blue” cities and states, why do you think that is? Because the whole model, based on unsound money, is failing. The “crack up” has begun.

Dan’s view isn’t dystopian, though. He just believes we’re coming to the end of the road of the current system. The ‘crack up’.

But that doesn’t mean there won’t be opportunities. In fact, you can still make big money in the crack up too, if you’re willing to risk it.

As Dan puts it:

You look for extreme valuations in the market — stocks and sectors radically over-priced AND under-valued. If you get your pairing right — the thing set to crash and the thing set rebound — you can trade the crack up for big money.’

This month, he and Selva, his editor down here, explore three ‘pair trades’ they’ve been looking at closely.

And hopefully I’ll catch up with Dan this weekend, too. Right now, he’s on the road in Utah, but we’ve booked in time for a chat on Sunday, which I’ll record. If all goes to plan and we do indeed get it done, I’ll share that conversation with you on Monday.

This is the beauty of having a range of advisory letters exploring a range of ideas, though.

Some, like Dan’s The Bonner-Denning Letter, Vern’s The Gowdie Letter, Greg’s Crisis & Opportunity and Catherine Cashmore’s Cycles, Trends & Forecasts…gives you a deep, long-term and historical perspective…and keeps you grounded.

Whereas other advisories focus more on the ‘is happening’ rather than what ‘should be happening’.

What is happening?

Small-caps, that’s what!

I say that purely from observation, seeing all the action from all five of our speculative services across both Port Phillip and Fat Tail Media.

There is no shortage of trades being made.

Take the weeks since Callum Newman’s service Catalyst Trader formally launched at the start of this month:

  • DroneShield: 51.85% in seven days
  • Althea Group: 79.17% in 11 days
  • Liontown Resources: 26.67% in 18 days

You may remember the event we put on titled ‘The Medici 2020 Trading Event’.

Well, DroneShield was the free live recommendation Callum gave away in that event. Almost to the day a week later, look what happened to the catalyst Cal earmarked…he advised subscribers close out and take a 51.85% gain off the table.

Liontown was another one of the recommendations new subscribers were privy to, and Althea Group was a recommendation the very next day.

And, by the way, the overall market is DOWN -4% since 3 September.

Of course, not all trades win like this. But the point is to cut any losers quickly to keep losses as low as possible.

So far, Callum’s been doing that well. In fact, it’s been an action-packed three months. Since May, Catalyst Trader has also delivered the following CLOSED trades:

  • DroneShield (trade 1): 70%
  • Ora Banda Mining (trade 1): 25%
  • Ora Banda Mining (trade 2): 22.73%
  • Cooper Energy: -4.65%
  • Family Zone (trade 1): 40%
  • BS Aus Eq Strg: -20.18%
  • Family Zone (trade 2): 150%
  • Life360: 6.15%
  • Grange Resources: 3.85%

I’m hoping to bring you an updated rerun of ‘The Medici 2020 Trading Event’ early next month, complete with a brand-new live recommendation. Callum’s working on that now along with a few other things.

But it just goes to show, it really is a stock picker’s market right now.

Which is a perfect segue into today’s video…

On Wednesday, I finished up by saying that we’ve entered The Age of Extreme Markets.

This is being fuelled by stimulus efforts from banks, recovery efforts from governments, new waves of coronavirus, new lockdowns and whatever other Black Swans lay in wait.  

You can see this in the VIX Index (a ‘fear gauge’ for the markets). It’s currently flashing hotter than at any time since the dotcom crash in the late ‘90s.

But this volatility is providing fertile ground for stock pickers willing to risk a little capital on extreme swings in value.

That’s why Greg and I got Ryan Clarkson-Ledward on a Zoom call. Ryan’s the latest steward of our oldest flagship newsletter, Australian Small-Cap Investigator.

Ryan’s a sharp mind and shrewd analyst. He doesn’t get sucked into hype, and he approaches the highly speculative end of the ASX with a calm and rational mind.

Click the play button below to see what he has to say…

Have a great weekend.